Question

Does airline pricing follow Game Theory? Why or why not?

Answer 1

ANSWER:

In my opinion airline pricing follow Game Theory. Game theory takes into consideration the following economic scenarios with the below mentioned properties:

-- Two or more 'economic actors' – which means, two or more firms,

-- Each individual economic actor has a payoff, such as minimize loss, maximization of profits, happiness maximization, etc.,

-- Each individual economic actor has a decision set which they can make - how much to save, what price to charge, whether to move right or left, etc.

The airline predicts the actions of the competitor companies while making managerial decisions that impact profitability. The decision made by one economic actor not only impacts the payoff of the firm, but also the payoff of one or more other economic actors. If one airline company is competing in a limited market and decides to reduce their prices significantly, then it determine their breakeven point and determine whether they want to set the new price below that for eliminating the competition or decide at what price above the breakeven point they want to set the price to gain profitability.