Consider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) Delta Air Lines ($ million) Low Fare ($ million) (2,40) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as punishment. If the discount factor (interest rate) is 8%, then the present value of cheating is cooperating is million dollars, and the present value of A million dollars.
Consider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing). Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the following payoff matrix: Strategy High Fare American Airlines High Fare ($ million) Low Fare ($ million) (10, 10) Delta Air Lines ($ million) Low Fare ($ million) (2,40) (40, 2) (8,8) Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely as punishment. If the discount factor (interest rate) is 8%, then the present value of cheating is cooperating is million dollars, and the present value of A million dollars.
Chapter26: Monopolistic Competition And Oligopoly
Section: Chapter Questions
Problem 13E
Related questions
Question
Transcribed Image Text:Consider that two major airlines, Delta Air Lines and American Airlines, operate on a competitive route from New
York to Los Angeles. Both airlines offer similar services, have comparable cost structures, and regularly interact in
the market where they can choose to set either high fares (cooperative pricing) or low fares (competitive pricing).
Each airline's profit for this route depends on the pricing strategy chosen by both airlines as described by the
following payoff matrix:
Strategy
High Fare
American Airlines
High Fare
($ million)
Low Fare
($ million)
(10, 10)
Delta Air Lines
($ million)
Low Fare
($ million)
(2,40)
(40, 2)
(8,8)
Now consider that the airlines compete repeatedly and they both use a trigger strategy to maintain high fares over
time. Specifically, with this strategy,each airline agrees to set high fares as long as the other airline does the
same. However, if any airline undercuts by setting a low fare, the other responds by setting low fares indefinitely
as punishment.
If the discount factor (interest rate) is 8%, then the present value of cheating is
cooperating is
million dollars, and the present value of
A
million dollars.
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