Tag Archives: Duopoly

New Zealand Supermarket Duopoly – maximax and maximin strategies

Michael Cameron did a very relevant post on his blog ‘Sex, Drugs and Economics’ which focused on the duopoly market structure of New Zealand’s supermarkets. Part of the NCEA Level 3 and the CIE A2 economics courses look at market structures – monopolistic, oligopoly, duopoly, monopoly, and monopsony. A duopoly refers to two firms in a market whilst an oligopoly has a small number of firms but greater than two. Therefore we can say that Oligopoly and Duopoly are very similar market structures and they can co-ordinate their behaviour to exploit the market by lowering competition which in turn leads to greater profits for all.

Using the example of the supermarket duopoly Foodstuffs and Woolworths. Each company has two options – high price or low price. Obviously if they both price low they stand to be worse off and if they price high they are both set to gain. The outcome and payoffs are illustrated below:

Maximax – riskier strategy
A maximax strategy is one where the player attempts to earn the maximum possible benefit available. This means they will prefer the alternative which includes the chance of achieving the best possible outcome – even if a highly unfavourable outcome is possible. This strategy, often referred to as the best of the best is often seen as ‘naive’ and overly optimistic strategy, in that it assumes a highly favourable environment for decision making.

In this case, for both food providers, the aggressive maximax strategy is $140m from a low price and $120m from a high price, so a low price gives the maximax pay-off.

Maximin – conservative strategy
A maximin strategy is where a player chooses the best of the worst pay-off. This is commonly chosen when a player cannot rely on the other party to keep any agreement that has been made – for example, to deny.

In terms of the pessimistic maximin strategy, the worst outcome from a low price is $100m, and from a high price is $70m – hence a low price provides the best of the worst outcomes.

Again, lowering price is the dominant strategy, and the only way to increase the pay-off would be to collude and increase price together. Of course, this requires an agreement, and collusion, and this creates two further risks – one of the food companies reneges on the agreement and ‘rats’, and the competition authorities investigate the food companies, and impose a penalty.

Nash equilibrium
Nash equilibrium, named after Nobel winning economist, John Nash, is a solution to a game involving two or more players who want the best outcome for themselves and must take the actions of others into account. When Nash equilibrium is reached, players cannot improve their payoff by independently changing their strategy. This means that it is the best strategy assuming the other has chosen a strategy and will not change it. For example, in the Prisoner’s Dilemma game, confessing is a Nash equilibrium because it is the best outcome, taking into account the likely actions of others.

Chinese challenge Boeing and Airbus Duopoly but for what reason?

C919 - COMACThe commercial aircraft market has been dominated by Boeing (USA) and Airbus (EU) and according to Airbus’ Global Market Forecast 2015, in the next 20 years, passenger air traffic will grow annually at 4.6 percent driving a need for around 32,600 new passenger and freighter aircrafts. This duopoly has existed since Airbus introduced its long-range A330/A340 in the 1990’s when it challenged Boeing’s monopoly position. However, the Chinese are now challenging the duopoly’s market share by introducing its alternative to the Boeing and Airbus options. COMAC, a Chinese state-owned planemaker, has revealed its C919 plane as a competitor to the Airbus 320 and Boeing’s 737 although the C919 will not be ready for service until 2019.

Eventhough COMAC is state backed there are still significant barriers to entry for the commercial airline manufacturer.

  • It is anticipated that the C919 fuel efficiency will not be a the levels of the newer versions of the Boeing 737 and Airbus A320.
  • The Chinese have little experience in creating complex production systems and supply chains. Boeing research and development costs for the new Dreamliner, grew to $28 billion as a result of problems with its supply chain.
  • They will need to improve their safety records in order to encourage sales. COMAC’s regional jet, the ARJ21, had its first test flight in 2008, but has yet to be certified because of poor wiring and cracks on the wings.

Are the Chinese actually trying to break the duopoly?

COMAC’s goal of breaking up the Boeing/Airbus narrow-body aircraft duopoly is a challenging ordeal but is this the motivation behind the C919? With China’s secret-capitalist economy, the central government likes to use American or European aircraft orders as a way of correcting a trade imbalance. Although they would still be importing the avionics and engines from around the world, the overall value of those components are insignificant when compared with a complete aircraft. China does need planes now and with the growing income levels of the economy there will be huge demand for air travel. But what is ironic is that Airbus already have a factory in Tianjin making the A320 aircraft although COMAC are realistic that new aircraft take significant time to put into service and therefore still require Airbus planes.

National Pride

China has established itself as a economic powerhouse but they also want to be seen as having the innovative ideas and technological knowledge to challenge the established market. By producing a state-of-the-art aircraft they can announce their arrival on the world stage of innovation. The C919 is a pathway to achieving this.

Aircraft Manufacturing Duopolies – Long-Haul and Regional

On my way up to the 10th Anniversary Tutor2u conference in London this week and I have plenty of time to catch-up on reading and some blog posts. Flying on an Air New Zealand Boeing 777 200ER from Auckland to London (via Hong Kong) – flight time 24 hours 35 minutes. Free Internet access at HK meant a few blog post were able to be published.

However flying up on Boeing one thought of the duopoly market that pervades the aircraft industry. In the long haul market we all know about Boeing and Airbus but in the regional markets there are two competitors that are starting to make their presence felt with the established duopoly. At the moment the regional jet market is dominated by:

Brazil’s “Embraer”
Canada’s “Bombardier”

However two other manufacturers are starting to break into the short-haul market and they are:

Russia’s “Superjet”
China’s “ARJ21”

Even for the airlines with long haul flights, which has been dominated by Boeing and Airbus planes, Russia’s MC-21 and China’s C919 are being developed and are potential threats to the Boeing 737 and the Airbus 320. Although both Boeing and Airbus have successfully launched modified versions of the above which should maintain their competitive edge. However according to The Economist the money is the Chinese to come out with the best plane in the end.

End of Airbus and Boeing dominance?

Yet another hat tip to A2 student Andrew Larkey for this piece on the challenge to the airline manufacturers duoploly.

The duopoly of Boeing and Airbus appears to be coming under pressure. The Bombardier CSeries seems to be gaining traction amongst commercial carriers and airline customers believe that they now have the ability to negotiate with the two established manufacturers as the Bombardier CSeries and the Comac C919 have become viable options. For Lufthansa the power over suppliers is partly what motivated them to buy the Bombardier.

EasyJet Founder v EasyJet Board
Stelios Haju-Ioannou, the founder of EasyJet, had a disagreement with the easyJet Board over the expansion of the company’s fleet. The Board plans to spend money on the Airbus A320’s but Stelios was thinking about the cost saving by purchasing the CSeries.
In his letter attacking the airline’s decision this year to exercise options fo 15 A320s, Stelios writes that “the board has a duty to benchmark the price with the other suppliers before placing more orders.” He includes a table of list prices and notes that “from the table, it is apparent that based on list prices, a similarly sized Boeing aircraft (737-700) can be purchased for $10 million dollars less than the A319 and a Bombardier CS-300 is even less expensive.”

The Irishman Michael O’Leary, CEO of Ryanair, is also putting pressure on its normal supplier Boeing. Although it is thought that he wouldn’t seriously buy Airbus aircraft he is now using Comac C919 with whom he stuck a deal at the recent Paris air show. It is believed that he would consider the Chinese narrowbody for a future fleet order of at least 200 planes.