Strategic Situation Between Players.

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In business, sports, politics, and many other fields there are probably countless situations akin to the prisoner’s dilemma where players acting in their own self-interest do not produce an ideal outcome. Likewise, some player dynamics also illustrate other game theory concepts like a game of chicken, credible threats/commitments, and other similar concepts. Use at least one article from The Wall Street Journal to discuss a strategic situation between players that resembled or used any of the concepts above. What could have any of the players done differently to achieve a better outcome?

Sample Solution

The Airline Price War: A Prisoner’s Dilemma Takes Flight ()

The airline industry is a prime example of situations resembling the prisoner’s dilemma. A recent Wall Street Journal article titled “The Airline Price War That Wasn’t” (June 20, 2023) details how major airlines avoided a price war despite the temptation to undercut competitors.

Prisoner’s Dilemma in Action:

Imagine two airlines, Airline A and Airline B, in a market. They can either set high prices (Cooperate) or start a price war with low fares (Defect).

  • Cooperate (High Prices): If both airlines maintain high prices, they earn healthy profits.
  • Defect (Low Prices): If one airline cuts prices, it attracts more customers but reduces profit margins. The other airline can either match the low price (suffering losses) or maintain high prices (losing customers).

This situation mirrors the prisoner’s dilemma. Individually, it might be tempting for an airline to cut prices and gain a temporary edge. However, if both airlines engage in a price war, everyone loses profit.

Avoiding the Race to the Bottom:

The article highlights how airlines, aware of the prisoner’s dilemma, took steps to avoid a price war:

  • Capacity Management: Airlines strategically adjusted flight schedules to avoid oversupply and maintain some upward pressure on prices.
  • Focus on High-Value Customers: Airlines offered targeted promotions and loyalty programs to retain high-paying business travelers.
  • Consolidation: Mergers and acquisitions reduced the number of major players, leading to a more concentrated market where price wars are less likely.

What Could Airlines Do Differently?

While the airlines successfully avoided a price war, there’s always room for improvement:

  • Transparency and Communication: Clearer communication between airlines about capacity management could further stabilize pricing.
  • Focus on Customer Experience: Airlines could invest in improving in-flight services and amenities to differentiate themselves beyond just price.
  • Innovation in Pricing Models: Exploring dynamic pricing models that adjust fares based on demand could offer a more nuanced approach than simply high or low prices.

By continuing to cooperate and innovate, airlines can achieve a more sustainable and profitable future, avoiding the pitfalls of the prisoner’s dilemma.

 

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