Oligopoly in Commercial Aircraft: The Impact of Boeing and Airbus Consolidation on Production, Pricing, and Market Control

According to the study by Tangel, 2018, the consolidation in commercial aircraft manufacturing has led to superiority in marketing among the consolidated companies. The merging between Boeing and European Airbus has seen a state of oligopoly in commercial aircraft. Boeing took an 80% stake in Embraer’s commercial aeroplane and services business and Embraer the remaining 20%. Dominance of limited number of commercial aircraft in a region causes higher production rates and high pricing rate to customers.

With Boeing owning a higher percentage of the stake in the consolidation, now Embraer, being known for making regional jets in the 70- to 100-seat range, will help enhance the production of small jets to compete against airbuses (Tangel, 2018). Small jets can contain 100- to 120-seat ranges and higher travelling speeds. Therefore, there is an increase in pricing due to limited competition and variation in time (less time taken in travelling due to an increase in travelling speed).

Former Market production
The Cournot pricing rule:
Qi = (a-c) / [(b (j+1)]
= (200-40) / [1.75-0.5(2+1)]
=160/3.75
=42.7
Productions resulting from individual firms before the takeover.
Latter Market production
Qi = (a-c) / [(b (j+1)]
= (200-40) / [1-0.5(2+1)]
=160/1.5
=106.7

Productions resulting from the firms after the takeover.

For limited companies operating in a limited market, both the companies will receive profits drawn from decisions made on how many to produce and also on pricing. For maximum production of orders, Qi should be the same as Qj. For both companies to share equal profits they should all have same pricing otherwise the one with lower price will have full market shares.

With limited market, consolidated aircraft companies experience maximum profits due to maximum sales and higher prices. However, increasing profitability by constantly increasing prices can damage revenue by losing market shares. Cournot duopoly approach however, mitigate the possibility of revenue damage by maximizing both profitability and market shares via optimum prices.

Work Cited

Tangel, A., & Wall, R. (2018, July 6). Boeing moves into smaller jets. Wall Street Journal, B1-B5.