Consider the price strategy of Delta Airlines for its Detroit-to-Philadelphia route. In this game spirit is a potential competitor along the same route. Spirit will make competitive profits on less-popular routes if it does enter the market for this service. The matrix representing this game is as follow:
To analyze the price strategy of Delta Airlines and Spirit Airlines on the Detroit-to-Philadelphia route, we can use game theory. Let's take a look at the matrix representing this game:
Delta Airlines Spirit Airlines
Delta Airlines (High, High) (Low, Low)
Spirit Airlines (Low, Low) (Medium, Medium)
In this matrix, the payoffs are represented as (Delta Airlines's profit, Spirit Airlines's profit) for each combination of strategies.
- If both Delta and Spirit choose high prices (High, High), both airlines make high profits. This scenario may occur when there is limited competition on this route, and both airlines can maximize their profits without needing to lower prices.
- If Delta chooses high prices while Spirit chooses low prices (High, Low), Delta still makes a high profit as it can take advantage of customers who prioritize service quality over price. However, Spirit may experience lower profits due to its lower prices competing for customers on this route.
- If Delta chooses low prices while Spirit chooses high prices (Low, High), Delta may generate lower profits as it competes with Spirit's higher-priced tickets. Spirit, on the other hand, would make higher profits by targeting customers who prioritize affordability.
- If both Delta and Spirit choose low prices (Low, Low), both airlines may experience lower profits due to price wars and intense competition. This scenario can occur when both airlines want to attract price-sensitive customers.
- If both Delta and Spirit choose medium prices (Medium, Medium), both airlines may achieve moderate profits by balancing affordability and service quality. This scenario can occur when both airlines want to capture a broader customer base with a reasonable price range.
To determine the optimal price strategy, both airlines need to consider factors such as their cost structure, market demand, and competitive advantages. They can use various analytical techniques, such as game theory models, market research, and pricing experiments to estimate the potential outcomes and make informed decisions. The choice of price strategy will ultimately depend on the airlines' goals, market conditions, and their assessment of customer preferences.