Paper Example on Use of Game Theory to Maximize Profits

Introduction

Upon its discovery, game theory was praised as a revolutionary concept which brought together philosophy, mathematics, psychology and many more areas of academics (Lindgren, 2018). In game theory, two players compete for favorable positions but in the end, the third party gains from their competition. The competition arises from the fear of either player concerning the intentions of the other player. This concept was used by Southwest airlines to increase their profits by huge margins. Previously, the travelers queued at the gate hence creating congestion. The airline policy was based on a first-come, first-serve basis. After its introduction, the revenue stream from the online-boarding system has been growing constantly. Game theory can be beneficial if businesses use it in the right manner.

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Description of the Change in Boarding Process

Previously, Southwest airlines' policy on the boarding process involved "open-seating." This policy ensured that the passengers were free to take their preferred seats based on the availability. This policy was loved and hated in equal measure. It meant that families got separated from each while traveling and passengers crowded the gate to secure. On a positive note, the process of assigning seats was much faster. This policy was adopted mainly because of its tendency to save on costs.

In the year 2007, Southwest airlines ended this battle for seats. They introduced a new process in which a traveler was assigned a boarding group, that is A, B, or C (Talwakar, 2015). They were also assigned boarding numbers in addition to the boarding group. In this new process, group A went first while C went last. The travelers that have lower boarding numbers in each of the groups boarded the plane first. This change brought more order at the gate. With this process, travelers who failed to check in online had the worst experience as they had to wait for the rest of the passengers to get their seats first.

Therefore, as opposed to the previous system, this new policy did not reward people who arrived first but rather those who applied online first. There was the emergence of a secondary market to take advantage of the online-boarding technology. Websites sprung up offering to automatically book a flight for the travelers at the earliest possible time. This website operated for some time before the airlines decided to shut all of them and profit from the online-boarding process.

The Main Goal of Introducing the Early-Bird Check-in

The main aim of introducing the early-bird check-in was to profit from the need of customers to get the best seat. They would make this profit by charging the customers an additional $10 for a one-way fare for the customers who wish to have favorable positions. Therefore, in addition to the online-boarding policy introduced in 2007 that eliminated crowding, this system ensured that the airline benefitted from the process of online-boarding (Talwakar, 2015).

How the Game-Theory Approach Increased Profits

The outcomes of the game involving early-bird check-in, considering two travelers, is that if none of them pays for a favorable seat both of them have a chance of getting a favorable seat. If one of the travelers pays for a favorable seat, the other traveler has no chance of getting the favorable seat. If both of them pay for the good seat, they still get drafted into the lottery for to determine who gets the good seat. In other words, they still compete for the seat in spite of paying to get the better seat.

These outcomes show that by paying an additional fee, the traveler is not guaranteed to have a good seat. The outcome of the booking depends solely on whether the other travelers will pay for the good seat. Businesses have used this strategy on many occasions to create competition among customers for favorable conditions but the main aim of using it is to increase the profitability of the business. Paying does not necessarily guarantee favorable conditions (Telser, 2017).

The passenger's dominant strategy is paying for the favorable seat. This means that if the other traveler fails to pay the $10, the other person who cares about the position will pay for it and get the better seat. Travelers are always afraid to get the bad positions hence they would prefer to pay to increase their chances of getting a better seat. In reality, both would be better off paying nothing because then both of them would still have the same chance of getting the best seat at no extra cost. The travelers that usually pay for the better seat get caught in the prisoner's dilemma.

The travelers face the prisoner's dilemma. The prisoner's dilemma is a situation where two suspects are caught are caught and placed in separate cells thus, they cannot communicate with each other (Lindgren, 2018). The police give each one of them a chance to defect by confessing his crime and the crime that the other committed. There is also an option of cooperating with the other suspect by remaining silent about the crime that they committed. The outcomes are that if they both remain silent, each one of them will have a one-year jail term for their crimes. Additionally, if one suspect gives a confession he will be released while the other suspect will be jailed for twenty years. Lastly, if each one of them gives a confession each one of them gets a five-year sentence.

Therefore, the Southwest airlines travelers face the prisoner's dilemma because the outcome of one traveler depends on the decision that the other traveler makes. Just like the suspects, the traveler will always be afraid of the decision that the other travelers will make. This fear drives the traveler to pay just in case the other traveler also decides to pay in order to have a favorable position.

Advantages and Disadvantages of Early Bird Check-in

The advantage of the early-bird check-in to the airline is that it has made a tremendous profit since the initiation of the policy. In the year 2010, the airlines realized additional revenues amounting to $98 million because of the new policy, surpassed the expectations of the potential it had. In the following year, revenue grew 44% to $142 million. It is evident that more travelers were realizing the importance of paying the extra dollars for getting good seats. The more customers embraced the early-bird check-in, the more the profit that the airlines earned.

On a negative note, a problem can arise when too many people are paying to be checked with good seats. The consequence of this is that there is no guarantee that traveler will get the best seat. There are only 60 seats that are considered good seats. This means that if more than 60 travelers pay for the good seats and some of them end up getting seats that they consider unfavorable, the unlucky few tend to raise complaints about the situation. Therefore, the dilemma for the airlines can arise when travelers raise complaints about the seats that they have been allocated given the extra $10 dollars they paid.

However, this is not going to happen any time soon. Most of the travelers that choose the airlines are cost-conscious hence a majority of the travelers still have reservations about paying extra money to travel. Therefore, most of the travelers using this airline still don't pay to have priority seats. If this trend continues, Southwest airlines will continue making a huge profit out of the need for customers to compete.

Suggestions for Other Companies

Other companies can use the same approach to maximize their own profits. For instance, a company has invited tenders for suppliers of beverages to the company. There are two known suppliers of the beverages in a region. The company states in its policy that the supplier who pays an additional $100 will have a favorable chance of being awarded the tender. The two suppliers are in a dilemma. There are a number of possible outcomes in this scenario. If none of the suppliers pays the $100, both of them will be considered favorably. If only one of the suppliers pays $100, the other supplier will have little chance of being awarded the tender. However, if both of them pay $100, they will still be drafted into the lottery to determine the most suitable supplier. This situation puts both suppliers in a dilemma. None of them can depend on the other supplier to refrain from paying because each one of them is competing for a favorable chance.

In effect, the company that invited the tender for the supply of beverages ends up benefitting from the need of the tow suppliers to emerge the best options for the award of the tender. According to the Nash equilibrium, no one player in the game can gain an unfavorable advantage over another assuming that the other player does not attempt to change the current conditions of the game. This concept was developed by John Nash and provides the solution for players in non-cooperative competition (Nash, 2015). In the above situation, the company can gain from the situation because none of the players would be willing to cooperate with each other to have a lottery draft without making a payment.

Conclusion

It is evident that game theory can be beneficial to businesses if used in the right manner. Southwest Airlines used the first-come-first-serve for almost half a century before adopting the online-boarding system in the year 2007. A number of websites took advantage of the new technology but they were soon replaced by the early-bird check-in in the year 2010. This approach improved the airline revenue tremendously because of the competition by travelers to have good positions while traveling. The advantage of the new approach was mainly the revenue it generated for the airlines. However, the disadvantage is that problems may arise when more customers start using the service hence there will be no guarantee to have good seats. Overall, the game-theory approach can be a good source of revenue for any business.

References

Lindgren, K. (2018). Evolutionary Dynamics in Game-Theoretic. The Economy As An Evolving Complex System II, 337.

Nash, J. (2015). The Contributions of John Nash to Game Theory and Economics. Economic & Political Weekly, 50(48), 75.Talwakar, P. (2015) Southwest Airlines boarding and game theoryhttps://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory/

Telser, L. G. (2017). Competition, collusion, and game theory. Routledge.