Consider the following game in strategic form, describing an airline duopoly. Th

Question

Consider the following game in strategic form, describing an airline duopoly. The first number in parentheses represents a payoff for Firm 2. Second number is a payoff for Firm 1 Suppose this is a one-shot game with simultaneous play: Identify any and all Nash Equilibria. Make sure you explain the logic for each firm's selected strategy. Is/are Nash Equilibrium/equilibria Parato Optimal? Explain your answer. Is there a dominant strategy for either Firm 1 or Firm 2? Explain. Assume that Firm 2 never chooses "improve food" as one of its strategy. Given this information is there a dominant strategy for Firm 1? If there is what is that strategy?

Explanation / Answer

a. Firm 1 will lower prices because that is most likely to give them the highest benefit. Firm 2 will also lower prices because that gives them the highest expected benefit. b. No, both players could increase their profit if they chose a riskier option. c. Firm 2 has a dominant strategy if they improve food or lower prices. If firm 2 improves it's food or lowers prices, every payoff will be greater that firm 1's payoff, regardless of firm 1's strategy. d. No, there is no dominant strategy for firm 1. Even if we eliminate the improve food option, firm 2's lower price option strictly dominates all of firm 1's options.

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