Over the last decade, the Delta Shuttle and the U.S. Air Shuttle have battled for market share on the Boston-New York and Washington, D.C .-New York routes. In addition to service quality and dependability (claimed or real), the airlines compete on price via periodic fare changes. The hypothetical payoff table lists each airline's estimated profit (expressed on a per-seat basis) for various combinations of one-way fares.
U.S. Air Shuttle Fares $139
Delta Shuttle $119 Fares
$139 $119 $99
|
$34, $38
|
$15, $42
|
$6, $32
|
|
42, 20
|
22, 22
|
10, 25
|
|
35, 7
|
27, 9
|
18, 16
|
|
|
$ 99
a. Suppose that the two airlines select their fares independently and "once and for all." (The airlines' fares cannot be changed.) What fares should the airlines set?
b. Suppose, instead, that the airlines will set fares over the next 18 months. In any month, each airline is free to change its fare if it wishes. What pattern of fares would you predict for the airlines over the 18 months?
c. Pair yourself with another student from the class. The two of you will play the roles of Delta and U.S. Air and set prices for the next 18 months. You will exchange written prices for each month. You then can determine your profit (and your partner's profit) from the payoff table. The competition continues in this way for 18 months, after which time you should compute your total profit (the sum of your monthly payoffs). Summarize the results of your competition. What lessons can you draw from it?