Monday, November 21, 2011

Boeing and Orders Committment

When I talk about oligopolies, one of the models I refer to is the Stackelberg oligopoly model. To make things easy, I usually just refer to the two firm Stackelberg model where the good sold by each firm is homogeneous (standardized). After solving for the optimal conditions, we look at the output and profits from this model -where one firm moves first - to the Cournot model where both firms move simultaneously. One of the points of doing this is to show that moving first in a quantity game leads to higher profits.

One of the immediate questions is: how can a firm move first? The answer I focus on is through commitments. Now the Financial Times has a nice piece on Boeing receiving a commitment from Singapore and Lion Air to purchase a large number of their 777 airplanes, and this fits well with the spirit of the model, although the real world is more complicated than this simple commitment model.

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