Question

Suppose United and American both service the New York-Boston route. If they both charge $100 each way, they each get monthly profits of $81 thousand. If they both charge $200 each way, they get monthly profits of $112 thousand. If United (American) charges $100 and American (United) charges $200, then United’s (American’s) profits are $123 thousand and American’s (United’s) profits are $58 thousand and vice versaUsing a payoff matrix determine the Nash equilibrium:

Answer 1

Answer:

Nash equilibrium exists when both companies charge $100 per ticket and each makes $81,000 in profits.

Explanation:

                                                                   United

                                       ticket price $100        ticket price $200

                                       $81,000 /                    $58,000 /

         ticket price $100                 $81,000                       $123,000

American                                                            

                                        $123,000 /                 $112,000 /

         ticket price $200                   $58,000                   $112,000

United's dominant strategy is to charge $100 per ticket price with expected profits of $81,000 + $123,000 = $204,000. If it charges $200 per ticket, expected profits = $170,000.

American's dominant strategy is to charge $100 per ticket price with expected profits of $81,000 + $123,000 = $204,000. If it charges $200 per ticket, expected profits = $170,000.

Since both companies' dominant strategy is to charge $100 per ticket, then that is the Nash equilibrium.