Consider a market dominated by just two airlines, American and United. Each can choose to restrict capacity and charge a high price or expand capacity and charge a low price. If one of the two airlines expands capacity and reduces the price and the other does not, the airline that reduces price will be able to capture customers from the other airline. The economic profits for each outcome are illustrated in the following payoff table: 

a. If American and United are playing a simultaneous game, what is the Nash equilibrium (or equilibria)? Use the check mark method to help illustrate your answer. 

b. Is this game an example of a Prisoner’s Dilemma? 

c. If United and American were to play this game as a repeated game for two periods, what outcome would occur in the second period? d. What outcome would occur in the first period? 

e. If United and American play this game for an indeterminate number of periods so that neither American nor United knows when the game will effectively end, then each will play a Grim Trigger strategy. In this case the payoff table will become:

What is the Nash equilibrium (or equilibria)? Use the check mark method to help illustrate your answer. 

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American charges a high price United charges a high price American receives $20 billion profit United receives $15 billion profit American receives $25 billion profit United charges a low price American receives $5 billion loss United receives $20 billion profit American receives $0 profit American charges a United receives United receives $0 profit low price $5 billion loss Stevenson/Wolfers, Principles of Economics, 1e, © 2020 Worth Publishers