Question

New Entrants Pose a Challenge to Boeing's Share of the Global Commercial Airplane Market Competition is going to get tougher for Boeing. Currently, the global commercial airplane market for airplanes with a seating capacity of over 100 passengers is lead by Boeing and Airbus. Last year, Boeing with 648 commercial airplane deliveries occupied 43 percent of this market. Airbus with 626 commercial airplane deliveries stood second. Source: Forbes, March 06,2014 a. According to Reuters, the market share of Boeing in the large commercial aircraft segment was above 75 percent before 1990 Describe how the structure of the airplane market has changed over the past few decades. b. If Boeing and Airbus formed a cartel, how would the price charged for airplanes and the profits made change?

Short answer

Market shifted from Boeing's dominance to a competitive duopoly with Airbus. In a cartel, airplane prices and profits would rise.

Step-by-step solution

Understanding Market Share Change

In the past few decades, the structure of the market has shifted significantly. Before 1990, Boeing controlled over 75% of the market share in the large commercial aircraft segment. As of last year, Boeing's share dropped to 43%, while Airbus has gained a sizable portion, showing the increased competition.

Analyzing Current Shares

In the most recent year, Boeing had 648 deliveries, capturing 43% of the market, while Airbus had 626 deliveries. This indicates a near equal split in market share between the two companies, demonstrating a competitive duopoly.

Market Share Dynamics

The market shift signifies increased competition and a reduction in Boeing's dominance. This shift likely resulted from Airbus's strategic advancements, increased production, and successful market penetration.

Understanding Cartel Formation

If Boeing and Airbus formed a cartel, the dynamics would shift from competitive to cooperative. Both companies would agree on the price and output levels, which would likely result in higher prices for airplanes.

Impact on Prices

In a cartel, since the main objective is to maximize profits, the price charged for airplanes would increase above competitive levels. The reduced competition allows the cartel to set prices higher than they would be in a competitive market.

Impact on Profits

With higher prices, the profits for Boeing and Airbus would increase. Cartels reduce the price wars and ensure steady profit margins, leading to higher overall profitability for the participating firms.

Key concepts

Market Share

Market share represents the percentage of an industry's sales that a particular company controls. In the airplane market, Boeing held over 75% of the market share in the large commercial aircraft segment before 1990. However, due to competition from Airbus, Boeing's market share has decreased to 43%. This shift indicates significant changes in the market dynamics.
Airbus's rise in market share can be attributed to various factors, such as advancements in technology, improved manufacturing processes, and effective market strategies. As both companies now share a near-equal market share, it highlights the competitiveness of the industry.
Understanding market share is crucial for companies as it influences strategies and operational decisions. The shift from dominance to a more balanced market requires companies to continuously innovate and adapt.

Duopoly

A duopoly refers to a market structure dominated by two firms. In the commercial aircraft market, Boeing and Airbus represent a classic example of a duopoly. Both companies hold significant market shares, with Boeing at 43% and Airbus close behind.
In a duopoly, the actions of one firm directly impact the other. This includes strategies related to pricing, production, and innovation. The intense competition between Boeing and Airbus has led to advances in aircraft technology and efficiency, benefiting consumers.
The presence of a duopoly often results in strategic decision-making where each company must consider the potential responses of its competitor before implementing major changes.

Cartel Formation

Cartel formation occurs when competing firms in an industry collaborate to control prices and output. If Boeing and Airbus formed a cartel, they would agree on the prices and quantity of airplanes produced rather than competing against each other.
Cartels aim to maximize joint profits by reducing competitive pressures. However, they are often illegal because they manipulate market conditions, leading to higher prices and reduced consumer welfare.
In the context of Boeing and Airbus, forming a cartel would shift the competitive landscape to a more cooperative one. This would likely result in higher prices for airplanes, as the reduced competition allows the cartel to control the market more effectively.

Price Setting

Price setting in a competitive market depends on supply and demand dynamics. Companies like Boeing and Airbus determine prices based on production costs, market conditions, and competitive strategies.
In a competitive setting, prices tend to be lower as firms strive to gain market share by attracting customers with better deals. However, in a cartel, Boeing and Airbus would agree on higher price points to maximize profits.
This controlled price setting ensures that both companies benefit from reduced price competition. In the long run, though, such practices can harm consumers by limiting choices and increasing costs.

Profit Maximization

Profit maximization involves strategies aimed at achieving the highest possible profits. For Boeing and Airbus, this includes optimizing production, reducing costs, and setting competitive prices.
In a competitive market, profit maximization forces each firm to innovate and improve efficiency. However, in a cartel, the focus shifts to maintaining high prices and stable profit margins. By removing the cutthroat competition, a cartel guarantees higher profits for its members.
While profit maximization benefits companies by increasing revenues, it should balance with ethical practices and consumer interests to avoid long-term consequences such as market manipulation or reduced consumer trust.