Question

Imagine two fictional airline manufacturing companies, Nechako Jet and Air Fraser, are in a fierce competition to sell their corporate jets. In 2019, Nechako’s “Brown Bear” has 1500 orders. Fraser’s “Wolverine” has 1550 orders this year.

Background Data:

Aircraft	Price		Aircraft	Price
Nechako Brown Bear	$19,000,000		Fraser Wolverine	$18,500,000

Assumptions:

• Assume that the performance and operating costs of the two aircraft are the same.
• At list price, both Nechako and Fraser can get another 200 orders each, and make 4 Mn in economic profit.
• At discounted prices, each manufacturer can get an additional 225 orders each and make 2 Mn in economic profit.
• If one keeps the list price and the other discounts, the discounter can get 450 new orders and make 6 Mn, and the other will get no new orders
  

1. What type of market is described above? (2 pts)

2. Given the assumptions above, will the companies discount their prices, or stick to list price? Answer this question by illustrating the payoff matrix: (8 pts)
   
   
   
   
   
   
   

3. Identify the Nash Equilibrium and name the game strategy they will pursue. (4 pts)

Answer 1

a) The market described above is a Duopoly where there are only 2 players with non-differentiated products serving the same market competing with each other.

b)

		Nechako Brown Bear
		No Discount	Discount
Frazer Wolverine	No Discount	4,4	0,6
	Discount	6,0	2,2

The above payoff matrix lists out the probable payoffs in Mn dollars.

In this scenario, both players will tend to discount to capture the entire market of new orders since discounting will give them the full pie if the other does not discount. So the attraction of making a $6 Mn profit will cause both the companies to dicount.

c) Nash equilibrium happens when both the players give a discount. In that scenario, there is no incentive for any player to change their strategy to get a better payoff if the other player does not change.

Giving a discount is the dominant strategy for both the players. Even though not giving a discount will lead to better payoffs but still this is a classical case of Prisoner's Dilemma when the players will not be trusting the other player and tend to maximize its own profit and end up with a lower payout. So both the players will choose to offer a discount.

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