Question

A) Assuming that there are only 2 airline companies in the U.S. flying between Newark and Miami, Delta and Continental, what is the ((Nash) Equilibrium) or price that each company in the following matrix will charge? At that price, what are the profits for each company? Note that the first number listed in bold is the profit for Delta and the second number listed that is in italics is the profit for Continental.

B) Can Delta and Continental Collude to increase their profits? Why or why not?

			Continental
		299	399	499
Delta	299	13000 22000	16000 19000	20000 16000
	399	12000 18000	15000 15000	18000 13000
	499	9000 14000	13000 12000	16000 10000

Answer 1

A) The Delta airline has a dominant strategy of of charging a price of 299$, whereas Continental airline also has a dominant strategy of charging a price of 299$. Thus, Nash equilibrium is that both players charging price of 299$ and earning the profits of 13000$(Delta) and 22000$ (Continental ).

B) No, collusion can not yield higher profits to Continental airline which it is earning by playing its dominant strategy which is equal to 22000$. Thus, Continental airline will be allow for collusion.