The Prisoners’ Dilemma in the airplane industry

Games of Strategy Home Assignment

Tamás Seres

Introduction 3
The Prisoners’ Dilemma 3
An Oligopolistic market: 5
The Case Study 6
Conclusion 8
References: 8

Introduction

In today’s world the Prisoners’ Dilemma is a common phenomenon in business, politics and in social life as well. This paper will analyze a real life example. It will describe the airplane manufacturing industry and their two giant manufacturers: Airbus and Boeing. The two companies find themselves in a business environment where both parties take the others decision into consideration and act in respect of those. The companies can have two choices: to cooperate with each other for higher prices or to compete at …show more content…

Prices are unstable on markets with few big companies since the collusion of firms to fix prices is prohibited. In this case study a special oligopoly a so called duopoly will be presented. This is a market with only two big players. As mentioned before the companies must decide based on the competitor’s behavior. Therefore in this game each company can have two behavioral patterns: • Cooperative behavior: If companies cooperate it would lead to maximizing profit by setting higher (monopoly) prices. This can only happen if both parties obey the rules i. e. they don’t lower prices. • Non-cooperative behavior: If the company does not cooperate then there is a possibility to make higher profits if the other company cooperates. If both companies are non-cooperative then both their profits are lower than in case of cooperation.
It is also important to point out again that official written cooperation is prohibited by law between companies. Therefore if any cooperation would take place the rules could be violated easily with any consequences.

The Case Study

As mentioned before the case will analyze the duopolistic market on the passenger airplane production industry. There are two major producers: Airbus and Boeing. Airline companies mostly buy from them. An airplane is a huge and long-term investment (one plane serves