From 1989 to 1991 the Trump Shuttle and the Pan Am Shuttle battled for market share on the Boston/New York and Washington DC/New York routes. In addition to service quality and dependability (claimed or real), the airlines competed over price via periodic fare changes. The hypothetical payoff table below lists each airline's estimated profit (expressed on a per-seat basis) for various combinations of one-way fares.
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Trump Shuttle Fares
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Pan Am Shuttle Fares
|
|
$139
|
$119
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$99
|
|
$139
$119
$99
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$34, $38
$42, $20
$35, $7
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$15, $42
$22, $22
$27, $9
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$6, $32
$10, $25
$18, $16
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a. Suppose that the two airlines will select their fares independently and "once and for all." (The airline's fare cannot be changed.) What fares should the airlines set?
b. Suppose instead that the airlines will set fares over the next 18 months. In any month, each airline is free to change its fare if it wishes. What pattern of fares would you predict for the airlines over the 18 months?