AirTrain and BigJet are considering starting nonstop service from Pittsburgh to Las Vegas. Assume that no other airlines serve this route. Market demand is such that if there is one airline serving...

AirTrain and BigJet are considering starting nonstop service from Pittsburgh to Las Vegas. Assume that no other airlines serve this route. Market demand is such that if there is one airline serving the Pittsburgh to Las Vegas route the profit will be $20000. If two airlines serve the route, each will lose $5000. If an airline chooses not to enter this market, their profit is $0.

a. Illustrate the game in normal (matrix) form, if the decision must be made simultaneously. Find the pure strategy Nash equilibria.

b. Illustrate the game in extensive (tree) form, if the decision is made sequentially, with AirTrain moving first. Find the two pure strategy Nash equilibria. Find the subgame perfect (backwards induction) equilibrium.

c. Before AirTrain makes their decision, the CEO of BigJet publicly announces that regardless of AirTrain’s decision, she will enter this market. If AirTrain believes that BigJet will follow through with their threat, what is AirTrain’s best strategy? Is BigJet’s threat to ‘enter no matter what’ credible? Why or why not?