One research question was addressed in this study. That question is as follows: "Can the competitive behavior of air transportation companies in the United States market in relation to setting fares be explained as an application of game theory?"
Game theory, as applied in the airfare wars. forecasts how competitors will respond when confronted with certain competitive situations. When formulating business strategy, no company can afford to ignore how competitors will behave. Game theory is based on the premise that in any competitive situation there are factors at work which lend themselves to mathematical representation and analysis. In turn, these representations and analyses will help explain how a result will occur.
The findings of this research indicate that the airfares competition gives the appearance of the use of games theory by the air carriers in the United States market. In most instances, it appears also that the airline players in this game of airfare wars are playing a zero-sum game. In 1993, however, the Antitrust Division of the United States Department of Justice reviewed the price-setting practices of the players in the airfare wars as possible collusion within a framework of games theory. While the airlines at that time were not charged with collusion in the setting of prices, the investigation did indicate that game theory may have produced the outcomes that resembled collusion. The conclusion drawn from the findings of this research is that game theory may be used to explain the competitive behavior of air transportation companies in the setting of airfares.
The problem investigated in this research is the competition between passenger air transportation carriers in the United States market wherein airfares are the primary strategic tool. The purpose of this research is to assess the ability to explain this competitive behavior within the context of game theory.
Background on and Development...