Suppose that Air India and Jet Airways charge $400 for a round-trip economy class fare from New Delhi to Hong Kong, and that, presently, each airline has an equal market share in this corridor. Each airline believes that, if it cuts price by 10% while the other airline maintains price, the elasticity of demand will be -4.0. Half of the additional customers will be new flyers, while the other half will switch from the higher-priced airline. If both airlines cut price by 10%, then each will have a demand elasticity of -2.0. In this case, all of the additional customers will be new flyers. Let the unit cost of each seat be constant at $200 for both airlines.

(a) Use a game in strategic form to analyse this situation. For each airline, the possible strategies are to maintain its price, or to cut its price by 10%. What will be the equilibrium? (Hint: let the sales of each airline at the current prices of $400 be Q). Show all calculations. No marks will be awarded without detailed calculations.

(b) Suppose now that the two airlines form a revenue pool. Under this arrangement, they will contribute all their revenues to a common pool and each will get a half share of the pooled revenues. Each, however, must pay its own costs. Use a game in strategic form to analyze this revised situation. For each airline, the possible strategies are the same as in (a). What will be the equilibrium? Show all calculations.No marks will be awarded without detailed calculations.