Exercise on Fare Wars Game: Solutions

In Brief

This page includes solutions to the set of questions related to the Fare Wars Game.
This helps learners to ensure their learning on aspects of economics in general but also Fare Wars Game in particular.

Consider the following:

The decsion makers (players) are: British Airways and KLM.
The choice is to cut fares by 25% or leave fares alone.

If both airlines cut fares, each airline's profit = $200 million
If neither airline cuts fares, each airline's profit = $300 million
If only one airline cuts its fares, its profit = $500 million
the other airline' profits = $100 million

Questions:

Draw the payoff matrix and find the Nash equilibrium.

Solution:

Nash equilibrium: cut both firms fares

For more details, please contact me here.