A case study in the chapter describes a phone conversation between the presidents of American Airlines and Braniff Airways. Let’s analyze the game between the two companies. Suppose that each company can charge either a high price for tickets or a low price. If one company charges $100, it earns low profits if the other company charges $100 also and high profits if the other company charges $200. On the other hand, if the company charges $200, it earns very low profits if the other company charges $100 and medium profits if the other company charges $200 also.
a. Draw the decision box for this game.
b. What is the Nash equilibrium in this game? Explain.
c. Is there an outcome that would be better than the Nash equilibrium for both airlines? How could it be achieved? Who would lose if it were achieved?