Airline Industry. The jet aircraft industry is dominated by two major competitors: Airbus (denoted by A) and Boeing (denoted by B). Their costs functions are, respectively, ca = 14q and Св = 14q. There are no fixed costs. The total (industry) output is produced by only these two firms, Q = 9a + 9B, and the inverse demand function for jets by major airlines is estimated to be p = 626 - Q. Suppose that Airbus and Boeing decide simultaneously their production levels. Derive each company's best-response function. How much output will each firm produce? What will the market price be? Compute each company's profit. Suppose that Airbus and Boeing collude. What is the level of production, the market price, and profit per firm? Does collusion benefit the two producers? Compare each firm's profits. Discuss. (a) If Airbus produces the level of output that the companies have agreed upon, will Boeing have incentives to cheat and produce a different level? Calculate the market price and each company's profit in this case. Create the payoff matrix of this game and discuss your results (competition/ collusion/ cheating).
Airline Industry. The jet aircraft industry is dominated by two major competitors: Airbus (denoted by A) and Boeing (denoted by B). Their costs functions are, respectively, ca = 14q and Св = 14q. There are no fixed costs. The total (industry) output is produced by only these two firms, Q = 9a + 9B, and the inverse demand function for jets by major airlines is estimated to be p = 626 - Q. Suppose that Airbus and Boeing decide simultaneously their production levels. Derive each company's best-response function. How much output will each firm produce? What will the market price be? Compute each company's profit. Suppose that Airbus and Boeing collude. What is the level of production, the market price, and profit per firm? Does collusion benefit the two producers? Compare each firm's profits. Discuss. (a) If Airbus produces the level of output that the companies have agreed upon, will Boeing have incentives to cheat and produce a different level? Calculate the market price and each company's profit in this case. Create the payoff matrix of this game and discuss your results (competition/ collusion/ cheating).
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter13: best-practice Tactics: Game Theory
Section: Chapter Questions
Problem 1E
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Question
Airline Industry. The jet aircraft industry is dominated by two major competitors: Airbus
(denoted by A) and Boeing (denoted by B). Their costs functions are, respectively, ca = 14q and
Св = 14q. There are no fixed costs. The total (industry) output is produced by only these two
firms, Q = 9a + 9B, and the inverse demand function for jets by major airlines is estimated to be
p = 626 - Q.
- Suppose that Airbus and Boeing decide simultaneously their production levels.
- Derive each company's best-response function.
- How much output will each firm produce?
- What will the market
price be? - Compute each company's profit.
- Suppose that Airbus and Boeing collude. What is the level of production, the market price, and profit per firm? Does collusion benefit the two producers? Compare each firm's profits.
Discuss.
- (a) If Airbus produces the level of output that the companies have agreed upon, will Boeing have incentives to cheat and produce a different level?
- Calculate the market price and each company's profit in this case.
- Create the payoff matrix of this game and discuss your results (competition/ collusion/ cheating).
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