Boeing Airplane Company

Case                                BOEING AIRPLANE COMPANY

        In 1955, the Boeing airplane Company was faced with the problem of determining the selling price for the 707 jet airliner.  The situation in which the company found itself was rather unusual.  It had one competitor – Douglas and its DC-8, Boeing realized  that price would be only one variable affecting demand for its aircraft.  With a single competitor and a very few potential customers, political and financial considerations beyond the control of its operating division would assume substantial importance.  United Airlines had purchased propeller type aircraft from Douglas for many years and appeared to be willing to wait for the DC-8 even though the 707 was going to be operations first.  In spite of these factors, it was felt that an attempt to determine an optimal price on the basis of explicit economic considerations would be useful.

        The company realized that the two airplanes were sufficiently similar and that one firm would have to more or less meet the other’s price.  If either firm lowered the price, the other would have to follow the suite.  However, if one raised the price, the other might do so – which would affect the proportion of sales for each firm.  Since the Boeing 707 was to be on the market earlier than Douglas, it was felt that Douglas would follow the Boeing lead and set a price approximately the same as the Boeing price.

        Boeing had an advantage over Douglas in that its fixed costs were lower because of an arrangement with the military to share certain costs.  But this same arrangement involved paying a form of rent to the military, thus making Boeing’s operating costs somewhat higher than those of Douglas, all other things being equal.

        Due to high initial investment necessary for undertaking the production of the aircraft, one plausible strategy was to set as high a price as possible in order to reach the breakeven date quickly.  This attitude met with resistance from the sales people, who naturally wanted a lower price.  If, however the primary objective was to maximize profit over the plane’s production period, a different strategy was necessary.

        The Boeing Market Research Department estimated the total demand for both  the planes (707 & DC-8) at several prices.  A smooth curve was drawn through the points on the graph, and the mathematical equation for the curve was found to be

                Total Market Demand = -1125 + (655 * price) – 78* (price)²

        Where Total Market Demand is in number of planes , Price is in million dollars and the relationship holds for a price between 4.2 and 5.4 million dollars.

        Based on a detailed study and using learning curve experience, Boeing estimated the relationship between the total cost of producing planes and the number produced.  A mathematical expression of this relationship is: