Suppose that currently there are no airlines serving the city of South Podunk. Both Accommodating Airlines and Friendly Flyers are looking to enter that market. (They are the only two.) The figure shows in extensive form the possible outcomes of the two firms' decisions. The payoffs represent, in thousands per month, the profit (or loss) the firm will realize from its decision. What does this extensive form game indicate about the decision to enter the South Podunk market?

Question

Quizplus · Accepted Answer

Both airlines are better off by entering the market as they both have positive payoffs in the event that the other firm also enters. This is known as a mutual benefit scenario or a coordination game. Neither firm has a dominant strategy and there is no first-mover advantage. Therefore, both firms are better off by entering the market together.

Suppose That Currently There Are No Airlines Serving the City