Computer software, S, and hardware, H, are complementary products used to produce “computer servicesâ€. In order to enjoy computer services customers must make a one-time purchase of hardware and then can purchase as much software as they choose. Once the hardware is purchased, consumers receive computer services by purchasing units of software. Therefore, the price of additional computer services is PS, the price of a unit of software. (In other words, the demand for computer services can be drawn with the quantity of software on the horizontal axis and the price of software on the vertical axis.) The software market is competitive. However, the hardware market is monopolized by the firm, HAL, Inc. The marginal cost of producing the hardware is cH and the marginal cost of each unit of software is cS:

a. Assume that all computer service users are alike, that is, they have the same demand curve for computer services. Use a graph to illustrate the overall value of computing services to the consumer. What does this imply about the profit maximizing price HAL can charge for the computer hardware.

b. Would HAL gain anything by buying software at the competitive price, branding it as its own, and then selling its hardware only to customers that use HAL-brand software?