So how do we take all that information and put it into a matrix?
Well, we've got again, as always, we've got the two players, Airbus and Boeing.
And they can choose whether to stay out of this large-scale market or, to enter
that large-scale market. Now, if both stay where they are, then
Airbus is assumed to make two billion in profits, $2 billion and Boeing is assumed
to make $3 billion in profits. If Airbus continues to stay out, but
Boeing launches the 747X, then they take some market share of the largest plane by
Airbus. And they open up the entire
market for super-large airplanes, so they would make 4 billion and Airbus' profits
would drop to 1 billion. If it's the other way around, so that the
A380 comes into the market, and Boeing stays out, then Airbus' profits would go
up to 4 billion and Boeing would lose 1 billion, because
they'd lose market share for the 747. And the issue of course is that if both
planes get launched, then both firms would start making losses, here to the
tune of 2 billion. Now looking at this issue looking at the
situation, what are the Nash Equilibria in this game?
Well, let's assume that, Boeing doesn't launch the 747.
What does Airbus do? They choose between not launching and
launching. Not launching in this case would give
them $2 billion. Launching in that case would give them $4
billion. So they're going to choose to launch the
A380. If Boeing, launches the 747X then Airbus
faces the choice between staying out and making $1 billion.
Losing some market share or going in but losing $2 billion, because the market
does not sustain two planes of this size.
So therefore, they're better off getting the $1 billion that comes
from not launching the new product. So, so much for Airbus.
What about Boeing? If Airbus chooses to stay out of the
market, then Boeing can choose if they stay out, they make $3 billion, if they
go in, they make $4 billion. So, they would choose to go in.
If Airbus, has launched the A380 or has committed to launch the A380 then Boeing
can choose to stay out getting $2 billion
and going in and creating losses for the entire market.
So therefore their best option is again to not enter with the super large plane.
So here, just looking at that, you see that we've got two Nash Equilibria, one
where the A380 is launched and not the 747X.
And one where the 747X is launched and not the A380.
So, looking at this, it's pretty clear that Airbus has a clear preference over
these two Nash Equilibria, right? So Airbus wants to launch the A380, but
wants to make sure that Boeing does not get to launch the 747X.
Now, as we've seen in previous sessions, we've seen that if
we have multiple Nash Equilibria, it's not easy always
to select which one of those is going to be the one that we play.
So, let's see what Airbus did, or what Airbus was trying to do in trying to
change the game and influence the game such that their
preferred equilibrium is chosen. So, they choose an aggressive commitment,
they choose to move first. And they chose to move first such that,
even before the plane was completely developed and so on,
they started building production facilities in their two hubs, Hamburg and
Toulouse. And, what's more is they made sure that
these production facilities can only be used for the production of the A380 okay?
There's no way back. They couldn't produce a smaller plane
with these production facilities. And this changed the game decisively,
because this meant that Airbus was now committed to building the A380.
So again let's go back to the theory and see how that works.
Well, Airbus has a choice and they have the choice first.
They have the choice of launching the A380 or not launching it.