The Boeing Company which manufactures aircraft ranging from commercial jetliners to military aircraft is the world’s leading aircraft company based in the United States of America. The company has partnered with different airlines across the globe in the field of aviation. The industry of the Boeing Company is the oligopoly market (industry) since the aviation industry is dominated by a few sellers as noted by different experts in the market.An oligopoly industry is an industry whereby the entire output is produced by a few large firms and the contribution of each firm is sufficiently large to be significant in the market. For instance, the Boeing Company of United States of America competes with Airbus of Britain among other competitors in the production of commercial aircraft.
Competition in the aviation industry is stiff because the number of competitors in the market is few giving the Boeing Company management team sleepless nights. This means that each of the firm i.e. Boeing and Airbus accurately become aware of how its competitor is likely to react to any change the firm is going to make, especially relating to price.
The oligopoly industry which the Boeing Company plays is a unique market structure because if Boeing is making a decision regarding its pricing and output, it will put into consideration the perceived or expected reaction from its competitors like Britain’s Airbus. This implies that the policies Boeing Company makes being in an oligopoly market structure are interdependent as argued by industry leaders.
Boeing Company: Oligopoly Market
According to studies, price rigidity of the firms in the oligopoly market structure is better explained by the interdependence of the oligopoly firms in making decisions. This means that prices will be sticky in the sense that they are unlikely to change very often. A kinked demand curve explains the price rigidity of firms in an oligopoly market structure.
In the figure above, for price increases the Boeing Company is on the elastic demand curve dd and for price decreases it is on the inelastic demand curve DD. In this case, it implies that the Boeing Company actual demand curve is represented by dED.
In such as situation, the demand curve is said to have a kink at point E associated with the Price P1 and Quantity Q1. All the firms in the oligopoly industry including Boeing Company are assumed to be similar. This means that if the Boeing Company raises its prices and its competitors such as Airbus fail to follow suit, then it will lose a large proportion of sales and revenue.
The price rigidity of the oligopoly market leads to collusion by the firms in order to maximize their joint profits and reduce uncertainty. Collusion may be in the form of agreeing on prices or market shares by the firms in the oligopoly industry. Most firms usually form a cartel in which they will produce separately but come to a common census in the determination of prices and output.
In conclusion, oligopoly market structures are usually characterized by different forms of non-price competition because of collusion or because of fear of consequences of a price war and also barriers to entry such as the large scale production such as the case for the Boeing Company.