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Prisoner's dilemma

Two aircraft manufacturing companies - Boeing (U.S.) and European Airbus - are contemplating a mid-sized fuel-efficient generation of air carriers. If both companies produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable both of them to capture potential scale economies if they had to share the world market). If neither produces, then each company's net gain would, of course, be zero. If one company produces and the other does not, then the producer will gain $500 million.

What is the correct strategy for each company?

What is the correct strategy for a government seeking to maximize national economic welfare?

Solution Preview

(a) This is a classic prisoner's dilemma problem. In isolation, it is in each company's best interest to produce as they stand to gain $500M. However, if both companies produce then they end up loosing $50M in both cases. The ...

Solution Summary

The solution does a great job of explaining the concepts being asked in the question. The solution is very well explained and detailed. A good response for anyone looking to get a deeper understanding of the economics concepts. Overall, an excellent response.