Consider a rivalry between Airbus and Boeing to develop a new commercial jet aircraft. Suppose Boeing is ahead in the development process and Airbus is considering whether to enter the competition. If Airbus stays out, it earns 0 profit, whereas Boening enjoys a monopoly and earns a profit of $1 billion. If Airbus decides to enter and develop the rival airplane, then Boening has to decide whether to accommodate Airbus peace- ably or to engage into a price war. In the event of peaceful competition, each firm will make a profit of $300 million. If there is a price war, each will lose $100 million because the prices of airplanes will fall so low that neither firm will be able to recoup its development costs. A. Draw the tree for this game. B. Find the rollback equilibrium. What are the rollback equilibrium payoffs?
Consider a rivalry between Airbus and Boeing to develop a new commercial jet aircraft. Suppose Boeing is ahead in the development process and Airbus is considering whether to enter the competition. If Airbus stays out, it earns 0 profit, whereas Boening enjoys a monopoly and earns a profit of $1 billion. If Airbus decides to enter and develop the rival airplane, then Boening has to decide whether to accommodate Airbus peace- ably or to engage into a price war. In the event of peaceful competition, each firm will make a profit of $300 million. If there is a price war, each will lose $100 million because the prices of airplanes will fall so low that neither firm will be able to recoup its development costs. A. Draw the tree for this game. B. Find the rollback equilibrium. What are the rollback equilibrium payoffs?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question 2 Consider a rivalry between Airbus and Boeing to develop a new commercial jet aircraft. Suppose Boeing is ahead in the development process and Airbus is considering whether to enter the competition. If Airbus stays out, it earns 0 profit, whereas Boening enjoys a monopoly and earns a profit of $1 billion. If Airbus decides to enter and develop the rival airplane, then Boening has to decide whether to accommodate Airbus peace- ably or to engage into a price war. In the event of peaceful competition, each firm will make a profit of $300 million. If there is a price war, each will lose $100 million because the prices of airplanes will fall so low that neither firm will be able to recoup its development costs. A. Draw the tree for this game. B. Find the rollback equilibrium. What are the rollback equilibrium payoffs?
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