Question

In the Airbus-versus-Boeing example in Figure 11.7, what strategy should the EU governments follow if the upper-left box (a) gives Airbus and Boeing each a sure gain of 5 or (b) gives Boeing a gain of 5 and Airbus a gain of 0? In each case, should the EU offer a subsidy to Airbus? Explain.

Figure 11.7: A Two-Firm Rivalry Game with no Gov't Subsidy Payoff Matrix, with No Subsidies: Airbus gains this Boeing gains this Airbus produces Airbus does not produce Boeing produces 100 Boeing does not produce

Answer 1

A) new payoff matrix

	Produce	no produce
Produce	(5*,5•)	(100*,0)
No produce	(0,100•)	(0,0)

NE : ( both Firms will produce )

As Airbus is already producing, so no need to offer subsidy

B) new matrix

	Produce	no produce
Produce	(5*,0•)	(100*,0•)
No produce	(0,100•)	(0,0)

NE :

Boeing will surely produce , but airbus is Indifferent between Production or no Production.

So here in order to incentivize Airbus to start Production, it should be given subsidy