Exercise

Godzilla and Macrosoft produce software and operating systems respectively, both at marginal cost 10. Each firm has monopoly power in the production of its products. The products are perfect complements, i.e., consumers only obtain positive utility if they buy both products. The demand curve for the composite good software and operating system is given by

where  p ≡ p_c + P_m is the price of the composite good, p_g the price of software and P_m the price of the operating system.

a) What is the profit-maximizing P in the case that Godzilla and Macrosoft merge?

b) Consider the nonintegrated structure. Suppose that Godzilla chooses its price first, and that Macrosoft only picks its price after observing Godzilla's price. Is the equilibrium price of the composite good higher than in the case of a merger?

c) Suppose now that the two firms choose their prices simultaneously. Is the equilibrium price of the composite good higher than in the case of a merger?