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Airfare Price War

Foundations of Everyday Leadership Professor Gregory Northcraft

You are the owner of a small airline that flies passengers between Miami and Key West. Altogether, there are four airlines that fly this Miami-Key West route. The four airlines altogether fly 1200 passengers per week. The four airlines are:

Island Airlines, Miami West Air, Sunshine Express, Trans Florida

Passengers will only fly on the lowest-priced airline. You are ISLAND AIRLINES.

Every week, you must post your airline’s fare price for the next week’s flights. The 1200 passengers will be divided equally among only the lowest-priced airlines. If your fare price is higher than the other airlines, no passengers will fly on your airline. If your fare price is lower than all other airlines, all passengers will fly on your airline, but you will make less profit per passenger.

The fare prices you are allowed to charge are \$80, \$90, or \$100.

Each week, there is a meeting of the four airlines. You will meet and discuss possible prices for 10 minutes. Then each airline will decide what to charge that week – this decision can be private or public. Once all four airlines have decided, they will show each other what they decided to charge and calculate their revenue for the week. The lowest price is posted each week after all four airlines have decided what to charge. You will play this game for two periods (weeks).

The success of your airline is based on how much revenue your airline earns. Below is how much revenue you can earn each week during this exercise:

 Your Fare Price \$80 \$90 \$100 Your price wasn’t lowest: You get 0 passengers \$0 \$0 4 airlines charged the same low price: You get 300 passengers \$24,000 \$27,000 \$30,000 3 airlines charged the same low price: You get 400 passengers \$32,000 \$36,000 2 airlines charged the same low price: You get 600 passengers \$48,000 \$54,000 Only you charged the lowest price: You get all 1200 passengers \$96,000 \$108,000

Week 1

This week I have decided to charge (circle one):

\$100

\$90

What is your strategy at this point?

\$80

Which of the following best represents your thinking at this time? (choose only one)

a) I am charging this price because I think others will charge low prices and I don’t want to lose passengers.

b) I am charging this price because I think others will charge high prices and this way I can get more passengers.

c) I am charging this price because I think others will charge high prices and this way we can work together to keep prices high.

When the other airlines have made their choices.

How much money did you make this week?

Week 2

This week I have decided to charge (circle one):

\$100

\$90

What is your strategy at this point?

\$80

Which of the following best represents your thinking at this time? (choose only one)

a) I am charging this price because I think others will charge low prices and I don’t want to lose passengers.

b) I am charging this price because I think others will charge high prices and this way I can get more passengers.

c) I am charging this price because I think others will charge high prices and this way we can work together to keep prices high.

When the other airlines have made their choices.

How much money did you make this week?

Copyright © 2015 Gregory Northcraft at University of Illinois at Urbana-Champaign. All rights reserved. Reproduction, modification, storage in a retrieval system or retransmission, in any form or by any means, electronic, mechanical or otherwise, for reasons other than personal use, is strictly prohibited without prior written permission.