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Airbus vs. Boeing in Superjumbos: Credibility and Preemption

by Benjamin C. Esty and Pankaj Ghemawat

Current Draft: August 3, 2001

Benjamin C. Esty Morgan 381 Harvard Business School Boston, MA 02163 Tel: (617) 495-6159 e-mail: besty@hbs.edu

Pankaj Ghemawat Morgan 227 Harvard Business School Boston, MA 02163 Tel: (617) 495-6270 e-mail: pghemawat@hbs.edu

Acknowledgements: We would like to thank Ed Greenslet and The Airline Monitor for providing data on and insights about the commercial jet aircraft industry, Mike Kane for assistance with the original teaching case, and the Division of Research at the Harvard Business School for supporting this research.

Airbus vs. Boeing in Superjumbos: Credibility and Preemption

Abstract In December 2000, Airbus formally committed to spend $12 billion to develop and launch a 555-seat superjumbo plane known as the A380. Prior to and after Airbus’ commitment, Boeing started and canceled several initiatives aimed at developing a “stretch jumbo” with capacity in between its existing jumbo (the 747) and Airbus’ planned superjumbo. This paper provides a strategic (game-theoretic) interpretation of why Airbus, rather than Boeing, committed to the superjumbo, and why Boeing’s efforts to introduce a stretch jumbo have, at least to date, been unsuccessful. Specifically, game theory suggests that the incumbent, Boeing, would earn higher operating profits if it could somehow deter the entrant, Airbus, from developing a superjumbo, but that entrydeterrence through new product introductions is incredible even if the incumbent enjoys large cost advantages in new product development (e.g., because of line-extension economies)! This hypothesis of potentially profitable preemption precluded by credibility constraints is consistent with a wide array of evidence from the case studied: pro forma financial valuations, capital market…...

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