GameTheory:ApplicationstoBankingandFinance





JérômeMathis

CasestudyChapter6 BoeingvsAirbus BoeingandAirbusfrequentlycomplaintoWorldTradeOrganization(WTO).BoeingaccusesAirbusto receiveprohibitedandactionablesubsidiesfromEuropeansgovernments.AirbusaccusesBoeingto receivestateandlocalsubsidiesaswellasresearchanddevelopmentsubsidiesfromtheNASAand theDepartmentofDefense. Letushavealookatthemarketforthetwomostpopularjetairliners:Boeing737andAirbus320. BothjetsaremediumͲrange,narrowͲbody,andfor120to150Ͳpassenger.Boeingdevelopedthe737 first.DiditmakesenseforAirbustoenterthemarket? The primary market for these aircraft was in the United Sates and in the European Economic Community(E.E.C.)countries.Weassumeeachofthesemarketsisworth$900milliontoamonopoly firm. Were the two firms to compete headͲon, total profits fall from $900 million to $600 million, divided evenly between the two firms. Although profits fall, competition results in cheaper planes and lower airfares, so consumers benefit. These benefits to consumers are worth $700 million in eachmarket. AirbusIndustriesestimatesthatitwillcost$1billiontodeveloptheA320.Iftheygoaheadwithout any government assistance, they can expect to make profit of $300 million each of the markets, American and E.E.C. The total of $600 million is not enough to cover the development costs. Consequently, Airbus asks the E.E.C. to assist by giving it a protected market, that is, by requiring EuropeanairlinestobuyA320overtheBoeing737. YouarecalledtoBrusselsandaskedforadviceonwhethertheE.E.C.shouldassistAirbus.Whatdo yousuggest? Then, you are called to Washington D.C., and asked for advice on whether the United States governmentshouldassistBoeingbygivingitaprotecteddomesticmarket.Whatdoyousuggest? Inlightoftheprecedinganswerswhatdoyousuggestataninternationallevel?