uppose Delta (D) and United Airlines (UA)are thinking about pricing a round-trip
ID: 1137418 • Letter: U
Question
uppose Delta (D) and United Airlines (UA)are thinking about pricing a round-trip airfare Atlanta to Chicago. If both airlines charge a price o million and the profit of UA wou then the profit of UA i f $500, the profit of Delta would be $100 llion. If Delta charges $500 and UA charges $200, s $150 million while Delta has a loss of $200 million. If, however, Delta sets 0, then the profit of Delta is $200 million and UA has a loss of s a price of $200, then both airlines end up with losses of $10 million. ld be $50 m ee at oth m ued tn,a its price at $200 and UA charges $50 $100 million. If both charge a) Draw a game table for this game. b) Find out the Nash equilibrium outcome of the game. c) Identify any dominant and dominated strategies for each player s the game a prisoners' dilemma, a chicken, a battle of the sexes, or an assurance (stag hunt) game? Explain your answer d) IExplanation / Answer
Answer (a)-
$100
$50
-$200
$150
$200
-$100
-$10
-$10
Ans(b)- Nash equilibrium of the game is:
The pure strategy NE is both firms charging Price equal to $200
The Best response of Delta when UA choose P = $500 = BRd(UA = $500)
BRD(UA = $500) = $200
BRD(UA = $200) = $200
BRUA(Delta = $500) = $200
BRUA(Delta = $200) = $200
Thus Both Players choose P = $200.
Ans(c) -The dominant strategy for both players is to choose $200
P = $500 is a dominated strategy since none player chooses it.
Ans(d)- This game is Prisoners dilemma.
Because Prisoners Dilemma is a paradox in decision analysis wherein each player who would prefer to choose a payoff maximizing strategy but ends up choosing a sub-optimal strategy in terms of payoff. Here in our question, The best payoff that each firm can achieve is by choosing $500 but because by defecting to $200 while the other player plays $500, the player can increase their payoff. Given the assumption of rationality, each player fails to cooperate resulting in a sub – optimal outcome.
UA 500 200 DELTA 500$100
$50
-$200
$150
200$200
-$100
-$10
-$10
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