AirTrain and BigJet are considering starting nonstop service from Pittsburgh to Las Vegas. Assume...

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AirTrain and BigJet are considering starting nonstop service from Pittsburgh to Las Vegas. Assume that no other airlines serve this route. Market demand is such that if there is one airline serving the Pittsburgh to Las Vegas route the profit will be $20000. If two airlines serve the route, each will lose $5000. If an airline chooses not to enter this market, their profit is $0.

a. Illustrate the game in normal (matrix) form, if the decision must be made simultaneously. Find the pure strategy Nash equilibria.

b. Illustrate the game in extensive (tree) form, if the decision is made sequentially, with AirTrain moving first. Find the two pure strategy Nash equilibria. Find the subgame perfect (backwards induction) equilibrium.

c. Before AirTrain makes their decision, the CEO of BigJet publicly announces that regardless of AirTrain’s decision, she will enter this market. If AirTrain believes that BigJet will follow through with their threat, what is AirTrain’s best strategy? Is BigJet’s threat to ‘enter no matter what’ credible? Why or why not?

Komalavalli · Accepted Answer

1.
Pure strategy Nash equilibrium 
a)
	 
Bigjet
 
	 
 
Airtrain
	
	 
	serve
	not serve
	
	Serve
	-50,00,-5,000
	20000,0
	
	not serve
	0,2000
	0,0
A pure Nash equilibrium is a strategy specification for each player in which no player would gain from altering his strategy if the other players did not change their strategies. From above game table matrix we can say that pure strategy nash equilibrium is both firms serve.
b)
From above game tree we can say that Airtrain choose to serve first,

AirTrain and BigJet are considering starting nonstop service from Pittsburgh to Las Vegas. Assume that no other airlines serve this route. Market demand is such that if there is one airline serving...

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