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Nash Equilibrium Question?
Hi, I was studying for my economics exam and this example in the notes stumped me:
The players: Air Canada and WestJet
The choice: cut fares by 50% or leave fares alone
If both airlines cut fares,
each airline’s profit = $400 million
If neither airline cuts fares,
each airline’s profit = $600 million
If only one airline cuts its fares,
its profit = $800 million
the other airline’s profits = $200 million
The professor wrote that they should both cut fares and make $400 million each. What I don't understand is why they don't leave the prices alone and make $600 million each. Can someone please explain
Thanks!
1 Answer
- Mike D.Lv 58 years agoFavorite Answer
The reason that they both cut fares is because each of them is better off doing this. Each airline does not know what the other will do so they so what will benefit themself the most. This is the "Nash Equilibrium".
