“ To shore up profit margins, in the upcoming quarter, we intend to be statesmanlike
in the pricing of our aircraft and will not cut price simply to win an order. However,
ii'the competition takes advantage of our statesmanlike policy, we intend to abandon
this policy and will compete all out for orders in every subsequent quarter." Boeing is considering its pricing strategy for the upcoming quarter (amuming the
above statement is a credible commitment from Airbus}. What price would you rec—
ommend that Boeing charge? Present a formal reasoning. (Note: to evaluate payofl's, imagine that each quarter Boeing and Airbus receive
their payoff right away. That is, if in some quarter, Boeing chooses $5m and Airbus
chooses Slfl, Boeing will immediately receive its profit of $27G in that particular
quarter}. Furthermore, amume that Boeing and Airbus evaluate future payoffs in the
following way: a stream of payoffs of $1 starting next quarter and received in every
quarter thereafter has exactly the same value as a one—time payoff of $40 received
immediately this quarter. [3} Suppose that aircraft orders are received once a year rather than once a quarter.
That is, Boeing and Airbus will compete with each other for an order this year [with
payoffs given in the table above}, but their next competitive encounter will not occur
for another year. In terms of evaluating present and future payoffs, suppose that
each firm views a stream of payoffs of $1 starting next year and received in every
year thereafter as equivalent to $10 received immediately this year. Again assuming
that Airbus will follow the policy in its public statement, what price would you
recommend that Boeing charge in this year and beyond? Present a formal reasoning.

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Status NEW Posted 03 May 2017 03:05 AM My Price 6.00

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