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Running head: GAME THEORY 1

Game Theory

Name

Institution Affiiation

GAME THEORY 2

GAME THEORY

Grouping system

Over the year, the Southwest Airlines has been using the open seat policy; this is

where the passengers who board the plane first have the priority of choosing the most suitable

seat (Talwalkar, 2015). The main reason for the adoption of this policy is to reduce the cost

incurred to create the necessary order of seating. However, over the past years, it has adopted

an established procedure of how the passengers boarded the plane despite the fact that they

don’t book their seats. Several advancements have been to make the system more effective,

travelers who initially arrive at the gate earliest were given priority to board the plane first and

pick their favorable seats. However, it leads to camping out at the entrance which caused

several arguments and misunderstanding among the passengers and workers (Talwalkar,

2015). In 2007, the company adopted a more advanced system where each traveler was

assigned a travel group; A, B or C which had different boarding numbers. The procedure

adopted was more convenient within each group; a traveler who had the lowest number was

allowed to board the plane the first one. However, the travelers were allowed to choose seats

once they were in the plane. Passengers in group A went first followed by B and C

respectively. The convenience of the system is that there was order and all passengers queued

(Li & Shen, 2012). The numbers assigned to the travelers was determined by the time at which

the passengers checked in for a flight, this system benefited individuals who used online to

check in for the flights and never helped individuals who wasted a lot of time at the gate.

The EarlyBird Prisoner’s Dilemma

The company also adopted a more effective system which targeted at increasing its

revenue as well as reducing the traffic at the booking offices. Upon the introduction of the

online platform, the company announced the EarlyBirds prisoner’s Dilemma which allowed

GAME THEORY 3

travelers who were willing to pay $10 extra. The system did not guarantee the customer a seat

of their choice, but they were given first boarding option.

The system entails a Game Theory for the firm to maximize on profits, this is where,

the two passengers who are termed as EarlyBirds are competing for favorable seats at the

simultaneously, where if none of the passengers pays for the EarlyBird system, then both of

them expect better places in the seating lottery (Talwalkar, 2015). If one of the passengers

pays for the $10 then he or she will get the better seat and at the same time the company will

earn extra revenue, if both pay for the $10, then they will get better seats and the firm will

generate more revenue.

The company made an application of the game theory to generate more revenue which

was developed based on the human cooperation and conflict with the competitive situation

among the passengers. The sciences of the strategy were to ensure that clients compete for the

early board with the aim of securing themselves seats of their choice. There is the aspect of

Zero-Sum Game where both participant’s gain and losses are balanced (Talwalkar, 2015). If

the total benefits of the individuals are added up, and the total losses are subtracted, the final

value is zero. The numbers assigned to the travelers was based on the time at which the

passengers checked in for a flight, this system benefited individuals who used online to check

in for the flights and never helped individuals who wasted a lot of time at the gate.

What was southwest’s primary goal in introducing the early-bird check-in?

The EarlyBird check-in was aimed at creating competition among the travelers for the

better seat which finally earn the company more profit as many people will be willing to pay

the $10 to get a better seat (Li & Shen, 2012). The strategy was based on the Game-Theory,

where those individuals who were willing to pay the $10 were entitled to better seats, and

those who were not willing were driven to a worse situation which motivated them to pay the

$10. Therefore, the primary aim of adopting the system was to cut on the marginal cost,

GAME THEORY 4

increase customer competition and thus to increase its revenue which results in profit

maximization.

Explain how Southwest Airlines used the game theory approach to increase its

profits

The customers of the company were required to pay $10 for a one-way flight to

secure a priority seat as they were allowed to board first. The system was used to impact a

game to the minds of the travelers as they were confused whether they should pay the $10 or

not, on the other side they were competing with other customers (Li & Shen, 2012). The urge to

pay the $10 and the existing competitions resulted in high turn-over rate on the receivable

accounts. The high turn-over translates into huge profits for the company. The earnings of the

company were identified to have grown by 44% upon the adoption of the system.

What is the outcome of the game involving early-bird check-in?

The outcome of the game was increased revenue to the firm. Also, an order was

established as traffic at the booking offices of the airlines were cut off as many travelers were

able to get their tickets online (Li & Shen, 2012). The conflict between the employees and the

passengers also reduced the number of clients who were waiting at the gate board reduced.

Identify what the passengers’ dominant strategy is

The possible outcomes of the plan were;if neither pays for EarlyBird, then both can

expect okay seats in the seating lottery.

If one person paid the $10, he or she gets a good seat, but, if both of them pay, they

will be competeing for the good seat for the lottery seat.

GAME THEORY 5

EarlyBird check in(EB) No

Therefore, the dominant strategy is to pay the $10 so as to get a good seat.

Determine why travelers face the Prisoner’s Dilemma with the early-bird check-in

process

The passengers experienced the Prisoner’s dilemma as they were experiencing a

conflict of either to pay the $10 or avoiding paying. The two choices had consequences which

allowed them to enjoy or suffer. Willingness to pay was accompanied too with comfort as

they were allowed to select a seat of their choice upon boarding the plane, on the other hand,

failure to pay the extra ten dollars drove them to worst situations (Zhang et al., 2018). The

check-in process was automatic and more efficient.

Advantages and disadvantages of the early-bird check-in process for Southwest

Airlines.

Advantages

The system is cheap as the company is using an online platform to check in customers.

It also reduces traffic at the offices as a passenger can get their tickets online. It is also a

significant source of extra revenue which translates into huge profits (Zhang et al., 2018). It

Good seat

Good Seat

Bad seat

Good seat

Okay pay

GAME THEORY 6

reduced on the conflict between the employees and clients, clients and clients pertaining who

arrived first. The system entails grouping and use of numbers which makes the process more

efficient.

Disadvantages

In the event that there are many persons who are purchasing ticket with the extra $10,

the customer will be given group B which is not as good as A. In addition, in situation where

the customer is not able to arrive in time yet he had been checked it, his or her ticket will be

issued out.

Suggest ways in which other companies can utilize the strategy

Prisoner’s dilemma and Game theory are used continuously in the Business

atmosphere to attain maximum profit. In a situation where there are two competing companies

such as Coca-Cola and PepsiCo, If Coca-Cola decides to cut down its prices, it will leave

PepsiCo in Prisoner’s dilemma of whether to follow suit or maintain its prices. PepsiCo will

finally cut down its prices, and the aggregate demand for Soda for the two companies will

increase and thus colossal profit turn-over. On the other hand, if PepsiCo maintenance its

initial prices, Coca-Cola will enjoy significant market share by maximizing its profits.

Therefore, Game Theory and Prisoners Dilemma are used by the organization to make

decisions.

GAME THEORY 7

References

Talwalkar, (2015) Southwest Airlines boarding and game theory

Hafezalkotob, A., Mahmoudi, R., Hajisami, E., & Wee, H. M. (2018). Wholesale-retail

pricing strategies under market risk and uncertain demand in supply chain using

evolutionary game theory. Kybernetes.

Zhang, A., & Zhang, Y. (2018). Airline economics and finance. In The Routledge Companion

to Air Transport Management(pp. 171-188). Routledge London and New York.

Li, Z., & Shen, H. (2012). Game-theoretic analysis of cooperation incentive strategies in mobile ad hoc

networks. IEEE Transactions on Mobile Computing, 11(8), 1287-1303.

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