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BOEING

Founded in 1917, Seattle Washington the world's largest aircraft and aerospace manufacturer . the second-largest defense contractor in the world $ 21 billion in revenues (2004) the world's largest civil aircraft manufacturer in terms of value (49 % of orders and 45% of deliveries) 2005 the largest exporter in the world.

AIRBUS
Airbus (S.A.S) was established in 1970 as a European Consortium of French, German, and later Spanish and U.K. companies. In 2001, it became a single integrated company. The European Aeronautic Defence and Space Company (EADS) and U.K. based BAE Systems are the owners of Airbus (80%/20% respectively.)

Airbus Versus Boeing


Aerospace is a global industry
Buyers are global R&D costs are extremely high

Industry increasingly defined by two firms Airbus (EU) and Boeing (USA)
Companies rely on government subsidies to help fund R&D costs Contention over amount and types of subsidies each government gives to their aerospace companies led to several WTO complaints

Airbus Versus Boeing (contd)

What would it take to attract a new entrant into the global aerospace industry?
Access to substantial funding to cover development costson average $37 million for each aircraft manufactured Management would have to
Love a challenge Be ambivalent towards profits Be a glutton for punishment Be clueless about what they were getting into

Launch of Airbus A380

A3XX: Capacity and Range

A Large-Scale Capital Project


On June 23, 2000, Airbus Industries Supervisory Board approved an Authorization to Offer the A380, a proposed super jumbo jet that would *+ have a list price of $216 million and cost $13 billion to develop.

Case Framework
Consider a Large Capital Investment and Market Expansion
Competition Market Size, Costs & Benefits Regulatory and Other Issues

Competition
Who is the main competitor? What is the likely competitive response? What is Airbus market appeal? What is Airbus market power?

Boeing
The only competition for VLA (Very Large Aircraft) Reputable provider over the decades Boeing 747: Paragon of wide-body aircraft

Boeings Possible Competitive Responses


Enhance 747 Launch a new model Lower prices on 747 Ignore Airbuss A380

Enhancement of 747
Unlikely Response: Could plan a larger and more spacious enhancement of the 747 to compete with A380 Rationale: Boeing previously backed out of a similar project due to lack of customer interest We were starting to spend a lot of money (but) we just did not see customers showing the interest. - Ronald Woodard, Head of Boeing Commercial Airplane Group Projected at $4 billion in 1999
Triggered 1.7% decline in Boeings Stock

Launch a New Model


Response: Could create a competing VLA Drawback: Too much of a financial risk Previously A380 was a joint venture between Boeing and Airbus
Boeing unwilling to invest $13 billion only to share the market with Airbus

Lower Prices
Response: Could cut the price of the 747 and divert sales from the A380 or even deter launch

Drawback: Significant loss of profits Ignores problem of the 747s unappealing older technology compared to the newer A380

Ignore the A380


Response: Ignore the potential competitive threat Drawback: A380 would increase its market power Boeing would lose its monopolistic hold on the VLA market
Lose ability to cross-subsidize of other products

Game Theory and Strategy


Some key points on strategic commitment:

Always give attention to how your competitors returns vary under different strategic scenarios; It is important to communicate the commitment to the other firms (for both competition and cooperation); Sunk cost investments can be used to precommit to a certain strategy and, thus, influence competitor response; and Understand what strategic investments are important in your business and how sunk those investments are.

16.3 GAME THEORY


The Duopolists Dilemma
Each firm has two strategies. It can produce airplanes at the rate of:
3 a week 4 a week

16.3 GAME THEORY


Because each firm has two strategies, there are four possible combinations of actions:
Both firms produce 3 a week (monopoly outcome). Both firms produce 4 a week.

Airbus produces 3 a week and Boeing produces 4 a week.


Boeing produces 3 a week and Airbus produces 4 a week.

16.3 GAME THEORY

The Payoff Matrix the payoff matrix as the economic profits for each firm in each possible outcome.

16.3 GAME THEORY


Equilibrium of the Duopolists Dilemma
Both firms produce 4 a week.
Like the prisoners, the duopolists fail to cooperate and get a worse outcome than the one that cooperation would deliver.

16.3 GAME THEORY


Collusion is Profitable but Difficult to Achieve The duopolists dilemma explains why it is difficult for firms to collude and achieve the maximum monopoly profit. Even if collusion were legal, it would be individually rational for each firm to cheat on a collusive agreement and increase output. In an international oil cartel, OPEC, countries frequently break the cartel agreement and overproduce.

16.3 GAME THEORY


Repeated Games
Most real-world games get played repeatedly. Repeated games have a larger number of strategies because a player can be punished for not cooperating. This suggests that real-world duopolists might find a way of learning to cooperate so they can enjoy monopoly profit. The next slide shows the payoffs with a tit-fortat response.

16.3 GAME THEORY


Week 1: Suppose Boeing contemplates producing 4 planes a week. Boeings profit will increase from $36 million to $40 million and Airbuss profit will decrease from $36 million to $30 million. Week 2: Airbus punishes Boeing and produces 4 planes a week.

16.3 GAME THEORY


But Boeing must go back to 3 planes a week to induce Airbus to cooperate in week 3. In week 2, Airbuss profit is $40 million and Boeings profit is $30 million. Over the two weeks, Boeings profit would have been $72 million if it cooperated but only $70 million with Airbuss tit-for-tat response.

16.3 GAME THEORY


In reality, where a duopoly works like a one-play game or a repeated game depends on the number of players and the ease of detecting and punishing overproduction.
The larger the number of players, the harder it is to maintain the monopoly outcome.

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