Two airplane manufacturers are considering the production of a new product, a 150-passenger jet. Both are deciding whether to enter the market and produce the new planes. The payoff matrix is as follows (payoff values are in millions of dollars):

The implication of these payoffs is that the market demand is large enough to support only one manufacturer. If both firms enter, both will sustain a loss.

a. Identify two possible equilibrium outcomes in this game.
b. Consider the effect of a subsidy. Suppose the European Union decides to subsidize the European producer, Airbus, with a check for $25 million if it enters the market. Revise the payoff matrix to account for this subsidy. What is the new equilibrium outcome?

Transcribed Image Text:

Airbus Don't produce Produce 100 for Boeing Produce -5 for each 0 for Airbus Boeing 0 for Boeing Dont produce 0 for each 100 for Airbus