A case study in the chapter describes a phone conversation between

the presidents of American Airlines and Braniff Airways. Let's analyze

the game between the two companies. Suppose that each company

can charge either a high price for tickets or a low price. If one company

charges, it earns low profit if the other company also charges and

high profit if the other company charges. On the other hand, if the

company charges, it earns very low profit if the other company

charges and medium profit if the other company also charges.

a) Draw the payoff matrix for this game.

b) What is the Nash equilibrium in this game? Explain.

c) Is there an outcome that would be better than the Nash

equilibrium for both airlines? How could it be achieved? Who

would lose if it were achieved?