You are the manager of Airbus and your sole competitor is Boeing. Prospective buyers regard the airplanes produced by the two firms as identical. The inverse market demand curve for this unique product is given by P = 1300 – 2Q where Q = QA+QB. Boeing and Airbus have identical cost functions: C(Qi) = 100Qi, for i = A,B. The two firms make production decisions, and the market price for airplanes depends on the total amount produced by each firm.

a. Now suppose that you two firms will compete for infinite periods. If the interest rate is 20%, could you use a trigger strategy to support cooperation? Describe your strategy and explain your reason with support of calculation.

b. Suppose the two firms only compete once. If you make decisions simultaneously you would produce Cournot outputs as in part b). Now you have an opportunity to make the decision before your rival but you have to pay $8,000 to get this opportunity. Are you willing to do? Explain with calculations.

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a To determine if a trigger strategy can support cooperation in the long run we need to analyze the payoffs and determine if there is a credible threat to punish defection In a duopoly setting the Cou... View the full answer