The above figure shows the payoffs to two airlines, A and B, of servin

The above figure shows the payoffs to two airlines, A and B, of serving a particular route. Is there a Nash equilibrium? What is it? Explain.

What will be an ideal response?

ANSWER

Firm A entering and firm B not entering is the Nash equilibrium. Entering is firm A’s dominant strategy. It will enter no matter what firm B does. Firm B does not have a dominant strategy but is always better off doing the opposite of firm A. Put in another way, given firm A’s decision, if firm B enters, it will incur a loss.