9781118041581

Three airlines (A, B, and C) are competing for passengers on a lucrative long-haul air route. At

present, the carriers are charging identical fares ($225 for a one-way ticket), the result of a truce

in recent price wars. The airlines currently compete for market share via the number of scheduled

daily departures they offer. Each airline must make a decision on its desired number of departures

for the coming month—without knowing its rivals’ plans ahead of time. Each airline is aware of

the following facts:

1. The size of the total daily passenger market is stable regardless of the number of departures
   offered. At current prices, an estimated 2,000 passengers fly the route each day.


2. Each airline’s share of these total passengers equals its share of the total flights offered by the
   three airlines. (For example, if airline A offers twice as many flights as each of its rivals, it claims
   half of all passengers and B and C obtain 25 percent shares.)


3. The airlines fly identical planes and have identical operating costs. Each plane holds a maximum
   of 200 passengers. Regardless of the plane’s loading (full, half full, and so on), each one-way trip
   on the route costs the airline $20,000.

As the manager of one of these airlines, how many departures should you schedule for the coming

month? After seeing the first month’s results (your rivals’ choices and the resulting airline profits),

what decisions would you make for the second month and subsequent months?

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CHAPTER 10 Game Theory and Competitive Strategy

CHAPTER 10 Game Theory and Competitive Strategy

It is a remarkable fact that business strategies are played largely in the mind.

Only a small part of the play appears in overt action. Its full scope and depth

lie in the players’ looking backward and forward and running through their

minds their alternative moves and countermoves.

JOHNMCDONALD, THEGAME OFBUSINESS

A Battle for

Air Passengers

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