Introduction to the Commercial Aircraft Manufacturing Industry This report pertains to the analysis of the commercial aircraft manufacturing industry. The industry was characterized as a near monopoly industry post World War II with Boeing emerging as the market leader while the other two players Loughead and Douglas competing in the small airliner industry (which had enough room for just one player). On account of intense competition in the small airliner industry, Loughead was forced to quit the commercial aircraft manufacturing industry and become a pure military leader, while the remaining player Douglas was suffering from financial woes which highly restrained its ability to fund R&D expenses. With the near emergence of Boeing as a leader in the global market place, European plane manufacturers namely France, West Germany and Great Britain collaborated to form Airbus Industries which strongly competed with Boeing to create a duopoly market structure. As of date, the Boeing Commercial Aircraft Company along with Airbus Industries occupy a dominant position in the global commercial plane manufacturing industry (Shokralla, 1997) with Boeing occupying a 55% share of the total dollar value of the market as of 2005 and Airbus occupying 40% (Landler, 2006). The Chinese industry also seeks to tap the potential of this industry and the industry is characterized by intense competition between the two players to emerge as the leaders of the market. The companies are adopting the strategies of Low Cost and Differentiation so as to capture market share. Thus, the gain in market share of one company is equivalent to a loss in the market share of another rival. As pointed out by Vasigh, Tacker & Ieming (2008), Airbus occupies a dominant position in the super jumbo aircraft market segment, while Boeing serves the smaller, super long range aircraft. As both of them price the output in a similar manner, competition occurs due to differentiated services of the players like financing, etc. Short run and long run behaviors in the Commercial Aircraft Manufacturing Industry Since duopoly is a type of oligopoly, the equilibrium in this industry can be best explained by the kinked demand curve model. Note that this model is applied as the products are also differentiated while price competitiveness is also a major attribute of the industry. The market model has been illustrated in the diagram below: Figure 1: Equilibrium in the Duopoly Market Source: Stonier (2008) The kink in the AR curve demonstrates that if the players cut their prices, competitors would follow suit but a price hike would not meet the same response. In the short run, the players may experiment to find out the best prices by equating Marginal revenue with marginal costs, so that the profits are maximized. However, if the players aim to capture a market segment through price war, competitors would follow suit and this would bring in a price war which would affect the profits of both the players. In the long run, equilibrium would be obtained where each player operates at the respective profit maximizing output without using pricing strategies to gain the market share of the rival (Stonier, 2008). Figure 2: Cost Structure of Commercial Aircraft Manufacturing Industry Source: Hartley, 1965 As can be seen from the graph, the effects of economies of scale is very strong in this industry since there is a substantial reduction in the average cost of airlines as the output increases. This stems from the dual benefits of learning curve effects and reaping economies of scale and scope. One of the most important costs associated with this industry is the high set up costs since substantial investments is needed for R&D activities while heavy investment is also needed in the manufacturing process like sourcing of equipment, human resources and training. As per Sturmey (1964), the costs of R&D of the aircraft can equal almost 20 times the price of the final aircraft. These high transaction costs make it difficult for new players to enter the industry. Another cost pertains to the cost of specialization. As has been reported by Shokralla (1997), a Boeing 777 contains almost 132,500 engineered and unique parts along with 3,000,000 fasteners. Thus high level of production output is needed to achieve specialization in an aircraft which is made up of so many constituent parts. Lastly, the benefits of reaping economies of scale and learning curve experiences impart competitive advantage to the existing players and makes entry difficult for new players in the industry. The presence of these varied and significant transaction costs makes it less lucrative for other players and this also explains the duopolistic nature of this industry. However, the Chinese industry seeks to enter this market segment and compete with the highly subsidized American and European aircraft manufacturers, which is further expected to change the dynamics of this industry’s model. To deal with these costs, the Chinese Government is adopting the route of technological collaboration by providing these players access to the lucrative potential of the market in return for gaining technological expertise and acumen in the manufacturing process in the home country. Collaborating with the big players would help the players to establish themselves in the market while Government support in the form of funding of some portions of R&D is also needed. Productivity Measures Given the duopoly of the two players along with intense competition to capture the market share, one of the major measures of productivity is the accumulated profits of the industry as has been represented below: Figure 3: Cumulative profits of the airline industry Source: Deloitte (2009) Another measure of productivity is the order book position of the players which has been declining since the onset of recession. The relative market share of the players can also be used to assess their productivity since declining market share implies that the productivity is declining. As per Deloitte (2009), all of the four orders of Airbus were cancelled in the month of January 2009 while the order book steeply declined in contrast to the previous year. Recession along with intense competition on the dimension of costs has taken a toll on the profits of the industry as can be seen above and thus the players need to effectively strategist to improve these metrics. Assume that the industry you wrote about in Assignment 1 wants to expand and that its only option is a merger. Now the industry is confronted with government regulations to oversee the merger. Write a four to five (4–5) page paper in which you: Explain why government regulation is needed, citing the major reasons for government involvement in a market economy. Justify the rationale for the intervention of government in the market process in the U.S. Assuming that the merger faces some threats and that the industry decides on self-expansion as an alternative strategy, describe the additional complexities that would arise under this new scenario of expansion via capital projects. Analyze how the different forces will come together to create a convergence between the interests of stockholders and managers. Speculate about the implications for the goals of the firm as to whether to maximize the industry’s profits or to create more value for the shareholders. Use at least three (3) high-quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources. Your assignment must follow these formatting requirements: Be typed, double-spaced, using Times New Roman font (size 12), with one-inch margins on all sides; references must follow APA or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required page length.