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## Airfare Price War

You are the owner of a small airline that flies passengers between Miami and Key West. Altogether,
there are four airlines that fly this Miami-Key West route. The four airlines altogether fly 1200
passengers per week. The four airlines are:

## Island Airlines, Miami West Air, Sunshine Express, Trans Florida

Passengers will only fly on the lowest-priced airline. You are ISLAND AIRLINES.

Every week, you must post your airline’s fare price for the next week’s flights. The 1200 passengers
will be divided equally among only the lowest-priced airlines. If your fare price is higher than the
other airlines, no passengers will fly on your airline. If your fare price is lower than all other airlines,
all passengers will fly on your airline, but you will make less profit per passenger.

The fare prices you are allowed to charge are \$80, \$90, or \$100.

Each week, there is a meeting of the four airlines. You will meet and discuss possible prices for 10
minutes. Then each airline will decide what to charge that week – this decision can be private or
public. Once all four airlines have decided, they will show each other what they decided to charge
and calculate their revenue for the week. The lowest price is posted each week after all four airlines
have decided what to charge.
You will play this game for two periods (weeks).

The success of your airline is based on how much revenue your airline earns.
Below is how much revenue you can earn each week during this exercise:

## Your Fare Price \$80 \$90 \$100

Your price wasn’t lowest: You get 0 passengers \$0 \$0
4 airlines charged the same low price: You get 300 passengers \$24,000 \$27,000 \$30,000
3 airlines charged the same low price: You get 400 passengers \$32,000 \$36,000
2 airlines charged the same low price: You get 600 passengers \$48,000 \$54,000
Only you charged the lowest price: You get all 1200 passengers \$96,000 \$108,000
Week 1

## What is your strategy at this point?

Which of the following best represents your thinking at this time? (choose only one)

a) I am charging this price because I think others will charge low prices and I don’t want to
lose passengers.

b) I am charging this price because I think others will charge high prices and this way I can get
more passengers.

c) I am charging this price because I think others will charge high prices and this way we can
work together to keep prices high.

Week 2

## What is your strategy at this point?

Which of the following best represents your thinking at this time? (choose only one)

a) I am charging this price because I think others will charge low prices and I don’t want to
lose passengers.
b) I am charging this price because I think others will charge high prices and this way I can get
more passengers.
c) I am charging this price because I think others will charge high prices and this way we can
work together to keep prices high.