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Rivalries are a common thing in business, but as Olienyk and Carbaugh (2011) narrate, not many rivalries have exhibited the characteristics of the competition between Boring and Airbus. Ever since the inception of commercial aircraft manufacture, Boeing and Airbus have positioned themselves as the dominant companies in this segment of aviation manufacturing. So intense has been their rivalry that in 2009, the World Trade Organization launched an inquiry that discovered illegal subsidy receipts by these companies from their host governments in a bid to strengthen their competitive positions (Cook, 2010).
This discussion looks at the effect of the control that these two companies yield over the aircraft manufacturing industry. Using a blend of economic theories, the effects of this dominance is dissected with respect to the influence of this rivalry on the commercial aircraft industry, and how the concentration of power in this industry affects the trends that are observed in the industry. Whether or not the rivalry between Boeing and Airbus is beneficial to the consumer remains to be established following the implications of this discussion.
Overview of the commercial aircraft manufacturing industry
When analyzing the commercial aircraft manufacturing industry, Olienyk and Carbaugh, (2011) categorized the firms in the industry based on three segments, including the large commercial airplanes, regional jets and private jets. Boeing and Airbus are the main companies that operate in the large commercial airplane segment. Companies such as Bombardier and Embraer manufacture regional jets, with Gulfstream and Learjet renowned for manufacturing private jets. In this industry, the large commercial aircraft segment is global, with the other two segments constrained to local regions.
Boeing and Airbus control nearly 100% of the market (Francis, 2016). Prior to their dominance, these companies had to await the extinction of older planes that were produced over four decades ago. Despite this, the technological advancements displayed by these rival companies have led to the market leadership position that they currently hold. As such, the large commercial aircraft market is concentrated with Boeing and Airbus planes, hence classifying it as a classic duopoly.
The market share in this industry is inclined towards Boeing. Quoting a report released by the International Aviation Authority, Francis (2016) documents that in the decade between 2006 and 2015, Airbus delivered over 5,600 airplanes, while Boeing delivered 5,700 airplanes over the same period. These statistics indicate that the market share between these two airplane manufacturers is relatively even. To assert more emphasis on this position, Airbus and Boeing received 9,900 and 8,900 airplane orders respectively between 2006 and 2015. These statistics indicate that Boeing has a more efficient production mechanism, as it managed to deliver 64% of its airplane orders, against the 56% order completion by Airbus.
Strategies of competition in the classic duopoly
There are several strategies that are used by either company to promote competitive advantage in the market. These companies have designed their aircrafts to compete on facets such as passenger capacity, with each company having an airplane model that has a passenger capacity similar to that of the competitor. Besides, these companies compete on the cargo capacity and range.
Effects of the duopoly
As defined by Pal and Saha (2013), duopoly is an oligopolistic form of market structure denoted by two companies controlling nearly all of the market for a specific service or product. In the commercial aircraft manufacturing industry, Boeing and Airbus control nearly 100% of the market, hence making the industry a duopoly.
Interdependence is a core feature that characterizes the duopoly of Boeing and Airbus. These two companies have control over the supply forces; hence play a role in determining the output and market prices. Boeing and Airbus work together to make market choices. Each of these competing firms considers the actions of the other firm in the market when making decisions. As such, the profitability of Boeing is dependent on the strategies employed by Airbus, and vice versa. Carbaugh (2014) explained that under such circumstances, it is impossible for either firm to improve its position without considering its competitors, hence the Nash Equilibrium.
The commercial airline manufacturing industry is profitably lucrative, and promises significant revenue for investors that venture into it. However, this is not the case, as the Boeing-Airbus duopoly has erected barriers that hinder the entry of new companies into the industry. The main barrier to entry into this industry is in the high costs of production. The companies have regulated the entry to this industry by controlling the costs of manufacturing, and limiting the access to the technologies required to produce these complex products. Besides, these companies, being the main players in the market, have set high safety standards for their production processes. Several expensive and time-consuming certification procedures have been laid out as the primary requirements to guarantee a new competitor entry into the industry, a factor that discourages new firms from entering the market.
As Cook (2010) explains, firms prefer being price setters rather than price takers. The author states that this preference is anchored on the premise that firms understand their own cost structures, hence the ability to determine their own profitability levels. The Boeing-Airbus duopoly has enabled these companies to maximize their profits. In this case, price competition in the aviation industry has been ruled out, as the airplane prices set by these two competing firms represent a calculated agreement by the firms based on the aggregate input and targeted profit maximization equations.
The effects of duopoly have been felt on the consumers, who are the airline companies. Boeing and Airbus enjoy a high bargaining power, given that they are the only companies that supply these products. Carbaugh (2014) hypothesizes that a high bargaining power for the manufacturer translates to a low bargaining power for the customers. The prices set by these competing companies are relatively the same, hence confining aviation companies to limited options.
In addition, the barriers to entry into this market continue to hinder innovation. These companies introduce change only when the other competing company has provided an incentive for this change. Therefore, this explains why the research and development into introducing new, bigger and technologically advanced commercial airliners has been slow. In a duopoly like the one of Boeing and Airbus, market firms collude to maximize profit, hence avoiding cost intensive practices such as innovation.
The rivalry between these two giant commercial aircraft manufacturers stretches beyond profitability to encompass the sense of national pride and market share in terms of supremacy in the airlines. Pal and Saha (2013) observed that several scholars have used the Boeing and Airbus example to develop case studies on the effect of oligopolistic and duopoly market structures, with other researchers directing their focus on the elements that distinguish this rivalry as epic.
- Carbaugh, R. (2014). Boeing-Airbus Subsidy Dispute: A Sequel. Global Economy Journal, 8(7).
- Cook. (2010). The airbus-boeing dispute: Implications of the WTO boeing decision. Intereconomics,45(5), 262-263.
- Francis, L. (2016). China’s comac to challenge Boeing and Airbus. IEEE Spectrum, 53(1), 49-50.
- Olienyk, J., & Carbaugh, R. (2011). Boeing and Airbus: Duopoly in Jeopardy?. Global Economy Journal, 11(1).
- Pal, R., & Saha, B. (2013). Mixed Duopoly and Environment. Journal Of Public Economic Theory,16(1), 96-118.