Question

Suppose there are only two Low-Cost airlines in a country: The Flash Airlines and the Burraq
Airlines (duopoly). Both airlines target leisure travelers which is the reason why they keep
their fares low (considering the high Price Elasticity of Demand of leisure travelers).
A) Read the following instructions carefully: 2 Marks
a. Treat the Flash Airlines as the Row Player and the Burraq Airlines as the Column
Player.
b. The two available strategies are:
i. Low Prices
ii. High Prices
Each of them naturally must select one of these strategies.
c. When they both charge a Low Price, they manage to attract many customers. In
this case, each of them reports same level of profit.
d. When they both charge a High Price, they lose a lot of customers. Each of them
still reports same level of profit but lesser that what they were making when they
both pursued ‘Low Price’ strategy.
e. If Flash charges a High Price but Burraq charges a Low Price, Flash incurs a loss
and Burraq incurs a phenomenal profit (its highest profit in the entire matrix).
f. If Flash charges a Low Price but Burraq charges a High Price, Flash makes a
phenomenal profit (its highest in the entire matrix) and Burraq incurs a loss.
Now, construct a pay-off matrix using the instructions above. Create your numbers
keeping in mind the instructions above. Do proper labelling of the pay-off matrix.

B) Does ‘The Flash Airlines’ have a dominant strategy? If Yes, name that strategy. 2 Marks
C) Does ‘The Burraq Airlines’ have a dominant strategy? If yes, name that strategy. 2Marks
D) What is the “Nash Equilibrium” of your game?

Answer 1

[Please find attached pic to find the explanation]
A. Normal form of the game[see pic]
B. Yes, Low prices[see pic]
C. Yes, Low prices[see pic]
D. Yes, pure strategy nash equilibrium --- (Low Price, Low Price)