How Game Theory May Be Used by Managers of Boeing and Airbus - Case Study Example

In the business environment companies participate in a marketplace competing against other enterprises. The industry a business belongs too can be categorized as a type of market. There are various market categories such as monopoly, oligopoly, perfect competition and monopolistic completion. An oligopoly is a marketplace with a limited number of companies participating in the market (Varian, 2003). An industry whose market behaves as an oligopoly is the aircraft industry. This industry has few players participating in it since it requires start-up to establish an airline or an airplane manufacturing operation as well as passing a rigorous regulatory process to be accepted into the industry. In this industry or any industry when two players competitive head to head in the market or a niche of the market this is considered a duopoly. This paper studies and analyzes the duopoly case of Beoing 747 combo jet and Airbus new creation the A380 by applying game theory. Game theory is the discipline that studies the way players act and behave among each other (Levine). In business and economy game theory is applied to the strategic decisions companies and organizations make internally or externally to counterattack against the moves the competitors perform. Duopoly is the classic scenario that simplifies the study and application of game theory. Companies try to utilize a dominant strategy which is a position that optimizes the performance of a company irrelevant of the moves the other firms make. The position companies try to accomplish is to obtain Nash equilibrium. Nash equilibrium is when each company makes the optimal choice, given the other company’s choice (Varian, 2003). The Nash equilibrium of firms operating in an oligopoly is called Cournot equilibrium. A Cournot equilibrium is when each firm is choosing its profit-maximizing output, given the choices of other firms (Varian, 2003). Different strategic games company may utilize include cooperation, coexistence, competition, assurance, hold up, deterrence, commitment and bargaining. The two companies focused on this study are Boeing and Airbus. Boeing is a firm with a long history in the aircraft industry that has achieved high levels of success for a long time. In 2006 Boeing had revenues of $61.23 billion a figure that represents a 16.7 per cent increase in total revenues in comparison with the overall revenue five years before (Annual report: Boeing, 2007). Boeing is the world largest aerospace company and the largest manufacturer of commercial jetliners and military aircraft (Boeing, 2007). One of the products the company is most proud off is its commercial jet the 747 aircraft. “The 747 is a key element of Boeing long-term strategy” (Boeing, 2007). The company was the first to market a large commercial jetliner by entering into this niche market in the 1960’s. One of the games the company played to keep competition away was deterrence. The company has been able to sale 1,500 units of the 747 product in the 39 year history of the aircraft (Geoff, 2007). The company has a new pet project which was launched recently which is the introduction of next generation large aircraft called the 787 Dreamliner. Deterrence was one the original strategies utilized early on by the company. The current game possibilities for this company to face Airbus will be discussed later on in the paper. Airbus is a fully integrated single enterprise with headquarter in Toulouse, France with subsidiaries in North America, China and Japan (Airbus, 2007). The company generated more than $37 billion in sales in 2006 and had a global workforce of 56,000 employees (Airbus, 2007). This company during the last 5-8 has been constantly beating Boeing in over aircraft unit sales. One particular competitive advantage the company enjoys which enable them to be fierce competitor against Boeing is governmental subsidies that allows them to have a greater buffer zone to lower prices since the subsidies has the practical effect of lowering overall costs for the company. The company has a new commercial plane called the A380, a spacious aircraft with the capacity to seat 550 passengers. The two giant companies in the aircraft industry are constantly utilizing game theory applications against each other. The A380 was a project to beat the 747 and take market share away from Boeing the in the large aircraft niche market. The project was a delayed a bit and Boeing immediately made a counter move by bringing to the market the 787 airplane. Boeing had a very successful launch that enable the company to sell 500 units of the airplane and sell out its future production until the year 2013 (Geoff, 2007). The moves displayed in this paragraph are an example of a sequential game. A sequential game is a game in which a player makes a move, then the competition counter attacks the move and this is followed the original player counterattacking against the countermove of the competition. These two companies do not like each other and instead taking advantage of their unique control of the market and playing games such as cooperation and coexistence which are passive games, the companies are playing an intense competition game. Pricing has been a very critical element of the war among these two players. Airbus has gained a lot market share in the aircraft industry, a large portion which used to belong to Boeing by having better prices on its different jetliner products. This is a very risky strategy and has caused the company some financial troubles recently. In a price war game a company lowers its price to gain market share and then the competition retaliates and lowers it bit, which is a classical tit-tat game. In such a game there is a breaking point for both players. The breaking point in price wars occurs when marginal cost equal marginal revenue. This point represents the limit and end of a price war because if any company goes below it will incur in financial losses. Price wars are not always tit-tat games. Many times games involving prices involve other business strategies such as sending a message to the competition. A player can send a ridiculous low price on a particular product in order to send a signal to the competition to stop a price war or demonstrate its capabilities to the opposition. Players involved in a game have to be conscious of the moves of the competitors and have to be able read signals or messages correctly to avoid making bad moves. Many times a player makes an awkward move to confuse the opposition and cause them to make business mistakes. In the corporate world a bad move and error of judgment can costs millions, inclusively billions of dollars for multinational companies. Making a move that results in the other player making a bad move is an extremely beneficial score for the company that induced the error. Companies involved in an oligopoly such as Boeing and Airbus which have a game history of over 35 years are playing repeated games until infinity. Repeated games is a much different scenario that a single game or a game with predetermined number of plays because at sometime in the game all rules are out and conservative strategies are thrown out into the garbage, which is what occurred between these two firms causing the game to be transformed to intense competition. On October 25, 2007 the Airbus A380 aircraft finally reached the market and made the first commercially flight of the luxurious, massive and powerful aircraft flying from Shangai to Sidney in a flight by Singapore Airlines (Economist, 2007). Airbus is attempting to beat Boeing at its own game by introducing this game changing product that introduces a plane bigger than the 747 to compete directly with this product. This strategy is extremely risky, but potentially high reward type move since this market was the only niche within the aircraft industry in which Boeing was way ahead of Airbus and enjoyed for years and years a type of monopoly in this niche market within the aircraft industry. The delayed released of the product was very detrimental for Airbus. Boeing did not stay put after this bold move by the competition. They designed their own product, the 787, to as a countermove. The company reached the market first which is always extremely beneficial. A company that reaches the market first in new product war gets the added and sweat benefit of obtaining the first contracts, which many times are from the largest and most lucrative customers in the industry. The product war between Boeing and Airbus of the 787 and the A380 was extremely ironic. The cornerstone product that caused this revolution of technologically advanced and sophisticated new large jetliners was the 747. A product introduced in an age when air travel was a luxury instead of the necessity it is in the 21st century. The 747 was a very expensive product that move slowly, but generated high gross margins for Boeing. Airbus has historically competed and started to gain market share in the aircraft industry by having very competitive prices. Now all of the sudden they enter the high priced product line in this industry with the introduction of the A380. The ironic part of this story is that Boeing introduced a new product to compete with the A380 which is smaller and cheaper than Airbus’ new creation. The strategy Boeing utilized in this circumstance is more aligned with the philosophy at Airbus than at Boeing. Currently these two companies are caught in a prisoner’s dilemma game for the future. The cards have been flipped and nobody knows the true identity of the opposing players. The game has completely changed and the history of the game between these two entities no longer serves as an indicator on the future moves of these two giants in the aircraft industry. At this point in the game and with the uncertainly of the new situation cooperation would be a good strategy to implement, but the most likely scenario is that it will not occur. Being had spectacular sales of its 787 product with a mind boggling 500 unit sales at its launch. A preferential pricing structure reap big benefits for this company, thus it is possible that the Boeing might continue this strategy it its future ventures and Airbus might completely switch its philosophical approach from cheap & small to big & expensive in its future ventures. Game theory is a very valuable field of study with lots of applications in the business world. It is valuable for all types of markets, but its applications are easier to implement in oligopoly markets due to the small number of players within the industry. In an oligopoly a company plays against few players thus it is able to closely track each move the competition makes. It is very hard and virtually impossible to track the moves of the opposition in a perfect competition market with thousands of players. The beauty of oligopoly for game theory applications is that not only do the players track the moves; they react to them making counter moves in scenarios in which a variety of different games and strategies can be applied to gain a competitive advantage. Companies introduce new products to continue the evolution of their business. Boeing and Airbus are two enterprises that recently introduced two new advanced aircraft products the 787 and the A380. The released of the A380 by Airbus was a surprising move that was inspired as a move to replace the 747 product of Boeing and take market share from that company. Boeing played the game and applied a good move by launching the 787 to compete with the A380 and moved fast and was able to reach the market first and obtain a lot of sale contracts for the product. Both these companies have been the game for a long time and they will continue to play against each other for years to come. References Airbus.com (2007). Available from [Accessed 19 October 2007]. Annual Report: Boeing (2007). Boeing Annual Report 2006. Available from [Accessed 19 October 2007]. Boeing.com (2007). Available from [Accessed 19 October 2007]. Economist.com (2007). The Airbus 380: The Giant of the Runway. Available from [18 October 2007]. Geoff, C. (2007). Boeing prepares for takeoff. Fortune, 155(10). p73-80. Available from EBSCOhost database [18 October 2007]. Levine, D. Economic and Game: What is Game Theory? UCLA. Available from [18 October 2007]. Varian, H. R. (2003). Intermediate Microeconomics: A Modern Approach (6th ed.). New York Norton & Company. 474-539. Read More