The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier

Question

If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million. (a) What is the correct strategy for either company? (b) What is the correct strategy for a government seeking to maximize national economic welfare? (c) If a national government decides to subsidize its aircraft producer, how high should be the subsidy?

Answer 1

(a) enter the market first. Then the other company knows that if it also enters, it will not be able to cover costs.
(b) Subsidize its producer. If this allows it to enter first, then we get the same solution as answer (a) above.
(c) Any figure above $50 million (e.g., $55 million). This would promise positive profits regardless of the decision of the competitor. The "winner" then may turn out to be that country whose voters are least sensitive to on-the-books, transparent subsidies given to rich corporations (these subsidies will have to continue year after year until the other country stops its subsidies).