Assume that the Australian low-cost airline industry consists of two firms and their situation can be represented by the following payoff matrix.

a. Before solving the game put yourself in the position of Jetstar and write down your action. Then independent of that, put yourself in the position of Virgin Blue and write down your action.

b. State all the dominated strategies in the full game, by which strategy they are dominated, and whether weakly or strictly. c. Solve the game by dominance, what is the equilibrium outcome by dominance, if any?

d. What are the pure strategy Nash equilibria of this game?

e. Assume that the two firms are able to cooperate with each other. Could this result in a better outcome? If yes, what is the outcome? f. Are the firms able to cooperate with each other? Why or why not?

g. If the firms play this game repeatedly, what do you think may happen?