Consider the market for smart-phones with two dominant players: Apple(A) iPhone4S and Samsung(S) Galaxy. These smart phones are similar, but not perfect substitutes, so each company faces a demand curve that depends on its own price and that of its competitor as follows (fractional amounts are allowed) :
QA=21-2PA+PS
QS= 18-2PS+PA
Each firm faces a total cost function given by:
TCA=10+2QA
TCS=QS
(a) If Apple and Samsung simultaneously determine their prices and units sold, what are the equilibrium prices, quantities and profits?
Apple and Samsung have been locked in an acrimonious battle in 10 countries involving smartphones and tablets since April. Apple successfully moved to block Samsung from selling its tablets in Germany and a case in the Netherlands has forced Samsung to modify some smartphone models. (Reuters 30th Nov. 2011). The ruling has provided a timely boost for Apple ahead of the busy pre-Christmas shopping season and has allowed them to market their product first. Samsung, on the other hand, has to move after Apple chooses its price.
(b) Assuming that Apple makes its strategic price decision first and Samsung has to follow: what will be the equilibrium prices?
Apple doesn't make the iPhone itself. Samsung turns out to be a particularly important supplier. It provides some of the phone's most important components: the flash memory that holds the phone's apps, music and operating software; the working memory, or DRAM; and the applications processor that makes the whole thing work. Together these account for 26% of the component cost of an iPhone. (The Economist 10th Aug 2011)
(c) Hypothetically, if Apple and Samsung decided to collude, instead of suing and counter-suing each other, what would the equilibrium prices and quantities be? Assuming each firm keeps the profit from its own market, what are these profits?
(d) Is this collusion stable? Justify your answer with a quantitative example.