Boeing and Airbus are the world’s only major producers of large wide-bodied aircrafts. But the increasing cost of fuel and the changing demand in the airline industry increases the need for smaller regional jets. Suppose that both firms must decide whether they will produce a smaller plane. We will assume that Boeing has a slight cost advantage over Airbus in both large and small planes, as shown in the payoff matrix that follows (in millions of U.S. dollars). Assume that each producer chooses to produce only large, only small, or no planes at all.

a. What is the Nash equilibrium of this game?

b. Are there multiple equilibria? If so, explain why. Hint: Guess at an equilibrium and then check whether either firm would want to change its action, given the action of the other firm. Remember that Boeing can change only its own action, which means moving up or down a column, and Airbus can change only its own action, which means moving back or forth on a row.

LO.1