In: Economics
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 |
$19,000,000 |
Fraser |
$18,500,000 |
Assumptions:
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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