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Three Case Studies In Game Theory

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Airline Hub Game

Two airlines, A and B, are deciding whether to choose Atlanta or Chicago as their major hub. Given the diagram here, find all equilibria of this game.

Airline A
Atlanta Chicago
Airline B Atlanta $40M, 40M $85M, $60M
Chicago $60M, 85M $35M, $35M

Auditing Game

The manager of a corporate division faces the possibility of an audit every year. She prefers to spend time preparing if she will be audited; otherwise, she would prefer to invest her time elsewhere. The auditor, who gets recognized for uncovering problems, prefers to audit unprepared clients. If the players match their actions (i.e., the manager prepares and the auditor audits, or the manager doesn't prepare and the auditor doesn't audit), the manager wins with a payoff of 20, and the auditor loses with a payoff of -20. If the actions don't match, the auditor wins with a payoff of 20, and the manager loses with a payoff of -20. Diagram this game, and comment on the equilibrium

Newspaper Bargaining

Two equal-sized newspapers have overlap circulation of 10% (10% of the subscribers subscribe to both newspapers). Advertisers are willing to pay $10 to advertise in one newspaper but only $19 to advertise in both, because they're unwilling to pay twice to reach the same subscriber. What's the likely bargaining negotiation outcome if the advertisers bargain by telling each newspaper that they're going to reach agreement with the other newspaper, so the gains to reaching agreement are only $9? Suppose the two newspapers merge. What is the likely post-merger bargaining outcome?

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Solution Summary

Three case studies in game theory: two airlines choosing a hub airport, a game of chicken between a manager and an auditor, and two newspapers bargaining with advertisers. The solution shows the equilibria and explains how to find them.

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