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Pricing Strategy

Huskte and Speedy are the only 2 companies licensed to provide transportation service from the city airport to downtown. Assume that low-price guarantees are illegal. The average cost per passenger is constant $10. Here are the possible outcomes:

-Price fixing cartel. Each firm has 15 passengers at a price of $30.
-Duopoly (no price fixing). Each firm has 20 passengers at a price of $20
-Underpricing: (one firm charges $20 and the other charges $30). The low price firm has 28 passengers and the high price firm has 5 passengers.

Questions to be answered:

a. Hustle chooses a price first. Draw a game tree for the pricing strategy of these firms and predict the outcome.

b. If a low price guarantee were legal, what would the likely outcome be?

c. If the local government deregulated this industry and allowed any firm to enter that met basic safety standards, what do you think the outcome would be in terms of price?

(NOTE: Calculate the profit and loss.)

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Solution Preview

Please see the attached file.

Answer 1: Please find the tree below. ProfitsH correspond to Profits of Hustle and ProfitsL corresponds to profits of Speedy. As you can see since Hustle goes first, it will pick the strategy that maximized its profits. In this case that ...

Solution Summary

The solution explains the several pricing strategies using the examples provided.