For each of the situations below, comment and briefly explain your reasoning in a few sentences. 5(a) In the market for production of large commercial aircraft, there are really only two players: Boeing and Airbus. For both of these companies, their customers are the airlines (e.g., Delta, British Air, Lufthansa) who negotiate and place orders for a large number of aircraft whenever they need to update or expand their fleet. For many years, Boeing and Airbus have been stuck in cycles of severe price wars, followed by "truces" where they pledge not to compete on price, followed by truces being broken and more price wars. Based on the frameworks from this class, why do you think it might be so difficult for these two companies to "collude" (explicitly or tacitly) and avoid price wars? 5(b) In the U.S. airline industry, studies have found two factors that predict when price wars are more likely to occur. (1) When GDP growth (and therefore demand for flights) is lower than what had been predicted. And (2) during the spring and summer, when more vacation travel usually takes place. Based on the frameworks from this class, why are we more likely to see price wars during these two times? (You can give different explanations for the two different factors.)

5(a) In the market for production of large commercial aircraft, collusion between Boeing and Airbus is difficult due to several reasons: Oligopolistic Nature: Boeing and Airbus operate in an oligopoly, where there are only a few dominant players in the market. Collusion requires a small number of firms, but the limited number also means that it's easier to detect deviations from the agreement. Mutual Dependence: Both Boeing and Airbus heavily rely on airlines' orders for their business survival. Airlines have strong bargaining power due to the significant costs involved in purchasing aircraft. If one company deviates from the collusion agreement and offers lower prices, airlines will likely switch their orders to the cheaper option. Uncertainty and Instability: The airline industry is subject to various uncertainties, such as changing fuel prices, economic conditions, and technological advancements. These uncertainties can lead to fluctuations in demand and make it harder to maintain a stable collusion agreement. Incentives to Cheat: Each company has an incentive to undercut the other to gain a competitive advantage, leading to a higher market share. This competitive behavior can easily undermine any explicit or tacit collusion attempts. Regulatory and Legal Scrutiny: Collusion is illegal in most jurisdictions due to its negative impact on competition and consumers. Companies risk severe penalties if they are found engaging in collusive behavior, which discourages them from attempting to maintain long-term agreements to avoid price wars. 5(b) Lower GDP Growth: During periods of lower-than-expected GDP growth, airlines might experience decreased demand for flights. In such scenarios, airlines might engage in price wars to stimulate demand and attract price-sensitive consumers. Lower demand puts pressure on airlines to fill seats, and price reductions can help achieve this. Spring and Summer Travel: During spring and summer, there is typically a higher demand for vacation travel. Airlines aim to capture this increased demand by offering competitive fares to attract leisure travelers. The increased demand might lead to capacity constraints, and airlines might choose to compete on prices to secure a larger share of the vacation travel market. In both cases, the underlying motivation for price wars is related to demand fluctuations and the need to attract customers in a competitive industry. Airlines adjust their pricing strategies to align with shifts in consumer behaviour and market conditions.