Boeing Vs. Airbus

One of the recurring trade disputes between the United States and Europe concerns the rivalry between Airbus and Boeing in the market for wide-body aircraft. Airbus first began production of aircraft in the early 1970s with substantial financial assistance from European governments. As Airbus succeeded in making inroads into many of Boeing's markets, Boeing alleged that Airbus benefited from unfair subsidies and has pressured US trade authorities to counteract Europe's financial support. As a result, the United States and European Community signed an agreement on trade in civil aircraft in 1992 that limited government subsides for aircraft production. This agreement, however, has come under new strain as Airbus introduces the A-380 super-jumbo aircraft designed to compete directly against the Boeing 747.

This paper has taken an empirical look at international competition and trade disputes in the wide-body aircraft market. We began by estimating the demand for wide-body aircraft and firm markups under various assumptions on the mode of competition. This exercise yields several insights into the wide-body aircraft market. First, we find evidence of significant market segmentation between the medium- and long-range wide-body planes, consistent with the anecdotal evidence on the near monopoly position enjoyed by the Boeing 747 in the long-range market until the early 1990s. Second, despite the small number of firms in the industry, market competition has intensified (we estimate higher demand elasticities and lower markups over time), especially with the entry of new aircraft varieties. Third, the markup estimates implied by the Bertrand and Cournot competition are relatively similar. This might be explained by the growing presence of multi-product firms in the industry. As producers expand the range of products, their incentive to aggressively underbid their rivals is diminished, since price cuts might also hurt their own sales of other products.