Airbus vs. Boeing in Superjumbos: Credibility and Preemption

In December 2000, Airbus formally committed to spend $12 billion to develop and launch a 555-seat superjumbo plane known as the A380. Prior to and after Airbus’ commitment, Boeing started and canceled several initiatives aimed at developing a “stretch jumbo” with capacity in between its existing jumbo (the 747) and Airbus’ planned superjumbo. This paper provides a strategic (game-theoretic) interpretation of why Airbus, rather than Boeing, committed to the superjumbo, and why Boeing’s efforts to introduce a stretch jumbo have, at least to date, been unsuccessful. Specifically, game theory suggests that the incumbent, Boeing, would earn higher operating profits if it could somehow deter the entrant, Airbus, from developing a superjumbo, but that entry-deterrence through new product introductions is incredible even if the incumbent enjoys large cost advantages in new product development (e.g., because of line-extension economies)! This hypothesis of potentially profitable preemption precluded by credibility constraints is consistent with a wide array of evidence from the case studied: pro forma financial valuations, capital market reactions, plane pricing data, demand forecasts, and even internal organizational changes.