Week 1

Sequential Games III

Credible Threats
 Airlines in Germany
 Lufthansa is monopolist on domestic flights

 British Airways considers entering the market (German BA)

 Lufthansa threatens British Airways to start a price war after entry

 Is this a credible threat?

 Airlines in Germany

Deutsche BA no market market

entry entry

Lufthansa status price no price

quo war war

Deutsche BA 0 -500 400

Lufthansa 1000 0 400
 Nash Equilibria (NE)

Deutsche BA no market market

entry entry
Nash Equilibrium I

Lufthansa status price no price

quo war war

Deutsche BA 0 -500 400

Lufthansa 1000 0 400
 Subgame Perfect NE

Deutsche BA no market market

entry entry Nash Equilibrium I
Nash Equilibrium II

Lufthansa status price no price

quo war war

Deutsche BA 0 -500 400

Lufthansa 1000 0 400
 Airlines in Germany
 Lufthansa is monopolist on domestic flights

 British Airways considers entering the market (German BA)

 Lufthansa threatens British Airways to start a price war after entry

 Is this a credible threat?

 Airlines in Germany
 Now: Lufthansa commits to a price war
 Contract with Star Alliance specifying a penalty of 500
if Lufthansa does not start a price war after Deutsche BA’s entry
 Is this a credible threat?
 Airlines in Germany

Deutsche BA no market market

entry entry

Lufthansa status price no price

quo war war

Deutsche BA 0 -500 400

Lufthansa 1000 0 400 - 500 = -100
 Subgame Perfect NE

Deutsche BA no market market

entry entry Nash Equilibrium I
Nash Equilibrium II

Lufthansa status price no price

quo war war

Deutsche BA 0 -500 400

Lufthansa 1000 0 400 - 500 = -100
 Airlines in Germany
 Now: Lufthansa commits to a price war
 Contract with Star Alliance specifying 500 penalty
if Lufthansa does not start a price war after Deutsche BA’s entry
 Is this a credible threat?
Competitive Strategy
Tobias Kretschmer
Professor of Management, LMU Munich

© 2013 LMU Munich