Managerial Economics and Strategy, 2/e

12.1 Oligopoly Games

We start with an example of two firms that can each take one of only two possible actions. Our example is a simplified version of the real-world competition between United and American Airlines that we described in Chapter 11. Later in this chapter, and in Chapter 13, we relax our simplifying assumptions.

The game has the following characteristics. The two players or firms are United and American Airlines. They play a static game—they compete only once. The rules of the game specify the possible actions or strategies that the firms can take and when they can take them. Each firm has only two possible actions: Each can fly either 48 thousand or 64 thousand passengers per quarter between Chicago and Los ­Angeles. Other than ...