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Boeing vs Airbus - 21

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    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 theworld.

    BOEING

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    AIRBUS Airbus (S.A.S) was established in

    1970 as a European Consortium of French, German, and later Spanishand U.K. companies.

    In 2001, it became a singleintegrated company.

    The European Aeronautic Defenceand Space Company (EADS) andU.K. based BAE Systems are theowners of Airbus (80%/20%respectively.)

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    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 toseveral WTO complaints

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    Airbus Versus Boeing (contd)

    What would it take to attract a new entrant into theglobal aerospace industry?

    Access to substantial funding to cover development

    costs on average $37 million for each aircraftmanufactured Management would have to

    Love a challenge Be ambivalent towards profits Be a glutton for punishment Be clueless about what they were getting into

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    Launch of Airbus A380

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    A3XX: Capacity and Range

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    A Large-Scale Capital Project

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

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    Case Framework

    Consider a Large Capital Investment and MarketExpansion

    Competition Market Size, Costs & Benefits Regulatory and Other Issues

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    Competition

    Who is the main competitor? What is the likely competitive response?

    What is Airbus market appeal? What is Airbus market power?

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    Boeing

    The only competition for VLA (Very LargeAircraft)

    Reputable provider over the decades Boeing 747: Paragon of wide-body aircraft

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    Boeings Possible CompetitiveResponses

    Enhance 747 Launch a new model

    Lower prices on 747 Ignore Airbuss A380

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    Enhancement of 747Unlikely 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

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    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 marketwith Airbus

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    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

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    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

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    Game Theory and Strategy

    Some key points on strategic commitment:

    Always give attention to how your competitorsreturns vary under different strategic scenarios;

    It is important to communicate the commitmentto the other firms (for both competition andcooperation);

    Sunk cost investments can be used to pre -commit to a certain strategy and, thus, influencecompetitor response; and

    Understand what strategic investments areimportant in your business and how sunk thoseinvestments are.

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    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

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    16.3 GAME THEORY

    Because each firm has two strategies, there arefour 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.

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    16.3 GAME THEORY

    The Payoff Matrix

    the payoff matrix asthe economic profitsfor each firm in eachpossible outcome.

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    16.3 GAME THEORY

    Equilibrium of theDuopolists Dilemma

    Both firms produce 4a week.

    Like the prisoners, theduopolists fail to

    cooperate and get aworse outcome than theone that cooperationwould deliver .

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    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 acollusive agreement and increase output.

    In an international oil cartel, OPEC, countriesfrequently break the cartel agreement andoverproduce.

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    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 fornot cooperating.

    This suggests that real-world duopolists might finda way of learning to cooperate so they can enjoymonopoly profit.

    The next slide shows the payoffs with a tit -for-tat response.

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    16.3 GAME THEORY

    Week 1: Suppose Boeingcontemplates producing 4planes a week.

    Boeings profit will increasefrom $36 million to $40million and Airbuss profitwill decrease from $36million to $30 million.

    Week 2: Airbus punishesBoeing and produces 4planes a week.

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    16.3 GAME THEORY

    But Boeing must go back to 3planes a week to induceAirbus to cooperate in week3.

    In week 2, Airbuss profit is$40 million and Boeingsprofit is $30 million.

    Over the two weeks, Boeingsprofit would have been $72million if it cooperated butonly $70 million with Airbusstit-for-tat response.

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    16.3 GAME THEORY

    In reality, where a duopoly works like a one-playgame or a repeated game depends on the number

    of players and the ease of detecting and punishingoverproduction.

    The larger the number of players, the harder it isto maintain the monopoly outcome.

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