Untied and Air ’R’ Us are the only two airlines operating flights between Collegeville and Bigtown. Each airline can charge either a high price or a low price for a ticket. The accompanying matrix shows their payoffs, in profits per seat (in dollars), for any choice that the two airlines can make. Suppose the two airlines play a one-shot game—that is, they interact only once and never again. What will be the Nash (noncooperative) equilibrium in this one-shot game? Explain why this is the likely outcome. Now suppose the two airlines play this game twice. Each airline then considers the future and decides on a “tit-for-tat” strategy, that is, it starts off charging the high price in the first period, and then in the second period it does whatever the other airline did in the previous period. If both play this “tit-for-tat” strategy, how much profit will each make?
Untied and Air ’R’ Us are the only two airlines operating flights between Collegeville and Bigtown. Each airline can charge either a high
Suppose the two airlines play a one-shot game—that is, they interact only once and never again.
What will be the Nash (noncooperative) equilibrium in this one-shot
game?
Explain why this is the likely outcome.
Now suppose the two airlines play this game twice. Each airline then considers the future and decides on a “tit-for-tat” strategy, that is, it starts off charging the high price in the first period, and then in the second period it does whatever the other airline did in the previous period. If both play this “tit-for-tat” strategy, how much profit will each make?
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