1. Assuming that there are only 2 airline companies in the world, Delta and US A

Question

1. Assuming that there are only 2 airline companies in the world, Delta and US Airways, what is the ((Nash) Equilibrium) or price that each company in the following matrix will charge? At that price, what profits do each company get? Note that the first number listed in bold is the profit for Delta and the second number listed that is italicized is the profit for US Airways.

2. Is there a way that Delta and US Airways could collude to increase profits? What might prohibit this collusion?

US Airways

$500

$400

$350

Delta

$500

$170000

   $170000

$140000

   $200000

$100000

$230000

$400

$190000

   $140000

$160000

   $160000

$130000

$190000

$350

$21,0000

   $110000

$170000

   $130000

$140000

$150000

US Airways

$500

$400

$350

Delta

$500

$170000

   $170000

$140000

   $200000

$100000

$230000

$400

$190000

   $140000

$160000

   $160000

$130000

$190000

$350

$21,0000

   $110000

$170000

   $130000

$140000

$150000

Explanation / Answer

1. In an non-cooperative game involving two players, a nash equilibrium is attained when both the players play thier dominated strategies. In this case, the dominated strategy of each airline is to charge a price of $350. Thus, the nash equilibrium is ($350, $350).

At this price, the profit for Delta would be $14000 and the profit for US Airways would be $15000.

2. When both the airlines collude, they would tend to maximise thier total profits. The total profits would be maximised when each airline would charge a price of $17000.

The Antritust laws might prohibit this merger, as this would increase the price of airtickets by reducing competition in the market and would create problem for consumers.

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