Game Theory

Game Theory

            Decision-making is crucial among customers and leads to dilemmas. Companies often take advantage of the dilemmas to make a killing in terms of profits by employing strategies such as game theory. Generally, game theory is a strategy that is used where decision-making is challenging. Companies that employ effective use of game theory end up making profits and get other benefits such as minimizing unnecessary conflicts among customers. One of the companies that have effectively used game theory in decision-making is Southwest Airlines. The assignment of seats during the boarding process had been a major challenge, but the game theory has solved most of the challenges and has also improved profitability. The shift from assigned seating has been made effective by game theory with minor conflicts such as line breaking and overcrowding at the gate have been solved. Open-seating is always a disorganized way of allowing passengers to board a plane, but Southwest Airlines has a way of organizing the process through game theory while enjoying the benefits of open-seating.

Southwest Airlines has been operating for more than forty-nine years and has remained profitable over the years. One of the strategies that have contributed immensely towards the profitability of Southwest Airlines has been the seat assignment procedure (Cote, 2018). Other strategies, such as lowering fares and filling empty seats before a flight, have also contributed to more profits. Initially, Southwest Airlines used the first-come, first-served approach to assign seats to customers. The procedure was, however, associated with conflicts with customers cutting on the line to get better seats or even overcrowding at the gate. Southwest Airlines eventually introduced a strategy where a customer would pay an additional $10 one-way fare for reservation of a better seat. The strategy improved on the organization of the boarding process and improved the profitability of the firm. The additional cost wins a customer an assignment to a boarding group, which is reserved at the gate. Also, the firm introduced the early-bird check-in, where an automatic assignment is done after a customer agrees to purchase a check. Moreover, the need to increase revenues and shut down third-party players was one of the goals of introducing Early-bird check-in.

Southwest Airlines is a profit-making firm, and its main goal in introducing Earl Bird Check was to improve profitability while shutting down third parties that were taking advantage of the boarding crisis. Customers usually have a preference for better seats during a flight (Weiss & Friesen, 2017). However, open-seating may deny customers the chance to have better seats due to the first-come, first-served basis. Southwest Airlines also noticed the activities of third party involvement where third-party websites charged customers for reservations. Generally, Southwest Airlines was losing revenue that should have been earned from its services. The early-bird check-in offered a chance to improve on profitability while allowing for the closing down of the websites. Besides, the Earl Bird Check has contributed immensely in keeping Southwest Airlines low-cost but with high profits hence the choice for most customers. Moreover, the demand for better seats led to competition among customers hence the engagement in game theory that eventually improved the revenues.

Game theory has been one of the main reasons Southwest Airlines is enjoying high revenues from the early-bird check-in. Customers are generally required to pay an additional ten dollars for reservations. However, the number of customers willing to pay the additional amount is high, and a decision has to be made (Talwalkar, 2013). Initially, customers were reluctant to pay the additional amount since the economic essence of the payment was not clear. However, the desire to have the opportunity for reservations pushed most of the customers to pay the additional amount. Generally, there existed competition among the customers and an urge to pay the additional amount, which resulted in profits for the firm. The game had positive outcomes for the firm, with a revenue increase throughout enactment. Also, the traffic that used to be witnessed at the gate disappeared as reservations were made online. Furthermore, the strategies reduced the conflicts that were frequent between employees and customers, leading to a reduced length of waiting for lines at the gates. Moreover, game theory is practical if played in pairs.

The best approach to make game theory effective is to pair customers according to whether or not they are willing to pay the additional amount. When customers are paired according to their willingness to pay, the early-bird check-in offers three possible outcomes. When neither of the customers has paid the additional amount, the possible outcome is that they can expect okay seats (Talwalkar, 2013). Where only one customer pays, then he or she expects an okay seat. Finally, where both customers pay the additional amount, they compete for the chance to have an okay seat. Therefore, the three outcomes mean that paying an additional $10 is the dominant strategy for winning an okay seat. Also, the choices available to the customers lead to the prisoner’s dilemma. Generally, a customer is in a dilemma as to whether or not to pay the additional amount. Paying the additional amount offers the customer with comfort while failing to pay leads to suffering for getting a seat that is not okay. Besides, the process is automatic, and customers can hardly claim that it is not efficient. Moreover, the early-bird check-in is based on a set of advantages and disadvantages that customers enjoy for engaging.

Early-bird check-in is associated with several advantages and disadvantages. The advantages are associated with the cost and profitability of the firm in the long run. First, the firm pays attention to cost-effectiveness, and the process offers the benefit. The use of an online platform for reservations saves the company costs that would be needed for paperwork and labor. Secondly, the offices at Southwest Airlines no longer witness traffic since passengers are encouraged to obtain their tickets online (Talwalkar, 2013). Also, the minimization of conflicts between employees and clients, or even clients and clients has smoothened processes at the firm. Besides, the process is efficient since it uses numbers to present outcomes, and customers are satisfied with the outcomes. However, the process suffers from a set of disadvantages. For example, the quality of the groups is not uniform because the seats are not similar in quality. The amount payable in extra does not change with the quality of the group that a customer is reserved.  Also, the reservation is only valid as long as the customer arrives in time; otherwise, the ticket is issued out. Moreover, other companies can employ a similar strategy to increase their profitability.

The strategy used by Southwest Airlines can be applied by other companies in different ways to maximize their profits. First, companies can use the strategy to predict the outcomes of their interactions with other firms. Most companies are based on systems that were developed by their founding management and have stayed under the challenge of low profitability. Also, the strategy can be used to model both competitive and individual behaviors that directly impact profitability. Generally, traditional strategies are associated with a series of challenges that need to be addressed over time. Companies can therefore use game theory to overcome the challenges since they add unnecessary pressure on profitability. For example, the problem of traffic is common where queuing is involved. Decision-making can be enhanced to improve on decision-making so that customers can be served within the shortest possible time (Groba, Sartal & Bergantiño, 2020). Also, conflicts are common where customers do not know the potential outcomes of the processes involved. Game theory strategies such as the early-bird check-in strategy ensure that the customers are making the final decision on whether or not they are going to engage in the decision-making game. Generally, companies should be moved by the desire to improve customer satisfaction as that is essential in improving the profitability of a company. Moreover, the strategy should be used alternatively, where it aids in the achievement of the company’s goals.

In sum, open-seating is always a disorganized way of allowing passengers to board a plane, but Southwest Airlines developed a way of organizing the process through game theory while enjoying the benefits of open-seating. The early-bird check-in offers customers an opportunity to have okay seats reserved for them by paying an additional $10 on top of their one-way fare. When customers are paired according to their willingness to pay, the early-bird check-in offers three possible outcomes. Also, the strategy used by Southwest Airlines can be applied by other companies to either increase their profitability or overcome challenges associated with decision-making.

References

Cote, R. (2018). Leadership Analysis: Southwest Airlines-Herb Kelleher, CEO. Journal of            Leadership, Accountability and Ethics, 15(1).

Groba, C., Sartal, A., & Bergantiño, G. (2020). Optimization of tuna fishing logistic routes           through information sharing policies: A game theory-based approach. Marine           Policy, 113, 103795.

Presh Talwalkar. (2013). Southwest Airlines boarding and game theory: Mind Your Decisions.     Retrieved from https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines- boarding-and-game-theory/

Weiss, E. N., & Friesen, M. (2017). Southwest Airlines: Singin’the (Jet) Blues. Darden Business   Publishing Cases.