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Homework answers / question archive / Strategic Advantage Boeing and Airbus are the world's only major producers of large, wide-bodied aircrafts
Strategic Advantage Boeing and Airbus are the world's only major producers of large, wide-bodied aircrafts. But with the cost of fuel increasing and changing demand in the airline industry, the need for smaller regional jets has increased. Suppose that both firms must decide whether they will produce a smaller plane. We will assume that Boeing has a slight cost advantage over Airbus in both large and small planes, as shown in the following payoff matrix (in millions of U. S. dollars). Assume that each producer chooses to either produce only large, only small, or no planes at all. Large Planes Airbus Small Planes Not Produce -5 125 0 10 115 115 100 0 0 Boeing Not Produce Small Planes Large Planes 150 15 150 100 125 0 O 0 0 2. What is the Nash equilibrium of this game? Assignments b. Now suppose the European government wants Airbus to be the sole producer in the lucrative small-aircraft market. What is the minimum amount of subsidy that Airbus must receive when it produces small aircraft to ensure that outcome as the unique Nash equilibrium? Is it worthwhile for the European government to undertake this subsidy?
Boeing and Airbus are the world's only major producers of large, wide - bodied aircrafts. But with the cost of fuel increasing and changing demand in the airline industry, the need for smaller regional jet has increased.
a.) Nash Equilibrium:
If Boeing decides to produce small planes as it is its dominant strategy, than the Airbus chooses large plains.
Wher Boeing receives 115 and Airbus receives 125 as pay off.
The best strategy adopted given the opponents strategy and neither have an incentive to deviate from the strategy. Airbus chooses large plains and the nash equilibrium exits at payoff 150(Boeing) and 100(Airbus)
So there is no single nash equilibrium existing.
1. If Boeing decides first and chooses to produce samll planes as it is dominant strategy than the Airbus chooses large plains and the nash equilibrium exists at payoff 150 (Boeing) and 100 (Airbus).
2. Where Boeing receives 115 and Airbus receives 125 as payoff.
3. If airbus decides to moves first, than the dominant strategy for Airbus is Small planes and if it chooses small planes than Boeing wil choose large planes.
b.)
Subsidy:
1. The payoff will be 140 for Airbus by producing small planes and 15 for Boeing for producing large planes.
2. Airbus will produce as it receives 15 as payoff even if Boeing produces small planes, looking at the subsidy boeing might decide to concentrate on large planes.
3. The new payoff of Airbus if it produces Small planes is 140 or 150 or 140
Yes Europeangains the market for small planes.
please see the attached file for the complete solution.
