Boeing and Airbus are competing to fill an order of jets for Singapore Airlimes
ID: 1194826 • Letter: B
Question
Boeing and Airbus are competing to fill an order of jets for Singapore Airlimes Each firm can offer a price of S10 million per jet or $5 million per jet. If both firms offer the same price than the other, the lower-price competitor wins the entire order. Here is the profit that Boeing and Airbus expect they could earn from this transaction: 85m 30,30 payoffs in millions of dollars) $10m (1) What the Nash equilibrium of this game? 2) Suppose that Bocing and Airbus anticipate that they wil be competing iar orders like the one from Singapore Airlines every quarter, from now to the foresecabl e future. Each quarter, each firm offers a price, and the payoffs are determined according to the table above. The prices offered by each airline are public information. Suppose that Airbus has made the following public statement: To shore up profit margins, in the upcoming rter, we intend to be ststesmantike in the pricing of osar aircraft and will not cat price simply to win an onder Houeter, the competition takea advantage of our statesmanlike policy, te intend to abandon this policy and will compete all out for orders in every subseguent guanter." Boeing is considering its pricing strategy for the upcoming quarter assuming the above statement is a credible commitment from Airbus). What price would you reoommend that Boeing charge? Present a formal reasoning. (Note: to evaluate payoffs, imagine that each quarter Boeing and Airbus receive their payoff right away. Thatis, if in quarter, Boeing chooses$5m and Airbus chooses sin, Boeing will immediately receive its profit of S20 in that particular quarter). Furthermore, assume that Boeing and Airbus evaluate future payoffs in the following way: a stream of payoffs of Si starting neat quarter and received inevery quarter thereafter has exactly the same valac as a one-time payoff of 300 received immediately this quarter. (3) Suppose that aircraft orders are reoeived once 8 year rather than onoe a quarter. That is, Boeing and Airbus will com pete with each other for an order this year (with payods ven in the table above), but their next competitive encounter will not occur for another year. In terms of evaluating present and future payoffs, suppose that ench firm views stream of payoffs of $1starting next year and reoeived in every year thereafter as equivalent to 810 received immediately this year. Again assuming that Airbus wil follow the policy in its public statement, what price would you reoommend that Boeing charge in this year and beyond? Present a formal reasoning.Explanation / Answer
Boeing
P = $5m
270
30
30
….
30
P = $10m
50
50
50
….
50
Boeing values a stream of payoffs of $1 starting next quarter as a payoff of $40 in the first quarter. Therefore, Boeing values the two payoff streams as
P = $5m
270 + 40(30) = 1,470
P = $10m
50 + 40(50) = 2,050
Therefore, the value of “P = $10m” in current dollars is greater, so Boeing should select “P = $10m” in this quarter and all subsequent quarters.
P = $5m
270 + 10(30) = 570
P = $10m
50 + 10(50) = 550
Now “P = $5m” has a higher value in current dollars than “P = $10m.” Thus, Boeing should select “P = $5m” this year, receive the high payoff in the current year, and select “P = $5m” thereafter receiving a stream of payoffs of 30 each year.
P = $5m
270
30
30
….
30
P = $10m
50
50
50
….
50