Strategic behavior and International competitiveness: Using Game Theory

Suppose that Boeing and Airbus Industries (a consortium of German, French, English and Spanish companies) are both deciding to produce a new aircraft. The huge costs involved in production of the aircraft, a company would need the entire world market for itself to earn a profit of close to $100 million. If both the firms produce the plane both would incur losses of $10 million each. If both do not produce the plane then neither makes additional profit.

If Boeing enters the market and develops the planes, it earns $100 million while Airbus has been locked out of the market as it could not earn the profit. Now both make a loss of $10 million each. Now the European governments give a $15 million subsidy to Airbus which turns their loss into $5 million profit. Boeing with its unsubsidized loss will stop producing the aircraft and leave the entire market to Airbus and now it has the entire market to itself and earns $100 million. The idea is to overcome market disadvantage and acquire a strategic comparative advantage in a high tech field by using an industrial and strategic trade policy.

In fact Airbus is exploring the possibilities of producing a plane to carry up to 600 passengers to compete Boeing’s 747 that can carry close to 475 passengers. The U.S. government is less inclined towards subsidies than its European counterparts who have aided Airbus with subsidies totaling $26 bn. And yet Boeing has continued to earn high profits even after losing market share to Airbus.