Why Airbus Did Not Find Boeings Threat Credible and Proceeded with the "super Jumbo" Proj

The reasons are summarized below based on the whitepaper and the course learning's:

1. Perceived demand for VLA product leading to profitability:

Based on the 20 year forecast numbers of VLA deliveries (Passenger Jets > 500 Seats). As of 2001, Boeing forecasted 340 units and Airbus forecasted 1256 units(using different models). Airbus felt, Boeing to have deliberately understated the demand to deter/delay its entry, since delay could significantly increase the value of Boeings 747 franchise. With 1,445 planes order backlog and "fly-by-wire" technology catching up, Airbus estimated it would break even with 250 VLA plane sales and would have 100 firm orders by the end of 2001. As of early 2002, Airbus had 97 orders + 41 options for the A380 strengthening its resolve to build the superjumbo.

2. Game theory and models of strategic product introduction:

Key deductions by modeling competition in terms of a standard Hotelling-type model of spatial competition are:

a. With two product locations (Airbus superjumbo vs. Boeing superjumbo):

The desire to protect a stream of quasi-rents (747) by Boeing, may make preemption profitable, but is not sufficient by itself, to ensure that preemption will occur. Preemption must also be credible/feasible - it's not always feasible because large product development and introduction costs may well be an insufficient basis for successful preemption. If both firms were to introduce a VLA product, it would be a dominant strategy for Boeing to withdraw since it's not credible for it to stay in the market. By doing so, Boeing rationally saves itself some money by refraining to innovate - even if it's certain for Airbus to enter the market. It's in this sense that game theory - or more specifically, the relatively subtle constraint that preemption be credible - helps rationalize why Airbus did not find Boeings threat credible. Hence preemption by incumbent is incredible even if it can innovate at zero costs, unlike the entrant!

b. With three product locations (superjumbos and the stretch-jumbo):

If Boeing were to introduce the "stretch-jumbo", it would definitely increase its market share, however, this increase in market share is insufficient to offset the lower price realization as Airbus would reacts by cutting prices aggressively. Hence the incumbents' launch of an intermediate product fails exactly the same credibility test for entry-deterrence, as did its option of launching a superjumbo of its own. Boeing profits are higher without the intermediate product than with it. As the result it will prefer to withdraw the product, even after it has been introduced unless, of course, there are significant exit costs.

3. Monopoly/duopoly profits:

Boeing with more than 1,000 planes of cumulative production, enjoyed monopoly status in the large aircraft (747) segments with operating margins of 15-20%. However, since '96 Boeings margins were compressing and competition was already putting pressure