What would be the payoff for value jet

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Reference no: EM131250904

In the mid-1990s, Value Jet wanted to enter the market serving routes that would compete head to head with Delta Airlines in Atlanta. Value Jet knew that Delta might respond in one of two ways: Delta could start a price war or it could be "accommodating," keeping the price at a high level. Value Jet had to decide whether it would enter on a small scale or on a large scale. The annual profits (in zillions of dollars) associated with each strategy are summarized in the following table (where the first number is the payoff to Value Jet and the second the payoff to Delta):

a) If Value Jet and Delta choose their strategies simultaneously, what strategies would the two firms choose at the Nash equilibrium, and what would be the payoff for Value Jet? Explain.

b) As it turned out, Value Jet decided to move first, entering on a small scale. It communicated this information by issuing a public statement announcing that it had limited aspirations in this marketplace and had no plans to grow beyond its initial small size. Analyze the sequential game in which Value Jet chooses "small" or "large" in the first stage and then Delta accommodates or starts a price war in the second stage. Did Value Jet enhance its profit by moving first and entering on a small scale? If so, how much more did it earn with this strategy? If not, explain why not? (Hint: Draw the game tree.)

Reference no: EM131250904

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