Finance and the Economy · Seminar 5 · Market structures
Each airline chooses a low fare of €100 or a high fare of €200 without knowing what the other will do. Click a cell, or set each airline’s choice, and see whether either would want to switch. When neither would, you have found the Nash equilibrium. Question 6, from Business Economics (Mankiw, Taylor & Ashwin, ch. 15).
Airline 1 earns
Airline 2 earns
Stable?
Interdependence. In an oligopoly each firm’s result depends on the rival’s choice as well as its own, which is why game theory is the right tool. The Nash equilibrium is the position where every player is doing the best they can given the others’ choices, so nobody has an incentive to move. Here it is worse for the airlines than cooperation, and better for consumers.
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