Abstract:

This report discusses a case study entitled Game Theoretic Analysis of Exclusive Contract
for Carbon Fibre Reinforced Plastic in the Aviation Industry. In this case study the exclusive
contract between the aircraft manufacturer Boeing and the CFRP supplier Toray is analysed
using game theory. The various possible competitions that can exist due to the accepting or
rejecting of Torays offer for exclusive contract by Boeing is found using the game tree and
the best responses of the competing companies to obtain maximum profit is found by solving
the sub game Nash equilibrium.
Further this report discusses the possibility of applying the game theoretic methodology
adopted in the case study in a construction sector scenario. A hypothetical scenario similar to
that of the case study is built up and the game theory concept is applied to it. Finally, the Pros
and cons of applying the method to construction sector is discussed.

Introduction:
Terminologies Used:
1. Game Theory: Game Theory is concerned with the analysis of strategies for dealing
with competitive situations where the outcome of a participant's choice of action
depends critically on the actions of other participants. Game theory has been applied
to contexts in war, business, and biology.
2. Stackelberg Competition: It is a model of imperfect competition based on a non-co-
operative game. It is a sequential game. There are two firms, which sell homogenous
products and are subject to same demand and cost functions. One firm ( Leader) is
perhaps better known or has greater brand equity and is therefore better placed to
decide first which quantity to sell and the other firm (Follower ) observes this and
decides on its production qty.
3. Cournot Competition: It is a model of imperfect competition in which two firms
with identical cost functions compete with homogenous products in a static setting.
There are two firms operating in a limited market. Both companies will receive profits
derived from a simultaneous decision made by both on how much to produce and also
based on their cost functions. (policonomics, n.d.)
4. Nash Equilibrium: In game theory Nash Equilibrium is a solution methodology for a
non-cooperative game involving two or more players in which each player is assumed
to know the equilibrium strategies of the other players, and no player has anything to
gain by changing only his or her own strategy. If each player has chosen a strategy
and no player can benefit by changing strategies while the other players keep theirs
unchanged, then the current set of strategy choices and the corresponding payoffs
constitutes a Nash equilibrium. The Nash equilibrium is one of the foundational
concepts in game theory. (Nash Equilibrium, n.d.)
5. Backward Induction: It is the process of reasoning backwards in time, from the end
of a problem or situation, to determine a sequence of optimal actions .It proceeds by
first considering the last time a decision might be made and choosing what to do in
any situation at that time (Backward Induction, n.d.)
SUBGAME PERFECT NASH EQUILIBRIUM:
We have already discussed before the definition of Nash Equilibrium. A Strategy profile is a
sub game Nash Equilibrium if the profits induced from that strategy is not less than from
another strategy for every player

Analysis:
I) Exclusive Contract Case: By using backward induction, we first solve Nash equilibrium in
Airbus phase. First we solve optimal (KB, AB, KA) to maximize the profits for airbus

Now we solve the optimal solution of CFRP for Toray and the rival to maximise their profits.
In this scenario, Toray can be the leader in the market because it obtains know how as a result
of the exclusive contract in the Boeing Phase. We solve the optimal quantity of CFRP,KRA
which is the rival to maximise its profits given Torays strategy KTA

To maximise Torays profit the best response function is

Using the above solution we obtain the solution for the rival

Now we consider Boeing phase to solve AB to maximise B given KB and R (QA)

Applying the above solutions we get