Suppose two companies, A and B, are the only two airlines operating in the same
ID: 1209309 • Letter: S
Question
Suppose two companies, A and B, are the only two airlines operating in the same market. Each airline decides whether to charge a high price (H) or a low price (L) for a ticket. In the table below, the dollar amounts (in millions of $) represent the annual profits of the two companies (the first number in each cell refers to Company B and the second number to company A):
Company A
High Price (H) Low Price (L)
High Price (H) 40, 40 0, 50
Company B
Low Price (L) 50, 0 20, 20
a) Does either player have a dominant strategy? Therefore, does the game have a dominant strategy solution? Explain.
b) Does this game have a Nash equilibrium? Explain.
c) Consider what would happen if Company B were able to make its price choice first, before Company A is able to set its price (assume that A is able to observe B’s choice once made).
Would Company B choose the same price as in part a)? Would Company A choose the same price as in part a)? Explain why or why not.
Suppose two companies, A and B, are the only two airlines operating in the same market. Each airline decides whether to charge a high price (H) or a low price (L) for a ticket. In the table below, the dollar amounts (in millions of $) represent the annual profits of the two companies (the first number in each cell refers to Company B and the second number to company A):
Company A
High Price (H) Low Price (L)
High Price (H) 40, 40 0, 50
Company B
Low Price (L) 50, 0 20, 20
a) Does either player have a dominant strategy? Therefore, does the game have a dominant strategy solution? Explain.
b) Does this game have a Nash equilibrium? Explain.
c) Consider what would happen if Company B were able to make its price choice first, before Company A is able to set its price (assume that A is able to observe B’s choice once made).
Would Company B choose the same price as in part a)? Would Company A choose the same price as in part a)? Explain why or why not.
Explanation / Answer
a) there is no dominant strategy in this game and no dominant strategy solution as they can only charge a high price or a low price. If company A charge a high price and company B charges a low price then company A;s profit will be zero and vice-a versa. so best option will be low orice selection by both (L,L)
b) There are one nash equlibrium lower prices(L,L) for both companies. companies do not want to deviate from this point. they both know that 20 is better than 0.
c) company B will choose lower price because if they choose a high price than their profits will be zero. company B will charge the same price as in what a) and also company A will charge the same price because if they both deviate from point (L'L), there will be no profit.
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