Question

Airbus and Boeing will develop a new commercial aircraft. Airbus is ahead, and Boeing is considering whether to enter the market. If Boeing stays out, it earns zero profit, while Airbus enjoys a monopoly and earns a profit of $1 billion. If Boeing enters, then Airbus must decide whether to accommodate Boeing peacefully, or to wage a price war. With peace, each firm will make a profit of $300 million. With a price war, each will lose $100 million. what should boeing do. use payoff matrix and game theory

Answer 1

The payoff matrix is shown below. Note that payoffs are in million dollars and best responses for Airbus are circled iwth red and for Boeing they are circled with black

Airbus has a weakly dominating strategy of accomodating peacefully. Boeing has different responses under different strategies. There are two Nash equilibrium in this case, one of them is not stable. Note that when Boeing decides not to enter, Airbus enjoys a profit of $1000 million. This is not sustainable

When Boeing enters, it can observe that Airbus will weakly follow an accomodating strategy. Given that, Boeing has an incentive to enter and earn $300 million relative to not enter and earn nothing

Hence the stable NE is Boeing enters and Airbus accomodates peacefully