I need a paper written titled Dealing with Risk, Asymmetric Information, and Incentives

Running head: use of game theory to maximize profits 1

use of game theory to maximize profits 8

Assignment 2: Use of Game Theory to Maximize Profits

Cynthia D. Carlisle

ECO 550

February 20, 2019

Professor Diana Bonina, Ph. D.

Describe the change in Southwest Airline’s boarding process.

Southwest Airlines is one of the largest low-cost airlines in the United States. The airline is headquartered in Dallas, Texas. Since the airlines’ inception, the airline adopted the first come first serve basis. Using this formula, the passengers were required to board on the basis of the time that they arrived at the gate. In this case, the traveler who arrived the earliest would be allowed to board the plane first and pick the seat of their choosing. The open sear policy allowed travelers to occupy any of the seats available without restrictions or any extra conditions attached. Although, Southwest operated this open seat policy to save costs, the program did not leave without challenges. Most of the people would panic to get to the gate early in order to get their favorite seat and some passengers would eventually end up in heated arguments (https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory).

In 2007, Southwest Airlines introduced the new process that replaced the “cattle call” process. The airline brought in the boarding number grouped under group A, B, and C. Under this process travelers were required to board starting according what group they were in which group A followed by group B and finally group C would be the last to board. Southwest decided to apply the game theory much a more complicated. A traveler with a lower boarding number within each group was to board the plane first. The boarding numbers were assigned to the earlies passenger who checked in the earliest for the flight. Passengers who checked in the earliest such as 24 hours in advance would get the first boarding number. Once inside the plane, the passenger is free to choose his/her favorite seat. Surprisingly, under this process, a passenger who forgot to check in early online would be required to wait at the end of the queue.

The new boarding process completely changed the game in an interesting manner that instead of rewarding those who waited for the longest at the gate, it started rewarding those who checked would aid in the booking online of the boarding process at a cost of $1. The bust travelers would prefer to incur the cost as the service fee was appealing.

In 2009, Southwest Airlines unveiled the most recent boarding process which they called the early bird check-in, at this time Southwest shut down the third-party websites. The early bird check-in strategy, passengers were given the option to get early boarding by paying an extra $10 per one-way flight. Although this was a good idea the early bird check-in would not guarantee the passenger a decent seat or a seat of their choice but instead would only mean the passenger has been automatically checked-in.

What was the Southwest Airlines main goal of introducing the early bird check-in?

The main goal of the early bird check-in was to provide convenience during the passengers travel experience. The passenger no longer has to worry about checking-in for your flight as we doBird-check-in0 the work for you to help you get a better boarding position, which of course leads to improved seat selection and earlier access to overhead bin space (https://www.Southwestcommunity.com/t5/Southwest-Stories/Earlybird-check-in-A-Convenient-Way-to-Travel/ba-p/24871. The brilliant idea by Southwest Airlines to introduce the early bird check-in was initially viewed as a decent idea to help its clients and eventually, the profitability of the idea overtook it. The early bird check-in process which is seen as a transformed stolen idea from the third-party online booking companies generated more profits as compared to benefits. With this idea, the passengers were made to think of check-in early advantage by paying the premium early bird check-in fee but the reality was an entry into a lottery group where the benefit is not guaranteed. The idea was to induce more profits to the airline company. In 2010, Southwest reported revenue with an extra $98 million as compared to previous years. This was the revenue collected from the early bird check-in process. Southwest’s revenue from the early bird check-in process surprisingly increased by 44 percent in 2011 translating to over $142 million extra in revenue (https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory). The game theory for two travelers who are competing for the same seat will bring more profit to the company as compared to a traveler that will not pay for early bird check-in.

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

Southwest Airlines used the game theory approach to increase profits by assigning open seating. Travelers are willing to pay to get priority seating. Southwest Airlines knew that by offering early bird check-in at a low-cost of $10 would increase profits. Travelers will pay $10 per one-way flight and secure priority seating. The thought process of Southwest Airlines is that a traveler will pay extra to sit in a seat of their choice.

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

The outcome of the game involving early-bird check-in is early-bird check-in and priority seating increases profit. The options are pay $10 for a good seat or pay $0 for a lottery style seating. The pay $10 for a good seat option is that the traveler is competing with other travelers that are making the same decision. The pay $0 for a lottery style seating option is the traveler is thinking if I do not pay, I am still in competition with other travelers. The outcome is that both travelers either pay and compete or do not pay and are still competing in a seating lottery.

B. Identify what is the passengers’ dominant strategy.

The passenger’s dominant strategy is to purchase a seat to increase profits. A strategy is dominant if, regardless of what any other players do, the strategy earns a player a larger payoff than any other. Hence, a strategy is dominant if it is always better than any other strategy, for any profile of other players’ actions. Depending on whether “better” is defined with weak or strict inequalities, the strategy is termed strictly dominant or weakly dominant. If one strategy is dominant, then all others are dominated. For example, in the prisoner’s dilemma, each player has a dominant strategy (www.gametheory.net). The early-bird check-in is a dominant strategy for Southwest Airlines customers because if the different ways in the boarding process. Initially, before the airline adapted to the strategy, the airline was not gaining additional revenue from the boarding process, but immediately after launching the process earning profits through the earlier bookings were opened. In a dominant strategy, they must have an outcome. In our case, the passenger dilemma and the net profits were the outcomes of the game theory early-bird (Hammoudi and Daidj, 2018).

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

Prisoners’ Dilemma is a paradox in decision analysis in which two individuals acting in their own self-interests do not result in the optimal outcome. The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant (www.investopedia.com).

To pay $10 for early-bird check-in is the passengers’ dominant strategy. With the early-bird check-in process, it causes travelers to be placed in a prisoners’ dilemma. There are some travelers who will never pay $10. But practically, a good portion are willing to pay for the privilege and are caught in the Prisoner’s Dilemma (https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory). The caveat to early-bird check-in process does not guarantee a good seat, it means that travelers are checked-in automatically. Some passengers think that by purchasing the early-bird check-in after purchasing an airline ticket will provide assurance of good priority seating. Other passengers are convinced that purchasing early-bird check-in can de done 24 hours prior to boarding the flight. The early-bird check-in started a new game where the traveler pays an extra $10 to check-in early although there is no assurance to get early-bird check-in. In this case, the passengers enter a dilemma where they are trying to secure a better seat through the extra cost but the airline has only allocated 60 slots for the first early-bird check-in. Although purchasing of the ticket early, Southwest Airline cannot guarantee a seat beyond the 60 seats allocated. Travelers are stuck in the game because if you stop playing the game it will result in bad seating.

Analyze the advantages and disadvantages of the early-bird check-in process for Southwest Airlines.

Advantages:

· For $15 you can pay to check into flight 36 hours before departure

· Check-in process offers satisfaction to the travelers that they get the best preferred seat on the plane

· Check-in process has brought more profits to the airline as compared to before the launch of early-bird check-in

· Eases the time management for the boarding process

· Increased efficiency in handling travelers at the gate

· Maintains airline management prior to the flight’s departure

· Priority boarding privileges are already included with the purchase of Business Select fares and the benefit of being on the Rapid Rewards A-List

· Open seating is much faster

Disadvantages:

· Travelers pay an extra fee without the guarantee of getting a good seat

· Uncertainty from dissatisfied travelers

· Checking in 24 hours does not guarantee getting in the best boarding group

· More confusion especially by customers that had intentions of being seated together

· Some travelers will never pay for early-bird check-in service

· Early-bird check-in is a limiting factor

· Customers being angry for paying for early-bird check-in and ends in with a bad boarding position

· Customers forgetting to check-in early and getting positions in the last boarding group

· Families and groups can reserve seats

More travelers will continue joining the game theory as each will be hoping to be among the first 60 travelers. The literal concept of the early-bird check-in will always attract more early-bird check-in customers who may not be able to manage time for the normal booking process. Southwest Airlines offers lower rates for flights and early-bird check-in, there profits will always increase because passengers/customers always want to believe that they are getting a great deal. Travelers cannot stop playing the game because they want to always get good seating. The probability that the Southwest Airline will have a problem in the future is 1that is 0.6 seats booked and occupied plus 0.4 seats booked but not available (Hammoudi and Daidj, 2018). Southwest Airlines managed a game theory that they had no idea would bring so much profit to the airline. In the years to come, Southwest Airlines will be very profitable.

Suggest ways in which other companies, or the company you work for, utilize similar game approach to maximize profits.

In June 2000 the Bell Atlantic Corporation and GTE Corporation merged to become Verizon Communications. It was one the largest mergers in U. S. business history. Verizon Communications is currently a global technology company fulfilling the dreams of millions of customers across the globe (Verizon Wireless, 2019). Although Verizon Wireless is a famous telecom company, there are other competitors such as T-Mobile and Sprint. In the market, Verizon Wireless still remains a huge network infrastructure, customer base and top in the adoption of new technologies.

Prior to 2016, Verizon maintained only two kinds of options its Verizon Wireless customers could subscribe to.

The two options are listed below:

Option 1: Two-year plan where the customer was to subsidized phone prices for a device and be allowed to use Verizon services for a restriction of two years with a fixed service fee of $40 on top of the monthly bill. This option allowed the customer to terminate their contract early with a fee.

Option 2: A customer was required to pay for phone devices immediately or choose their own device but maintain the Verizon Wireless service (Verizon Wireless, 2019).

In January 2017, Verizon Wireless introduced a 24-month installment option for phone devices. With this option, the customer can upgrade their phone at any time by returning the old phone. The disadvantage to this option is the customer has to pay the remaining balance of the old device. The advantage of receiving a new device is if your old device has less than 50% of remaining payments. This is a win-win strategy for the telecom company because of the accumulated huge profits. Verizon applied the game theory to benefit without many investments.

References www.investopedia.com https://www.Southwestcommunity.com/t5/Southwest-Stories/EarlyBird-Check-in-A-Convenient-Way-to-Travel/ba-p/25871 Hammoudi, A., Daidj, N. (2018). Game Theory Approach to Managerial Strategies and Value Creation Talwalkar, P. (2013). Southwest Airlines boarding and game theory. Retrieved January 31, 2019. https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory www.gametheory.net Verizon Wireless. Retrieved February 20, 2019. https://www.verizon.com/about/our-company https://youtube/TxNrizGdhtY.