Applying Games Theory to Airfare Competition

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

. . .
ly affected by time. Thus, the element of time must be addressed in an effective decision-making tool. Time is incorporated in the TSP model. Consistent with the von Neumann-Morgenstern axiom, an infinite (theoretically) number of variables and participants (or alternatives) may be included in a decision-making problem employing the TSP model. Differences in utility are infinite. A major element of both games theory and the TSP Model is the determination of expected utility. The expected utilities are a marriage of the optimal monetary values of the outcomes and the probabilities of their occurrence. Some dissatisfaction has been noted with respect to the TSP modelùparticularly with reference to preference theory. It has been said that some "of its axioms seem more an adaptation of reality to mathematics than an attempt to provide a good picture of actual human behavior." Rodding went on to add that the "set of alternatives as an agent, as perceived or even in reality, is a discrete surrounding of possible or at least conceivable choices à . Axioms like those of completeness and continuity are vital for the existence of order-preserving real-valued utility functions, but they do violence to observations of actual be
. . .

Some common words found in the essay are:
ANALYSIS Game, Department Justice, TSP Model, Pan American, , S1 S2, Watergate Scandal, REVIEW Games, Deregulation American, American TWA, game theory, air transportation, games theory, free market, airfare wars, airline industry, price elasticity, free market economy, market economy, price elasticity demand, elasticity demand, united market, behavior air transportation, air transportation companies, carriers united market,
Approximate Word count = 3612
Approximate Pages = 14 (250 words per page)