Lecturer: Mrs.

Hoa Phan
Group
Le Bao Tram S3557230
Nguyen Tuong Minh S3538375
Cao Thanh Tra S3558048
Nguyen Thu Huyen S3575663
Nguyen Gia Man S3566243

Table of Contents
Question 1............................................................................................................. 2
Question 2............................................................................................................. 3
Question 3............................................................................................................. 5
Concentration..................................................................................................... 5
Product Differentiation........................................................................................ 6
Barriers to entry....................................................................................................... 6
Question 4............................................................................................................. 7
4.a...................................................................................................................... 7
4.b.................................................................................................................... 10
4.c.................................................................................................................... 11
4.d.................................................................................................................... 11
Question 5........................................................................................................... 12
Question 6........................................................................................................... 13
References........................................................................................................... 15

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Question 1

According to Boeing (2014), as a result of economic recession have happened in recent years,
the world has became a competitive battlefield of commerce and trade. However, the business
aviation industry has restored to its position and become a potential determinant to boost
countrys economic growth. To illustrate, there is an increase of passenger traffic by 5%
between 2012 and 2013. According to T.S. Kalayanaraman of Kalyan jewelers - a
businessman said that A business jet is not a luxury, it is a necessity. These reasons above
demonstrates that airlines became an integral part of peoples life. Moreover, the close
relationship between airlines and aircraft leads to the strong development of aircraft. The
growing demand of new airplanes is predicted that will increase three times than today,
especially Asia Pacific region.Nowadays, in business aviation, there are two largest supply
manufacturers that hold a majority of market share in this industry - Airbus and Boeing.

According to Clearwater International (2013), Airbus is the most successful manufacturer in

the world with more than 40 years history of developing in terms of aircraft industry. The
company owned by the European Aeronautic Defense and Space Company (EADS) with the
headquarter in Toulouse of France. There are nearly 63,000 employees from 4 different
countries: France, Germany, Spain and the United Kingdom. Airbus stands at the first
position with 33.8% of the global market share (Valuentum 2011). The major products are
defensive jet and commercial aircraft which help Airbus become leadership of business
aviation, especially A350 and A380 accounted for most orders . Nowadays, A380 is the most
effective solution for an rapid increase of passengers in the world. Furthermore, as the
A400M army transport airplane and the A330 Multi-Role Tanker Transport jet are promoted,
Airbus has also become a dominant supplier of value share in the military section (Clearwater
International 2013).

Boeing is one the largest aircraft companies and manufacturers. The two dominant
commercial units of Boeing are at Boeing Commercial Airplanes and Boeing Defense, Space
& Security. Not only producing business class, commercial and military jets, Boeing is also
famous in providing aerospaces. The company has roundly 165,000 employees that being
driven by President and CEO Ray Conner have been achieved the highest revenue of $53
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billion in 2013. Boeing publics its first two seats seaplane that has the range of 320 nautical
miles (515 km) in 1916. Boeing deliveries airlines to 150 countries which accounted for
32.4% of market share value (Valuentum 2011). The headquarter of Boeing is located in the
Puget Sound region of Washington state. With a long historic development, Boeing has high
skills through experiences in manufacturing defence airlines. Furthermore, around 10,000
Boeing commercial airplanes are allocated in the market of aircraft industry which accounted
for 48 percent of the world fleet and 5,500 jets are ordered to produce continuously. In
addition, roughly 90% of worldwide cargo is transported by Boeing planes. Today, Boeing
Commercial Airplanes offers an advanced technology and fuel efficiency airplanes.

Question 2

According to Hubbard & OBrien (2010), market demand is the demand by all customers of
given service or goods. This paper will illustrate the three reasons that lead to the high
demand in the aircraft market. That is consumer preferences, the increase in the income and
the number of buyers.
Kletzel (n.d cited by Jones, Charisse) claimed that Prospects for the global airline industry
are promising, as megatrends including shifts in global economic power and demographics
increasing the demand for air travel. In other words, the trend for using planes to travel
increase significantly in the pervious of time. According to Thomas etall (2015) the
consumer preferences means that an increasing in demand due to Favourable changes and the
decreasing in demand as a results of unfavourable change.

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Figure 1: Reproduce from IATA Economic (2014)

As can be seen on the graph, the demand of consumers for air travel rises dramatically from
1950 to 2010. Therefore, they need produce more new planes to stratify the demand of
consumers. As a consequence, the numbers of aircraft will growth.

Secondly, nowadays, thanks to the development of society, the incomes of the population in
the world have raises considerably (Knutsen 2014). Consequently, people will tend to use
planes instated of trains or ships to travel.
Finally, the number of users also became a reason that leads to the demand curve shift to the
right. Regarding Biller (2014) the number of airline passengers in the world will increase
from 2.9 billion in 2012 to 6.7 billion in 2032. In accordance with Thomas etall (2015) the
more consumers lead to an increase in demand; fewer buyers result in decrease. Therefore,
the more people travel by planes, the bigger demand in the aircraft industry.

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Question 3

Concentration
According to Hubbard & OBrien (2010) market concentration is the number of firms and the
ability to contribute on the one specific industry of those firms. He also claimed that a market
should be considered as low concentration if there are cover huge quantities of firms with
small in each firms size and has no market power. On the other hand, if there are just few
firms that dominate a large number of market shares, will be considered a high concentration
(Hubbard & O'Brien 2010).

Regarding Bisignani (2011), Airbus and Boeing dominate the large aircraft market on very
long periods of time. As a consequence, the aircraft market in the world is highly
concentrated.

Aircraft Market Share in the World from 2010- 2030

Figure 2.Adapted from Valuentum (2011)

More specifically, Boeing and Airbus covering majority of the market share that
concentration is 65.2%; meanwhile, other firms only befog less than 11% from each. In term
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of applying on the theory, two firms dominate the huge market share, they have the power of
the big market and not influenced by the market price. In other words, in term of using
Herfindahl Hirschman Index (HHI) to calculate the concentration; we have aircraft industry
HHI equal to 2493, that much higher than 1800 (Hubbard & O'Brien 2010). Consequently,
the aircraft market in the world could be assumed to have a low concentration.

Product Differentiation
Products differentiation is the different among the physical and instinct of the products from
different companies for the same product category (Hubbard & O'Brien 2010). More
specifically, the same products are the product that have the same functions, same category
and can be changes to each other even though there are produced by many different
companies. Other while, product differentiation is the product that customers can easy find
the different even they are the same category.

Aircraft market in the world seems to have differentiated products because there are many
types of planes, such as; jet- plane, copters, interceptors, propeller plane or the newest is
pilotless aircraft. However, the Boeing and Airbus are concentrating to supply the combat
aircraft and the aircraft normally used to move (Stonestreet, 2015). Therefore, types of
products in the world aircraft market might be considered as differentiated

Barriers to entry
Barriers to entry is the overcome the difficult challenging of new firms if they want to
compete with other current firms and enter in a particular industry (Hubbard & O'Brien
2010). Therefore, this essay analyse the market under tree concepts including government
imposed barriers, the economies of scale and ownership of a key input.

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In term of ownership of a key input, General Aviation Manufactures Association (GAMA)

Corporation is the biggest and the main supply of general aviation airplanes avionics
rotorcraft, components, and engines, and related services for all aircraft brands in the world
(GAMA 2015). Thus, aircraft industry in the world has not many chooses, which means that
it requires a particular input. Therefore, the other firms might not be able to take part in the
aircraft industry because of the barrier in terms of ownership key input. Then, if they want to
enter this market, they will stratify the strictly requirement of the input.
The economy of scale is also significant barrier for other company to enter on the market.
That is because Boeing and Airbus provides for the aircraft industry the high quality of planes
with cheaper price in term of comparing with other companies (Rhodes etall 2015).
Therefore, other companies will have not ability to compare with them. In fact, Boeing and
Airbus cover all most the aircraft industry in the world; they also contribute a huge portion
into total supplying aircraft industry. Besides that, Boeing and Airbus have many
manufactories around the world (Rhodes etall 2015). Thus, their cost for providing a plane
will less than other brands that have just few manufactories . As a consequence, the price for
each Boeing and Airbus aircraft will be cheaper than others.

In conclusion, aircraft industry is market structure of oligopoly. The market is high

concentrated with two main firms that are Boeing and Airbus. In detail they have
concentration of 65.2% and HHI equals to 2493. In addition, the different among the product
is also the main reason that leads to the oligopoly structure. Beside that the strongly barriers
to entry also contributed to the conclusion that aircraft industry is oligopoly.

Question 4

4.a.
In perfect competition, monopolistic competition and monopoly markets, firms maximize
their profits by producing at a rate where marginal revenue equals to marginal cost (Mankiw
2011). This strategy is still applicable to oligopolistic market. However, the problem is that it
is difficult for oligopolies to determine their marginal revenue because the quantity of
products to be sold at a given price is heavily influenced by the price charged by other
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competitors. In other words, firms in oligopoly are mutually interdependent (Pavcnik et.al
2002). In aircraft industry, Boeings pricing and producing depend on Airbuss decisions on
what price to charge, how many to produce, and vice versa.
Therefore, in order to explain how a firm in aircraft industry can maximize profits by
choosing the proper price to charge and the right quantity to produce, we need to analyse
game theory Prisoners Dilemma and Cartel Model.
Suppose Boeing and Airbus can either charge $100mil or $150mil for one aircraft. There are
two scenarios in which Boing and Airbus can either compete or collude, question 4d covers
the compete part with explanation of dominant strategy, so this question will only focus on
the collude part.
In the long run, firms have incentive to collude to gain more profits. According to figure 1, if
Airbus and Boeing shake hands to charge $150mil, their profits will be $100 billion for each.

Figure 3.Payoff Matrix

On the other hand, Boeing and Airbus can get together to form a Cartel. According to Glenn
Hubbard, cartel is formed when firms maximize their profits by agreeing on a specific output.
However, cartel is usually failed because firms tend to cheat to gain outsized profits.

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Figure 4.Reproduced from ThisMatter (ThisMatter n.d)

When firms in cartel colludes by producing a restricting quantity of Q 0, each firm will charge
price P0 and gain revenue of 1+3
When firms in cartel do not cooperate, the new quantity increases to Qc and the market price
drops to Pc, each firm gain profit of 3+4
If a firm cheats, 1+2+3+4 is the revenue earned by producing until MC=P 0 where quantity is
Qcheater.

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4.b.

Figure 5

Presently, the news about the terrorist is in the headlines due to the revolt of the conflict area.
Moreover, it is anticipated that the terrorists are starting to change their tactics to attack
commercial airliners (Gutteridge etall 2015), which is capable of affecting the aircraft
industry. Recently, on November 9, 2015, the territory ISIS group responsible for the
bombing of Flight 9268 Airbus A321 owned by a Russian airline (Minh Anh 2015). The
attack claimed the lives of 244, including crew and all passengers on board (Gutteridge etall
2015). In early 2014, Malaysia Airlines Boeing 777 also announced its flight MH370 is
missing while providing 239 passengers from Kuala Lumpur to Beijing, China (VN Express
2014).

These incidents have drawn attention from people all over the world and caused a fear of
airways. Airlines are vacant seat situation, such as Malaysia Airlines has lost billions of
dollars each day with the number of bookings was significantly reduced (Thu 2014).
Consequently, the airlines have to review aircraft orders to cut costs. That will leads to the
demand curve shifts left by the little plane purchase from the airline company. Therefore, this
will affect to the production of aircraft.

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4.c.

Figure 6

As can be seen from the chart, the old consumer surplus was 1, 2 and 3 while the old
producer surplus was 4, 5 and 6. However, when the aircraft industry is required to pay tax,
the cost of production will increase and the supply curve will shift to the left. Therefore, with
a new supply curve, it goes through a flat demand curve at point B. As a consequence, the
gap between point A and point B is the carbon tax. While buyers will have to pay P1 price,
the producer will received only P2 per aircraft (P tax = P1- P2). In addition, the new
Consumer surplus is 1 while the new producer surplus is in point 2. That led to the DWL
areas of 3 and 5.

4.d.
Airbus and Boeing have been making the two largest aircraft manufacturers in the world as
they share up to approximately 94% of the global market (Innovata LLC 2011)
As a result, every decision or strategy that they make has a huge impact on the market. For
simplicity, we assume that there are only Boeing and Airbus producing aircrafts. Whether
they decide to cooperate or compete with each other, their behavior and pay-offs will follow
the game theory called Prisoners Dilemma. (Brander et.al 1985)

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Based on the payoff matrix in Figure 7, there are two scenarios in which Boeing and Airbus
can collude or compete with each other. This question will only consider the situation where
Boeing and Airbus do not cooperate.

Figure 7.Payoff Matrix

First, if Boeing charges the lower price of $100mil, while Airbus charges $150mil, Boeing
will gain many Airbuss customers and gain a huge profit of $150 billion, Airbuss profit will
be only $50 billion.
Second, if Airbus charges the lower price of $100mil, while Boeing is charging $150mil,
Boeings profit will be only $50 billion, while Airbuss profit will be $150 billion.
Third, if both Boeing and Airbus charge the same price of $100mil, each will earn profits of
$75 billion.
Therefore, regardless of Airbuss pricing strategies, Boeing has a dominant strategy which is
charging $100mil for their aircrafts. The same context also applies to Airbus, they can be
better off charging $100mil given any Boeings pricing strategies. As a result, there will be
equilibrium where both firms charge $100mil because they all want to maximize their profits.
Question 5

According to Yoffie, David B., Prisoners Dilemma is game theory analyzing behaviors of
any two rational entities to explain why firms might not cooperate; each firm will try to
pursue its interests regardless of the others condition. The games result is each entity will
not reach the ideal outcome.
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In the game theory Prisoners Dilemma, firms are believed to go against each other to pursue
its own interest because the game will be played only once. In reality, the game is repeated
many times as firms have to make decisions on pricing strategies every month. (Klepper et.al
1990) As a result, firms have incentives to cooperate by explicit or implicit collusion.
However, according to Glenn Hubbard, in the US and many other countries, explicit
collusion is illegal, managers of each firm are not allowed by laws to set up meeting and
make agreement on prices. But if they send out signal to their counterparts that they will
follow the same price, that maybe still legal. There are two common techniques to implicitly
collude is advertisement and price leadership.
In the case of Boeing and Airbus, each month, managers have to decide what price to charge
for one aircraft, they can advertise to signal that they will match the lowest prices offered by
their rivals. With the matching offer, figure 8 shows the new payoff matrix with new
equilibrium shifting to Boeing and Airbus which charge higher price and higher profits.

Figure 8.New Payoff Matrix

Question 6

At the moment, the commercial aerospace industry is an oligopolistic competitive market.

Airbus and Boeing are currently dominating the global market with more than 94% of market
shares (Blanc 2015). There is a promising future ahead of aircraft industry due to the
development of Asian regions and the effect of globalization. For example, Indonesia is a
country with many archipelagos and islands, people there are heavily dependent on plane
travelling (Aerospace Marketing, 2014). China has many beauty spots and cultural values

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which attract more and more tourists around the globe; hence the demand for aircraft in Asian
area is high in the future.
Airbus and Boeing are making a duopoly in aircraft industry, they will make efforts to keep
the barrier to enter is very high for companies outside of the competition.
A Chinese aircraft company, COMAC, is trying to enter the commercial aircraft industry
(Trung 2015). However, aircraft experts said that COMACs aim is unachievable, that C919
is just an airplane from a Chinese brand but its important components are imported from
foreigner suppliers (Trung 2015). Additionally, Chinese Airline, is listed on top of deadliest
airlines in the world with 755 accidents happened in the last 30 years (McClure 2014).
From an economist point of view, after looking at the news article and analysing the situation
of the aircraft manufacture industry; I think the future of a monopolistically competitive
aircraft market is nearly impossible. Because Airbus and Boeing shadow is too large that
make the barrier for this market is unbreakable. Not only that, the airplane is a complicated
machine with thousands of compartments that need to be perfectly work together (Trung
2015). One small mistake would lead to fatality. Aircraft industry is not any others industry,
there are many obstacles along the way.
To sum up, Boeing Co and Airbus Group are doing very well at defending their market share
and keeping high barrier for new company to enter the industry. Not only that, Boeing Co and
Airbus Group have been in the aircraft industry for a long time, their reputation is
outstanding. They have a good background of history. Therefore, the future scenario of
monopolistically competitive could be considered as impractical.

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