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Oligopoly: Boeing

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Boeing is among the biggest companies that operate in the airplane manufacturing industry. It is ranked second to Airbus in the manufacturing of the biggest commercial jets. It is also ranked second in production of defense products after Lockheed Martin. Boeing has a variety of commercial jets and military aircraft such as Chinook, Apache and the Osprey. Other products include satellites, launch systems and missile defense systems.

Boeing has diversified both the products and the markets. It is a major supplier of products to airline companies, but it has also maintained cordial relationship with different governments from different countries that form its market. For instance, one of its major customers is the US government through the US Department of Defense and also NASA (Lynn, 1995). To facilitate sales, it also provides airplane financing to its customers including the military consumers. It has also devised strategies through which, it leases its product to the consumers with the aim of maintaining the market share.

Boeing operates in a market that is oligopolistic in nature and mainly dominated by two large firms: Boeing and Airbus. There are also many companies that are rising in China, while others are in Japan and they have started securing significant market share. Given the concentration ratios in the market, Boeing has faced a lot of competition by its major rival company Airbus for a long of time (Birkler & Rand Corporation, 2001).

From the oligopolistic theory of the firm, we may hypothesize that the prices for the firm are sticky and that the firm will always seek to use none price strategies to develop a competitive edge, rather than to use price differentials. As observed, firms such as Boeing has concentrated on product differentiation and other cost strategies to get competitiveness. We can also hypothesize that in the short run, firms will be able to make abnormal profit given their market power, which is derived from product differentiation. However, this faces the challenge of the costing structures of the firm, whereby a firm may be engaging in excessive cost in the short run, so as to have some cost advantage in the long run.

In the long run, this market is expected to be significantly competitive and we can hypothesize that it will be monopolistic in structure. This is because, apart from the pre-dominantly many small airplane manufacturing firms in Japan, China is also becoming an airplane manufacturing country, which cannot be ignored. It is, therefore, expected that, given there are no regulations on entry into the industry as long as the company has been domestically licensed, many more firms may come up, while the current one grows in size. In China the domestic policies are such that, they make it easier for the infant firms to grow first and get competitiveness by assuring them of the local markets. It has developed autarkic policies that help the local firms, and that if multinational firm has to operate then it has to find it viable through joint production arrangement as has happened in automobile industry. The aircraft market is significant and hence the local firms, having taken home advantage, are likely to grow to the higher levels of business cycle.

Degree of Competition

Number of Firms

Economic theory hypothesis that, the number of firms that operate in a market have great significance in determining the nature of competition to be experienced. In this market there are many firms that operate worldwide, but with low market share. The market is, however, highly concentrated due to the market share of Boeing and Airbus, which are the dominant companies in the industry, especially in commercial products. For instance, in 2011 Airbus booked 1419 order of plane worth $140 billion, while Boeing had 805 planes. However, competition is expected to rise with the estimation that, the $100 billion-a-year worth duopoly will soon, as soon as 2017, be broken by Chinese.

High Cost

This industry is a heavy cost one, and the initial investment cost may make it difficult for new entrants to find means of penetrating the market. Competition that is being experienced is likely to take the same form given that the same participants are likely to dominate. What have been observed, especially between Boeing and Airbus, is that, the companies are trying to undercut each other in their negotiation with the customers (Cohan, 2008). But this is limited to the unit cost being incurred by the firms. The companies have embarked on costing techniques that maximize their return or give them leeway in providing discounts to the consumers. Such as employed by Boeing is target costing. This involves determining prices that you would like to sell the products right at the design stage.

Technology

Ideally, there is no other sector rich in technology dominated by the United States and Europe than the aerospace, e.g. as compared to automobiles and renewable energies dominated by Japan and China. As Lynn (1995) notes, Technological advancement by the companies operating in aerospace industry has been fundamental in determining the nature of competition that is to be observed in the market. Here, competition has targeted the quality of the product. For instance, companies have been competing to produce supersonic aircrafts so as to meet the customer need for speed. They are also trying to adopt technology that reduces the designing and production time and hence save on costs. Boeing for instance, has used computers to develop prototypes in production of Boeing 777 hence tremendous cost reduction. Technology aimed at reducing cost has been used to develop robots, which are cheaper than human labor.

Sourcing Materials

The airplane manufacturing companies are also competing by trying to source their inputs competitively. This includes even creating certainty of the supplies through acquiring of the supplying plants of the crucial parts in production. To utilize resources efficiently, companies are also making use of lighter materials.

Competitors

According to Newhouse (2007), the top competitors of Boeing are European Aeronautic Defense and Space Company (EADS) and Lockheed Martin. Lockheed Martin is a major competitor of Boeing in defense products. The company’s threat to Boeing arises especially from the completion of International F-35 in UK. It has also been awarder U.S. Navy F/A-18 E/F ARST Sensor System Contract among others in defense. On the other hand, EADS owns such companies as Airbus, Eurocopter, Cassidian and Astrium. These companies have acted as a threat to Boeing in both commercial and defense product with Airbus scoping more than 50% of the entire commercial market. 

Pricing Policy

Target Returning Pricing

In this case, the company predetermines the prices to charge its product before the design of the product, and works together with target costing. This is important, because, this is a high cost industry and efforts should be put to lower the costs.

  1. It uses thousands of inputs and hence the need to design effectively, so as to source products efficiently.
  2. It may not be able to compete by lowering it prices without considering the costs, otherwise it would incur losses.

The maximum profit per unit is determined at the designing stage where, after coming with a prototype that meets the cost agreed; managers then make the real product and hence realize profit as planned. Also, profit is maximized by ensuring that profits are kept to the lowest levels possible. 

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