European Industrial Policy: The Airbus Case

European industrial policy The Airbus case We estimate the impact of Airbus on the market for large commercial airliners, modelling a multistage game of the development of this market with three players: Boeing, Airbus and McDonnell-Douglas (MDD). What would have happened had Airbus not entered the market? We find that, given the prior presence of MDD, entry by Airbus reduces airliner prices by only 3. 5% on average. The Airbus presence constrains actions by Boeing, but weakens the incentive for MDD to compete with Boeing; and, by reducing Boeing's market share, it reduces Boeing's economies of scale and scope, thus raising costs. Hence, the consumer surplus argument for government subsidy to Airbus is only weakly supported by our analysis: the beneficial challenge to Boeing was already being provided by MDD. In product development, we find that, although Airbus may have deterred MDD from producing a medium-range, medium-body aircraft like the A300, it made it easier for MDD to produce the MD11 in competition with the A330/340 and the Boeing 777. The loss of scale and scope economies by Boeing as a result of the Airbus entry substantially raised the cost to Boeing of producing the 777, making competition from MDD easier even with Airbus's presence. Finally, we find that the presence of Airbus reduces the profits of Boeing by over 100 billion, and of MDD by two-thirds. Airbus itself is estimated to make profits of around 50 billion over the five decades from the 1970s, or about a billion dollars a year, a rate of return over the whole period of between 6% and 11%. If we give the same weight to profits and consumer surplus, Airbus has had a large negative impact on world welfare, but a comfortably positive impact on European welfare. — Damien Neven and Paul Seabright