BIT 3434

When it comes to how Game Theory impacts business, it is often forgotten that it can be at high costs. And nothing quite reveals this such as this article reviewing the rivalry of Boeing and Airbus. To summarize, in the mid 1990’s both Boeing and Airbus made the prediction that larger seating flights was the wave of the future. We are talking Jumbo sized jets that have the capacity to hold up to 1,000 people. That is a little over three times the number of regular capacity of its time! But the hard question every business has to ask is, how much profit can we expect, and at what cost?
Well first it seems best to address the profit. Now in the past Boeing reasonably made about a 33% annual return on their investment, which is huge! The article estimates a 45 million return for every 150 million invested, but you should remember that is annually! Meaning after about 3-5 years we are talking a back in the black profit machine! Now granted there are some costs among the line of maintenance, but that is no-where near the compared costs of rebuilding. But then again, how long do airplanes last? Well some of Boeing’s 747s are still flying today, we are talking twenty years later! That is huge! But then again, such a long-term investment isn’t going to take a small sum. So let’s get to part two, the cost.

The cost, obviously varies depending on the plane but estimates depending on which company you looked at (Airbus vs Boeing). The spread is huge, going from Boeing’s first claim at 2 Billion dollars to as high as 8 Billion dollars. So we are talking some serious dollar bills, and you have to keep in mind that this was during the mid-1990’s meaning that both generating capital was difficult, and that in today’s value that every dollar then in today’s dollars is 150% more. Yeah, so that 8 Billion dollar Jumbo-Jet, is closer to 12 Billion dollars in today’s market.
Now here is where Game Theory is really applied, and I can hear you asking, what are you talking about this is just a matter of raw materials, right? Wrong.
See many of these corporations don’t have Billions of dollars lying around to invest into a brand-new plane.
So what do you do? Play the market, and bid on contracts. And here is the application of Game Theory. Just like the Prisoner’s Dilemma, we are looking at. Now if both Airbus and Boeing bid with the same cost in mind around 4 Billion dollars. They can both succeed holding roughly 50% of the market each. But then again, just like in the Prisoner’s Dilemma there is a possible pay off to cheating, which is what Boeing did or tried rather.
Boeing gave an estimated cost of only 2 Billion dollars to produce their first Jumbo Jet. 2 Billion, half of what Airbus was saying, at best. So, what did Airbus do? They called Boeing on their bluff, and after further review that 2 Billion quickly escalated from 5 Billion to 7 Billion. It is easier to see how then Airbus had the upper hand at receiving funding. And that is the point of this article, that Game Theory, which can seem like a small piece in the chain of decisions holds a massive sway over the future of some of these companies. If you are interested in learning more, the link to the article is listed below. (1)