Assume that marginal cost of supplying one more operating system to a computer is zero. PM=price charged. Cost of production per computer is equal to $1000 + PM. Assume that the downstream computer industry is perfectly competitive and aggregate demand is given by Q = 50,000,000 - 10,000P .
The marginal cost to a downstream firm of producing a computer is $500 + PM + PI where PM is the price paid to Microsoft for "Windows" and PI is the price paid to Intel for a microprocessor. Assume that Intel has a monopoly over the provision of microprocessors.
a. Suppose that Microsoft and Intel simultaneously and independently set the prices for Windows and Pentium chips, PM and PI . What are the are the Nash equilibrium prices that Microsoft and Intel set?
b. Suppose Microsoft and Intel agree to bundle microprocessors and Windows together for a price PMI. What bundle price maximizes Intel and Microsofts joint profits? Would consumers benefit from such an agreement?