Reference no: EM132475967
1. Boeing and Airbus are competing to fill an order of jets for Singapore Airlines. Each firm can offer a price of $10 million per jet or $5 million per jet. If both firms offer the same price, the airline will split the order between the two firms, 50-50. If one firm offers a higher price than the other, the lower-price competitor wins the entire order. Here is the profit that Boeing and Airbus expect they could earn from this transaction:
Question a) What is the Nash equilibrium in this game?
Question b) Suppose that Boeing and Airbus anticipate that they will be competing for orders like the one from Singapore Airlines every quarter, from now to the foreseeable future. Each quarter, each firm offers a price, and the payoffs are determined according to the table above. The prices offered by each airline are public information.
Suppose that Airbus has made the following public statement:
Point 1: To shore up profit margins, in the upcoming quarter we intend to be statesmanlike in the pricing of our aircraft and will not cut price simply to win an order. However, if the competition takes advantage of our statesmanlike policy, we intend to abandon this policy and will compete all out for orders in every subsequent quarter.
Point 2: Boeing is considering its pricing strategy for the upcoming quarter. What price would you recommend that Boeing charge? Important note: To evaluate payoffs, imagine that each quarter, Boeing and Airbus receive their payoff right away. (Thus, if in the upcoming quarter, Boeing chooses $5 million and Airbus chooses $10 million, Boeing will immediately receive its profit of $270 million.) Furthermore, assume that Boeing and Airbus evaluate future payoffs as perpetuities with an interest rate of 2.5% per quarter.
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