Consider the following static airline game. Two airlines, Delta and American Airlines, compete setting prices for the route Columbus-Chicago on Tuesdays at 7:20PM. There are 60 potential passengers with a reservation price of $500 and 120 additional passengers with a reservation price of $220. Assume that price discrimination is not possible (perhaps for regulatory reasons or because the airlines don’t know the passenger types). The costs are $200 per passenger. Assume that airlines must choose between a price of $500 and a price of $220. Assume that if equal prices are charged, the passengers are evenly shared but that the low-price airline gets all the passengers otherwise.
a. Write the pay-off matrix of this static game.
b. Find the two Nash Equilibrium(s) using the pay-off matrix in part a. Are these equilibrium in dominant strategies? Why is “both airlines charging a low price” an equilibrium?
c. Provide an intuitive explanation on which equilibrium you might expect to see? What might cause both airlines to price low?