Assume that two airline companies decide to engage in collusive behaviour.

Let’s analyse the game between two such 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 payoff matrix 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?