Full transcript
0:02Hello everyone.
0:04Welcome to this overview of case number
0:06two. We are going to
0:08study now.
0:10So, I thought about many topics
0:13to pick the case from.
0:15But, I really like this idea of game
0:18theory and how do we set the pricing?
0:22Given it is very, very relevant
0:24nowadays. So, the case background
0:29says that there are two airlines and
0:33keep in mind this is fictional and
0:36hypothetical scenario.
0:38North Star Airlines and Prairie Jet are
0:42two of the dominant airlines serving the
0:45fictional Chicago
0:48Fargo business travel market. So, two
0:50two cities. These two airlines fly in
0:54between these two cities and most of the
0:57flights they carry among between
0:59themselves. Together they account for
1:0185% of the non-stop passenger traffic on
1:05the route.
1:07So,
1:09both airlines currently
1:10currently charge $400. So, as you can
1:13see right now they are charging equal
1:16price $400
1:18for this
1:20route. Prairie Jet is considering
1:23introducing a promotional fare of $300
1:26to increase the passenger volume and
1:29market share as well. So, this is simply
1:32law of demand. If you lower the price,
1:36your demand will go up. So, this is what
1:39their goal is to attract more customers
1:42and to increase their
1:44market share. North Star must decide
1:47whether to maintain its current fare at
1:49400 or respond with a similar discount.
1:54So, they have a decision to make right
1:56now whether to maintain it at 400 or
1:58lower it at 300 as well.
2:01Management estimate the following uh
2:04operating profits
2:06uh which are given here.
2:08Um each payoff is stated as profit
2:10earned by named airline. So,
2:13um I did not give you the payoff matrix.
2:16I gave you the scenario and by reading
2:18the scenario, you are going to uh create
2:21a payoff matrix. So, that's your
2:23question number one. It's very simple as
2:25you can see. It's very simple uh
2:27scenario. Uh two competitors, one is
2:29thinking to lower the price, another
2:32needs to decide whether that
2:34that uh you know, uh competitor will
2:38lower the price or keep it at the same
2:39time.
2:40So, uh all of the scenarios and their
2:43followed up um you know, revenues are
2:46given here. I'll read one. So, if both
2:48maintain 400 fare, Northstar earns 12
2:53million and Prairie Jet earns 10
2:56million, right? And if both discount uh
2:58at 2 300, Northstar will earn a lower um
3:02revenue.
3:04And Prairie Jet will uh also earn a
3:06lower revenue. And by following the the
3:10the scenario here, 1 2 3 4, you will now
3:15uh create um you will answer the
3:18questions. And your first answer there
3:20five questions, I guess. Um uh four
3:24questions and you will answer these
3:25questions one by one. Uh you can see
3:28here, I haven't assigned the points yet
3:31to each question. Uh broadly and within
3:35uh each question, there are sub sub
3:36parts. Um um I'm thinking about it right
3:40now before assigning it to you. And my
3:43goal here is that you guys need to um uh
3:49pay Yes, you I'm going to ask you to do
3:52calculations, Uh but I would also like
3:56to
3:57you know hear from you about
4:01qualitative aspects in more detail. So
4:04for example, question 1A,
4:07question 1A asks you to create a matrix
4:11and I have no doubt all of you can
4:13create this matrix very carefully right
4:16now. I've graded the homework
4:19assignments.
4:21So you guys have done really well. You
4:23know,
4:25you will also be able to you know figure
4:28out their strategies.
4:31If one does this, the other will do
4:33what? But I would really like to hear
4:36from you the qualitative aspect. So you
4:39may see that I will assign higher points
4:42where I have explained in detail and I'm
4:45not asking you to explain in two lines
4:48or three lines. You have to convince me
4:52what you are telling me
4:54is is is the right answer, okay? So
4:59there's four questions very
5:01straightforward,
5:03but I would like to hear from you more
5:05qualitatively rather than
5:06quantitatively. In question number two,
5:09you will find out the Nash equilibrium.
5:12So there's a definition of Nash
5:15equilibrium. You have studied it
5:16already. Go revisit it and then apply it
5:19here.
5:21And then combined profit if they both
5:24maintain the higher fare and if they
5:28both you know provide discount and
5:31what will be the difference in the
5:35profits
5:36between these two scenarios that that's
5:39given over here.
5:40And then again, explain in detail why
5:43individual individually rational
5:45decisions can produce an outcome that is
5:48worse. I mean, here, as you can see,
5:51uh you you need to um
5:53uh relate your answer to first Nash
5:55equilibrium and then also to prisoner
5:58dilemma. And then here, uh this is some
6:01uh more
6:02quantitative stuff where
6:04um you know, um
6:06uh
6:07cha- uh probabilities are assigned. Hey,
6:10there's a probability that competitor
6:13uh will uh maintain the price and
6:15there's a probability that competitor
6:17will decrease the price. By using the
6:19probabilities, you can
6:21uh you know, um
6:23uh find the answers here as well
6:26uh in part A, B, and C. And again,
6:30uh here in part 3C, you will write in
6:34detail
6:36um and provide the answer. So, of
6:38course, I can understand the
6:40calculations will be one or two lines,
6:42but I would like to hear from you in
6:45detail. Lastly, this is where you are
6:48not really going to uh make
6:50uh a lot of calculations. This is again
6:53qualitative and um
6:56uh here the strategies are provided to
6:59you. Here, what if you don't want to
7:00change price,
7:02but you would like to differentiate
7:04yourself in customer loyalty and service
7:07differentiation.
7:08So, given these, uh you know, subjective
7:11ma- matrices like now, you need to
7:14answer these questions and make sure
7:16your answers are detailed detailed and
7:19detailed here. So,
7:22again, very easy, very straightforward
7:25case. Um some qua- quantitative stuff.
7:29Most of it is qualitative. So, pay more
7:32attention to the qualitative. I have
7:34been asked question previously here,
7:36"What what's the minimum and the maximum
7:39uh pages?" I generally do not set any
7:42minimum number of pages or the maximum
7:44number of pages. It is a graduate level
7:46class. You need to
7:49you know, figure it out by yourself. But
7:52again, for this kind of case, anywhere
7:54from four to five pages
7:56at the minimum should be given and more
7:59stress should be given on the
8:01qualitative
8:03your discussion. It's like your your
8:05boss gives you the number
8:08or if you are the boss, you give your
8:10colleagues the number
8:11and you stay here. I know the numbers.
8:14They're easy to calculate. I want to
8:16know
8:17in the greater detail how different
8:19strategies will work. So, give me a good
8:23presentation,
8:25you know, where I'm
8:26I want good discussion rather than
8:29number crunching, okay? So, that's the
8:31case number two.
8:33Again, it will be available to you guys
8:36shortly
8:37along with the video. If you have any
8:40questions, please reach out to me. I'm
8:43happy to answer any questions you may
8:45have.