competition between apple and samsung in the · pdf filecompetition between apple and samsung...

Competition between Apple and Samsung in the smartphone market– introduction into some key conceptsin the smartphone market– introduction into some key concepts

in managerial economics

Collège des IngénieursStuttgart, June 21, 2013

Dr. Markus Thomas Münter

SNORKELING VS. DOING THE DEEP DIVE

COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter 1

GLOBAL SMARTPHONE MARKET

• Smartphones are on the rise

• Apple and Samsung, by now and increasingly, dominate the market for smartphones capturing more than 50% of the global market (with


global market (with regional variations)

APPLE VS. SAMSUNG PROFITS

• But: they do not only take 50% plus of the market – Apple and Samsung also capture 100% of the industry profits, all firms making zero or negative profit


APPLE VS. SAMSUNG: KEY ISSUES

• Where do profits come from ? What is a profit function?

Which strategies are possible? What is Apple’s and Samsung’s respective strategy?Key issues in


• Which strategies are possible? What is Apple’s and Samsung’s respective strategy?

• How can Apple and Samsung derive the best strategy using game theory?

• How does strategic behavior affect market shares, profitability and prices?

Key issues in understanding

Apple vs. Samsung

OBJECTIVES AND FOCUS FOR TODAY

• … gain some basic understanding why economics can prove quite helpful for managers assessing situations of strategic competition

• … get some idea how to analyze the battle between Apple and Samsung in


today, you will …

• … get some idea how to analyze the battle between Apple and Samsung in the smartphone market using game theory (of course, there are other perspectives …)

• … (hopefully) become curious in learning more about real-life applications in managerial economics

AGENDA

What is managerial economics?1

Where do profits come from? 2


Deriving optimum competitive behavior using game theory3

Application to the Apple vs. Samsung case4

Key learnings & discussion5

• Economics is a social science that analyzes the production, distribution, and consumption of goods and services – a focus of the subject is how economic agents behave or interact and

WHAT IS ECONOMICS, WHAT IS MANAGEMENT?

economics

• Management encompasses all business and organizational activities that coordinate the efforts of people to accomplish desired goals and objectives using available resources

management


how economic agents behave or interact and how economies work.

• Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firmsor as buyers and sellers) and markets, and their interactions.

• Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

and objectives using available resources efficiently and effectively.

• Management comprises planning, organizing, staffing, leading or directing, and controlling an organization or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources.

• Managerial economics is concerned with application of economic concepts and economic analysis to the typical problems in managerial decision making

• applies mainly microeconomic analysis to decision problems trying to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of differential calculus, mathematical programming and game

WHAT IS MANAGERIAL ECONOMICS?

economics management


example through the use of differential calculus, mathematical programming and game theory for strategic decisions, most commonly applied to:

• production analysis – microeconomic techniques are used to analyze optimum output and production, costs, …

• pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, price discrimination, ….

• risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk

• organizational analysis – model are used to determine optimum internal structure of the firm, make-or-buy and outsourcing, governance and internal control, and incentive schemes

managerialeconomics

AGENDA







APPLE VS. SAMSUNG

• Apple and Samsung dominate the market for smartphonescurrently with their models iPhone and Galaxy

• Both models are offered as (subsidized) packages from telcos


packages from telcosas well as unlocked stand alones

• From a consumer’s perspective – what is your willingness to pay for any of these two alternatives?

WILLINGNESS TO PAY

• The willingness to pay describes, how much money an individual would pay at the maximum to purchase some product

• Most often, this sum varies considerably across individuals

maximumwillingnessto pay


across individuals

number ofindividuals

0

PRICE DEMAND SCHEDULE

• The willingness to pay can be translated easily into a ‘demand curve’ also termed price demand schedule

price p


quantity q0

PRICE DEMAND SCHEDULE

• the price demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price

price p ( ) bqaqpp −==

a

SSSS

AAAA

qbap

qbap

−=

−=


at that given price

• p: price

• q: quantity

• a: maximum willingness to pay

• 1/b: measure for size of the market

• Price demand schedule can be identified doing market research

quantity q

-b

0

REVENUES

• Revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers

• Revenue is often referred to as the "top

revenues R ( )

( ) 2bqaqqbqa

pqqRR

−=−

===


referred to as the "top line" due to its position on the income statement – not to be mixed up with profits, which is “bottom line”

quantity q

a

-b

0

COST STRUCTURE

• Costs are the sum of fixed and variable costs

• marginal cost is the change in the total cost that arises when the quantity produced changes by one unit

• variable costs are expenses that change in

costs C ( ) FcqqCC +==

costs C


expenses that change in proportion to the activity of a business, i.e., production

• fixed costs are business expenses that are not dependent on the level of goods or services produced by the business

• Costs can be identified analyzing P&L statements and balance sheets

quantity q

fixed costs F

variable costs cq

0

costs C

PROFITS (1) – SINGLE FIRM

• in managerial economics, profit is just revenues minus costs (cash flow perspective)

• in business, there are lots of other profit-concepts (Earnings Before Interest, Taxes,

profits ππππ

Fcqbqaq

CR

−−−

=−=2

πrevenues R

costs C

costs C

revenues R


Before Interest, Taxes, Depreciation, and Amortization EBITDA, Earnings Before Interest and Taxes EBIT, etc.) mainly for tax and depreciation issues

quantity q 0

CR −=π

costs C

STRATEGY, PROFITS, SHAREHOLDER VALUE

• profits as revenues minus costs measure success of an organization and guarantee

• the direction and scope of an organization over the long term

• which achieves competitive advantage for the organization through its configuration of resources (aka strategic variable) within a changing industry environment to meet the needs of markets/customers and to fulfill stakeholder expectations

strategy


• Shareholders are the owners of a company, hence they own all equity and receive all profits as dividends

• Shareholder value is simply the discounted sum of all future profits and measures the value of a company

shareholder value

• profits as revenues minus costs measure success of an organization and guarantee survival

• for simplicity and tractability, it is assumed that firms strive to maximize profits (however, there lot of other objectives, …)

profits

PROFITS (2) – SINGLE FIRM

• Maximum profits are derived choosing a strategy (a strategic variable), here: quantity

• FOC and SOC give optimum profits

• Solving for strategic variable (6) denotes

max!)4(

)3(

)2(

)1(

2 →−−−=−=

+=

=

−=

FcqbqaqCR

FcqC

pqR

bqap

π


variable (6) denotes necessary action to realize optimum profits

• For (6), there is a straight forward economic interpretation: (a-c) is a measure for competitiveness, (1/b) is a measure of market size

.0*

,0*

,0*

2*)6(

02)5(

max!)4(

<∂

∂<

∂

∂>

∂

∂

−=

=−−=∂

∂

→−−−=−=

b

q

c

q

a

q

b

caq

cbqaq

FcqbqaqCR

π

π

MONOPOLY EQUILIBRIUM

• Monopoly: one firm in the market, no competition

• Given a, b, c and F, choose optimum q to maximize profits

monopoly

a 100

b 1

c 10 1000

1500

2000

2500

3000

R


c 10

F 500

q* 45

p* 55

pi* 1525 -1500

-1000

-500

0

500

1000

0 20 40 60 80 100 120

C

pi

AGENDA







ANALYSIS OF MARKET STRUCTURE

• Market structure (better: industry structure) depicts number and size distribution of firms and structure of offered products

• most interesting: some firms, since this is the homogenous

products

one firm

(monopoly)

some firms

(oligopoly)many firms

national football

transportation, energy, railway,

free e-mailservices,


firms, since this is the most relevant and frequent case

products

hetero-geneousproducts

automobiles, gadgets, technicalconsumer

products, ….

music

footballleagues

railway, banking,telco, ….

services, groceries, …

-

STRATEGY AND COMPETITION

• For all market structures, it is crucial what is the nature of competition and what is the main strategic variable

• At least in the long run and from a strategic perspective, this boils homogenous

products

one firm

(monopoly)

some firms

(oligopoly)many firms

single-product vs. multi-product strategieslocation

entry barriers


perspective, this boils down to quantity versus price

products

hetero-genousproducts

quantity vs. price competition

simultaneous vs. sequentialdecision making

degree of product differentiation

innovation vs. imitation

entry barriers

QUANTITY VS. PRICE COMPETITION

• All firms decide on quantity, price is determined in the market (Cournot-competition)

Quantity as strategic variable

strategic characteristic evidence

• market structure and results differ with respect to type of competition

• both from a theoretical and an empirical perspective,

big picture

• Strong evidence in all markets and industries, where capacity is relevantand capacity adjustments are costly or take a long


competition)

• All firms decide on price, quantity is determined in the market (Bertrand-competition)

Price as strategic variable

an empirical perspective, quantity competition has more relevance (two stage game: first stage capacity, second stage price)

• however, asking managers, most of them think they are playing price competition

• game theory is the key approach to analyze competition

are costly or take a long time

• Some evidence in markets, where capacity is quickly adjustable (and low investments needed)

GAME THEORY – BASIC IDEA

• is a study of strategic decision making in conflict and

economics, political science, and psychology, as well as logic and biology, and of course pure math:

• war (that is actually one of the origins … )

• competition (but also auctions, bargaining, mergers

Areas and typical situations


conflict and cooperation (interactive decision theory) trying to identify some optimal behavior or strategy given strategies or options of others

Game theory

• competition (but also auctions, bargaining, mergers &acquisitions pricing, social network formation, mechanism and market design, …. )

• cooperation (formation and stability of cartels, organizations, coalitions, …. )

• bargaining in any situation

• social and private situations

• and of course: games like chess, etc.

GAME THEORY – REQUIREMENTS FOR APPLICATION

implementation requires some substantial efforts and information:

(1) an unambiguous and quantifiable objective function is necessary

(2) rationally acting players have to recognize the strategic interaction as a

• List of players

• List of strategies or actions available

… from a theoretical perspective … from a practical perspective


recognize the strategic interaction as a game

information needs to be given concerning the

(3) number of players

(4) the duration and

(5) structure of the game and

(6) all potential and feasible strategies

Game theory

• List of strategies or actions available

• Description of payoffs or profits for each strategy

• Rules of the game

strategy A ofplayer 1

strategy B ofplayer 1

GAME THEORY – A TYPICAL GAME (STRATEGIES)

Player 1

• Two players: player 1 (called column player) and player 2 (called row player)

• Two strategies (a strategy profile) for each player: A and B for player 1, C and D for player 2


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

1A / 2C 1B / 2C

1A / 2D 1B / 2D

for player 2

• Each combination of strategies is possible, 1A / 2 D, and so on

• A description of a game in a matrix (if possible) is called normal form

• If both players are able to draw the same normal form game, they have symmetric information



GAME THEORY – A TYPICAL GAME (PAYOFFS)

Player 1

π π π π (1)

• For each strategy combination, payoffs (profits) must be identified

• These payoffs are ‘compared’ to identify the optimum strategy for each player

• the mode of π π π π (1)


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

π π π π (1) 1A/2C

• the mode of comparing different strategic alternatives is called ‘solution concept’ to a game

π π π π (2) 1A/2C

π π π π (1) 1B/2C

π π π π (2) 1B/2C

π π π π (1) 1B/2D

π π π π (2) 1B/2D

π π π π (1) 1A/2D

π π π π (2) 1A/2D



GAME THEORY – A TYPICAL GAME (EXAMPLE 1)

Player 1

• Given the following payoffs – what would be the best strategy for player 1, what would be the best strategy for player 2?


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

4

2

3

3

6

1

1

9




Player 1

• The best strategy for player 1 would be B, for player 2 it would be C – the rule applied is called “maximin” –that is find first the minimum result of each strategy and than choose the maximum of these


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

4maximum of these minima

• This leads (typically) to the best-response strategy given all strategies of other players – the combination of all best-response strategies is called a Nash equilibrium (no player can benefit by changing strategies)

2

3

3

6

1

1

9

1 3

1

2




Player 1

• Given the payoffs in example 2 – what would be, applying the maximin rule, the best strategy for player 1, what would be the best strategy for player 2?


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

4

6

3

1

6

2

2

9




Player 1

• The best strategy for player 1 would be B, for player 2 it would be D

• The solution can be found applying maximin

• But: here, for player 2, strategy D is always


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

4strategy D is always (independent of what player 1 does) better than strategy C

• Such a strategy is called dominant

6

3

1

6

2

2

9

2 3

2

1




Player 1

• Given the payoffs in example 3 – are there dominant strategies, what would be a solution applying maximin?


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

5

4

4

7

3

8

2

3




Player 1

• There are no dominant strategies, and applying maximingives 1 B / 2 C as a Nash equilibrium

• But: what is strange about this equilibrium found by maximin?


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

5

4

4

7

3

8

2

3

2 3

3

4




Player 1

• Looking at 1 B / 2 C, it is obvious, that both players have an incentive to deviate

• Inspection of 1 A / 2 C and 1 B / 2 D shows, that these equilibria are indeed possible –hence: a game can


strategy

D ofplayer 2

strategy

C ofplayer 2

Player 2

5hence: a game can have more than one equilibrium, and even more than one Nash-equilibrium

• Solution concept here would be: trigger a mixed strategy

4

4

7

3

8

2

3

2 3

3

4

GAME THEORY – APPLICATION GUIDE

(1) Identify all players

(2) Identify all possible strategies

(3) Identify payoffs to all strategy combinations


(3) Identify payoffs to all strategy combinations

(4) Check, whether there are dominant strategies

(5) Apply a solution concept, preferably maximin

(6) Identify the Nash-equilibrium, check if it is unique

How to apply game theory (quick and easy):

AGENDA







Continuum of quantitystrategies

APPLE VS. SAMSUNG WITH GAME THEORY

Apple

• Players are easily identified

• Obviously, they have a large number of feasible quantity strategies

• What we have to do now is identify the optimum solutions to


Conti-nuum ofquantity

strategies

Samsung

optimum solutions to the Apple and Samsung strategies in quantities

qA

qSππππS

ππππA

QUANTITY COMPETITION WITH TWO FIRMS

• Suppose now two firms – of course now, ‘competition’ happens

• Firm 1 has to take into account the action taken by firm 2 and vice versa – analyzing these situations is called game theory

( )

( ) max!)4(

)3(

2;1,)2(

)1(

11211211

21

→−−+−=−=

+=

==

+−=−=

FcqqqqbaqCR

FcqC

ipqR

qqbabQap

ii

ii

π


called game theory

• Game theory is the study of strategic decision making in situations of conflict and cooperation

• Again, we maximize profits by choosing quantity – optimum quantity now depends on the quantity of the competitor

( )

( )

.0*

,0*

,0*

,0*

22*)6(

02)5(

max!)4(

2

1111

2

1

21121

1

1

11211211

<∂

∂<

∂

∂<

∂

∂>

∂

∂

−−

=

=−−−=−−+−=∂

∂

→−−+−=−=

q

q

b

q

c

q

a

q

q

b

caq

bqbqcacbqqqbaq

FcqqqqbaqCR

π

π

OPTIMUM QUANTITY OF FIRM 1 GIVEN QUANTITY OF FIRM 2

• For each quantity of firm 2, we can determine some optimum own strategy

• In a sense, this a reaction – hence we call this curve a reaction curve

quantity q2( )

22*)6(

02

)5(

2

1

21

121

1

1

q

b

caq

bqbqca

cbqqqbaq

−−

=

=−−−

=−−+−=∂

∂

π

Firm 1


0quantity q1

b

ca

2

−

2

2q−

Firm 1

OPTIMUM QUANTITY OF FIRM 2 GIVEN QUANTITY OF FIRM 1

• The same is true for firm 2 – for every quantity chosen by firm 1, it determines some optimum quantity 2

• So: what is the correct quantity?

quantity q2

( )

*)'6(

02

)'5(

1

12

221

2

2

qcaq

bqbqca

cbqqqbaq

−−

=

=−−−

=−−+−=∂

∂

π

Firm 2


0quantity q1

22*)'6( 1

2

q

b

caq −

−=

b

ca

2

−

2

1q−

Firm 2

COURNOT-NASH EQUILIBRIUM FOR HOMOGENOUS FIRMS

• Given both reaction curves, there is an intersection where strategies match

• This is a Nash equilibrium: a solution to a non-cooperative game in which each player knows the

quantity q2

b

ca

2

−Firm 1


player knows the equilibrium strategies of the other players

• if 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 constitute a Nash equilibrium

0quantity q1

b

ca

2

−

2

1q−2

2q−

*1

q

*2

q

Firm 2

QUANTITY COMPETITION FOR HETEROGENEOUS FIRMS

• If firms are not symmetric (i.e., they differ in cost or other characteristics), we have to apply some extensions

• b1 and b2: each firm has now some ‘local’ demand / market

1112

2

1111211

2112222

21111

max!)4(

)3(

2;1,)2(

,,

)1(

FqcqqbqbqaCR

FqcC

iqpR

bbbqbqbap

qbqbap

iii

iii

β

ββ

β

π →−−−−=−=

+=

==

>−−=

−−=


demand / market

• b(beta): denotes relation between “local” markets (b(beta)=0: “separate markets”, b(beta)=1: perfect substitutes)

• c1 and c2: firms differ in variable costs

• again, choosing quantity profits are maximized2

1

2

22

2

1

2

1

111

12111

1

1

11121111211

22*

22*)6(

02)5(

max!)4(

b

qb

b

caq

b

qb

b

caq

cqbqbaq

FqcqqbqbqaCR

β

β

β

β

π

π

−−

=

−−

=

=−−−=∂

∂

→−−−−=−=

COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (1)

• Resulting strategy pair is again Nash, however not symmetric (due to c1, c2, etc.)

• So, firm 2 is larger than firm 1!

quantity q2

22

2b

ca −2

1

2

222

1

2

1

11

1

22*

22*)6(

b

qb

b

caq

b

qb

b

caq

β

β

−−

=

−−

=

Firm 1


0quantity q1

22b

2

1

2b

qbβ−

*1

q

*2

q

1

11

2b

ca −

1

2

2b

qbβ−

Firm 2


• If costs of firm 2 increase, firm 2 shrinks and firm 1 grows

quantity q2

22

2b

ca −

Firm 1


0quantity q1

22b

*1

q

*2

q

*'2

q

*'1

q

1

2

3

⇑→ '22 cc

Firm 2


• If willingness to pay for products of firm 1 increase, firm 1 grows, firm 2 shrinks

quantity q2

1 ⇑→ '11 aa

Firm 1


0quantity q1*

1q

*2

q

*'2

q

*'1

q

2

3

Firm 2

1

11

2b

ca −


• If the market of firm 2 grows (i.e., the reaction curve of firm 2 is getting steeper) firm 2 grows and firm 1 shrinks

quantity q2

*2

q

⇓→ 'bb

Firm 1


0quantity q1

2

1

2b

qbβ−

*1

q

*2

q

*'1

q

12

3

⇓→ '22 bb

Firm 2

'2 2

1

b

qbβ−

APPLE VS. SAMSUNG – KEY DIFFERENCES (1)

• Apple and Samsung differ in their strategies

• We have to depict these differences in our model

• Innovator - consumers love innovativeness

• Being innovative requires R&D – that’s

Apple

strategic characteristic

• High willingness to pay, however smaller customer base

• Industry specific fixed costs,

modelingapproach


requires R&D – that’s high fixed costs

• Industry specific fixed costs, significantly higher marginal costs

• Imitator and follower

• In all industries, Samsung as a cost leader

Samsung

• Lower willingness to pay, however larger customer base

• Industry specific fixed costs,drastically lower marginal costs

APPLE VS. SAMSUNG – KEY DIFFERENCES (2)

Suppose we did some decent market research and we analyzed balance sheets:

• Apple customers are “keen on Apple” (higher a), but customer base is

• a(1) = 1100

• b(1) = 0,7

• b(beta) = 0,5 (market Apple

Price-demand schedule

• c(1) = 400

• F = 10000 (industry specific)

Cost function


• a(2) = 1000

• b(2) = 0,6

• b(beta) = 0,5 (market specific)

• c(2)= 360

• F = 10000 (industry specific)

customer base is smaller (larger b)

• Samsung customers are not dedicated, yet customer base is larger

• Apple has about 10% higher marginal costs than Samsung (c(2) vs. c(1))

• b(beta) = 0,5 (market specific)

specific)

Samsung

APPLE VS. SAMSUNG – EQUILIBRIA (1)

Case (A)

• Firms are identical in demand and costs

• Firms have completely separate ‘local’ markets, i.e., that’s two monopolies (b(beta) = 0, i.e., no Apple customer would

1112

2

1111211

2112222

21111

max!)4(

)3(

2;1,)2(

,,

)1(

FqcqqbqbqaCR

FqcC

iqpR

bbbqbqbap

qbqbap

iii

iii

β

ββ

β

π →−−−−=−=

+=

==

>−−=

−−=

(A)

Apple a (1) 1000,00

Samsung a (2) 1000,00

Apple c (1) 400,00

Samsung c (2) 400,00

Apple b (1) 0,70

Samsung b (2) 0,70

b (beta) (market specific) 0,00

F (industry specific) 10000,00

inp

ut

Apple vs

Samsung two separate

monopolies


Apple customer would ever consider buying Samsung)

• Applying formulas (1) to (6) gives equilibrium values

2

1

2

222

1

2

1

111

12111

1

1

22*

22*)6(

02)5(

b

qb

b

caq

b

qb

b

caq

cqbqbaq

β

β

β

π

−−

=

−−

=

=−−−=∂

∂

Apple q* (1) 428,57

Samsung q* (2) 428,57

Apple p* (1) 700,00

Samsung p* (2) 700,00

Apple pi* (1) 118571,43

Samsung pi* (2) 118571,43

Apple R (1) 300000,00

Samsung R (2) 300000,00

Apple C (1) 181428,57

Samsung C (2) 181428,57

Q 857,14

average p 700,00

Apple market share (1) 50,00%

Samsung market share (2) 50,00%

Apple profit share (1) 50,00%

Samsung profit share (2) 50,00%

Apple profit margin (1) 39,52%

Samsung profit margin (2) 39,52%

firm

le

ve

l re

sults

sta

tist

ics


Case (B)


• Firms have no separate ‘local’ markets, i.e., products are perfect substitutes(b(beta) = 1, customers are

(A) (B)

Apple a (1) 1000,00 1000,00

Samsung a (2) 1000,00 1000,00

Apple c (1) 400,00 400,00

Samsung c (2) 400,00 400,00

Apple b (1) 0,70 0,70

Samsung b (2) 0,70 0,70

b (beta) (market specific) 0,00 1,00

F (industry specific) 10000,00 10000,00

inp

ut

Apple vs


monopolies

perfect

substitutes

(b(beta)=1)


customers are completely indifferent between the two brands)

• Comparing (A) and (B), firms are smaller, profits are lower, prices are lower

Apple q* (1) 428,57 250,00

Samsung q* (2) 428,57 250,00

Apple p* (1) 700,00 575,00

Samsung p* (2) 700,00 575,00

Apple pi* (1) 118571,43 33750,00

Samsung pi* (2) 118571,43 33750,00

Apple R (1) 300000,00 143750,00

Samsung R (2) 300000,00 143750,00

Apple C (1) 181428,57 110000,00

Samsung C (2) 181428,57 110000,00

Q 857,14 500,00

average p 700,00 575,00

Apple market share (1) 50,00% 50,00%

Samsung market share (2) 50,00% 50,00%

Apple profit share (1) 50,00% 50,00%

Samsung profit share (2) 50,00% 50,00%

Apple profit margin (1) 39,52% 23,48%

Samsung profit margin (2) 39,52% 23,48%

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Case (C)


• b(beta) = 0,5, customers have a tendency for one of the brands

• Comparing (A), (B) and (C), firm size,

(A) (B) (C)

Apple a (1) 1000,00 1000,00 1000,00

Samsung a (2) 1000,00 1000,00 1000,00

Apple c (1) 400,00 400,00 400,00

Samsung c (2) 400,00 400,00 400,00

Apple b (1) 0,70 0,70 0,70

Samsung b (2) 0,70 0,70 0,70

b (beta) (market specific) 0,00 1,00 0,50

F (industry specific) 10000,00 10000,00 10000,00

inp

ut

Apple vs


monopolies

perfect

substitutes

(b(beta)=1)

imperfect

subsititutes


and (C), firm size, profits and prices are in-between, however identical across firms

Apple q* (1) 428,57 250,00 315,79

Samsung q* (2) 428,57 250,00 315,79

Apple p* (1) 700,00 575,00 621,05

Samsung p* (2) 700,00 575,00 621,05

Apple pi* (1) 118571,43 33750,00 59806,09

Samsung pi* (2) 118571,43 33750,00 59806,09

Apple R (1) 300000,00 143750,00 196121,88

Samsung R (2) 300000,00 143750,00 196121,88

Apple C (1) 181428,57 110000,00 136315,79

Samsung C (2) 181428,57 110000,00 136315,79

Q 857,14 500,00 631,58

average p 700,00 575,00 621,05

Apple market share (1) 50,00% 50,00% 50,00%

Samsung market share (2) 50,00% 50,00% 50,00%

Apple profit share (1) 50,00% 50,00% 50,00%

Samsung profit share (2) 50,00% 50,00% 50,00%

Apple profit margin (1) 39,52% 23,48% 30,49%

Samsung profit margin (2) 39,52% 23,48% 30,49%

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Case (D)

• Firms are now different: Apple having higher willingness to pay, Samsung lower marginal costs and a somewhat larger market

• Differences in inputs

• Innovator - consumers love innovativeness

• Being innovative requires R&D – that’s high fixed costs

Apple

strategic characteristic

• High willingness to pay, however smaller customer base

• Industry specific fixed costs, significantly higher marginal costs

modelingapproach

(D)

Apple a (1) 1100,00

Samsung a (2) 1000,00

Apple c (1) 400,00

Samsung c (2) 360,00

Apple b (1) 0,70

Samsung b (2) 0,60

b (beta) (market specific) 0,50

F (industry specific) 10000,00

inp

ut

Apple vs

Samsung cost and

demand

differences


• Differences in inputs leads to differences in output: Apple is smaller, yet having higher profits than Samsung due to much higher equilibrium prices

• Imitator and follower

• In all industries, Samsung as a cost leader

Samsung

• Lower willingness to pay, however larger customer base

• Industry specific fixed costs,drastically lower marginal costs

Apple q* (1) 363,64

Samsung q* (2) 381,82

Apple p* (1) 654,55

Samsung p* (2) 589,09

Apple pi* (1) 82561,98

Samsung pi* (2) 77471,07

Apple R (1) 238016,53

Samsung R (2) 224925,62

Apple C (1) 155454,55

Samsung C (2) 147454,55

Q 745,45

average p 621,02

Apple market share (1) 48,78%

Samsung market share (2) 51,22%

Apple profit share (1) 51,59%

Samsung profit share (2) 48,41%

Apple profit margin (1) 34,69%

Samsung profit margin (2) 34,44%

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Case (E)

• Suppose – due to pressure by shareholders –Samsung is realizing some cost cutting at ~ 10 % (decrease of c(2))

• Key results: Samsung is

(D) (E)

Apple a (1) 1100,00 1100,00

Samsung a (2) 1000,00 1000,00

Apple c (1) 400,00 400,00

Samsung c (2) 360,00 320,00

Apple b (1) 0,70 0,70

Samsung b (2) 0,60 0,60

b (beta) (market specific) 0,50 0,50

F (industry specific) 10000,00 10000,00

inp

ut

Apple vs

Samsung cost and

demand

differences

cost

reduction of

Samsung


• Key results: Samsung is growing, Apple is shrinking, and now Samsung is more profitable

• Following the cost reduction, Apple has to reduce prices (in order to maximize profits)

Apple q* (1) 363,64 349,65

Samsung q* (2) 381,82 420,98

Apple p* (1) 654,55 644,76

Samsung p* (2) 589,09 572,59

Apple pi* (1) 82561,98 75578,76

Samsung pi* (2) 77471,07 96334,00

Apple R (1) 238016,53 225438,90

Samsung R (2) 224925,62 241047,29

Apple C (1) 155454,55 149860,14

Samsung C (2) 147454,55 144713,29

Q 745,45 770,63

average p 621,02 605,33

Apple market share (1) 48,78% 45,37%

Samsung market share (2) 51,22% 54,63%

Apple profit share (1) 51,59% 43,96%

Samsung profit share (2) 48,41% 56,04%

Apple profit margin (1) 34,69% 33,53%

Samsung profit margin (2) 34,44% 39,96%

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Case (F)

• Suppose Apple is now releasing a new iPhone as an answer to cost cutting of Samsung (increase of a(1))

• Key results: drastic increase in quantity

(D) (E) (F)

Apple a (1) 1100,00 1100,00 1400,00

Samsung a (2) 1000,00 1000,00 1000,00

Apple c (1) 400,00 400,00 400,00

Samsung c (2) 360,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70

Samsung b (2) 0,60 0,60 0,60

b (beta) (market specific) 0,50 0,50 0,50

F (industry specific) 10000,00 10000,00 10000,00

inp

ut

Apple vs

Samsung cost and

demand

differences

cost

reduction of

Samsung

introduction

of iPhone6


increase in quantity and price for Apple, Samsung lowering prices at the same time and also reducing quantity

• Apple is now dominating market share and captures more than 80 % of profits

Apple q* (1) 363,64 349,65 601,40

Samsung q* (2) 381,82 420,98 316,08

Apple p* (1) 654,55 644,76 820,98

Samsung p* (2) 589,09 572,59 509,65

Apple pi* (1) 82561,98 75578,76 243176,19

Samsung pi* (2) 77471,07 96334,00 49945,43

Apple R (1) 238016,53 225438,90 493735,63

Samsung R (2) 224925,62 241047,29 161092,28

Apple C (1) 155454,55 149860,14 250559,44

Samsung C (2) 147454,55 144713,29 111146,85

Q 745,45 770,63 917,48

average p 621,02 605,33 713,72

Apple market share (1) 48,78% 45,37% 65,55%

Samsung market share (2) 51,22% 54,63% 34,45%

Apple profit share (1) 51,59% 43,96% 82,96%

Samsung profit share (2) 48,41% 56,04% 17,04%

Apple profit margin (1) 34,69% 33,53% 49,25%

Samsung profit margin (2) 34,44% 39,96% 31,00%

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Case (G)

• Suppose Samsung is catching up, yet not completely, with a new version of Galaxy (increase of a(2))

• Key results: Apple still able to charger higher prices, but Samsung

(D) (E) (F) (G)

Apple a (1) 1100,00 1100,00 1400,00 1400,00

Samsung a (2) 1000,00 1000,00 1000,00 1200,00

Apple c (1) 400,00 400,00 400,00 400,00

Samsung c (2) 360,00 320,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70 0,70

Samsung b (2) 0,60 0,60 0,60 0,60

b (beta) (market specific) 0,50 0,50 0,50 0,50

F (industry specific) 10000,00 10000,00 10000,00 10000,00

catching

with Galaxy

S5

inp

ut

Apple vs

Samsung cost and

demand

differences

cost

reduction of

Samsung

introduction

of iPhone6


prices, but Samsung drastically growing

• Market shares are like equal with Apple staying ahead in profits, especially due to much higher prices

Apple q* (1) 363,64 349,65 601,40 531,47

Samsung q* (2) 381,82 420,98 316,08 511,89

Apple p* (1) 654,55 644,76 820,98 772,03

Samsung p* (2) 589,09 572,59 509,65 627,13

Apple pi* (1) 82561,98 75578,76 243176,19 187721,16

Samsung pi* (2) 77471,07 96334,00 49945,43 147217,66

Apple R (1) 238016,53 225438,90 493735,63 410308,57

Samsung R (2) 224925,62 241047,29 161092,28 321021,86

Apple C (1) 155454,55 149860,14 250559,44 222587,41

Samsung C (2) 147454,55 144713,29 111146,85 173804,20

Q 745,45 770,63 917,48 1043,36

average p 621,02 605,33 713,72 700,94

Apple market share (1) 48,78% 45,37% 65,55% 50,94%

Samsung market share (2) 51,22% 54,63% 34,45% 49,06%

Apple profit share (1) 51,59% 43,96% 82,96% 56,05%

Samsung profit share (2) 48,41% 56,04% 17,04% 43,95%

Apple profit margin (1) 34,69% 33,53% 49,25% 45,75%

Samsung profit margin (2) 34,44% 39,96% 31,00% 45,86%

firm

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AGENDA







KEY TERMS LEARNED (1)

• managerial economics: is concerned with application of economic concepts and economic analysis to the typical problems in managerial decision making

• in managerial economics, profit is just revenues minus costs and firms strive to maximize profits


• the profit function is maximized by choosing a strategy, i.e., a strategic variable (some evidence that quantity due to investment character is the key variable)

• game theory: a study of strategic decision making trying to identify some optimal behavior or strategy given potential strategies of others

KEY TERMS LEARNED (2)

• a game is described by a) list of players, b) list of strategies or actions available, c) description of payoffs or profits for each strategy and d) rules of the game

• to find a solution to a game, a) check, whether there are dominant strategies, b) apply a solution concept, preferably maximin, and c) identify the Nash-equilibrium, check if it is unique


• the Cournot-Nash model proves quite flexible and powerful to analyze competition, see the Apple vs. Samsung case study

• key limitations and obstacles are: data, and what if managers do not really maximize profits

BACK UP


FURTHER READING

• Fisher, T.C.G., Prentice, D. and Washik, R., Managerial economics: a strategic approach, Milton Park 2010.

• Besanko, D., Dranove, D., Schaefer, S. and Shanley, M., Economics of strategy, Boston 2007.

• Mansfield, E., Allen, W.B., Doherty, N., and Weigelt, K., Managerial economics: theory, applications, and cases, New York 2009.


APPLE VS. SAMSUNG – EQUILIBRIA

(A) (B) (C) (D) (E) (F) (G)

Apple a (1) 1000,00 1000,00 1000,00 1100,00 1100,00 1400,00 1400,00

Samsung a (2) 1000,00 1000,00 1000,00 1000,00 1000,00 1000,00 1200,00

Apple c (1) 400,00 400,00 400,00 400,00 400,00 400,00 400,00

Samsung c (2) 400,00 400,00 400,00 360,00 320,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70 0,70 0,70 0,70 0,70

Samsung b (2) 0,70 0,70 0,70 0,60 0,60 0,60 0,60

b (beta) (market specific) 0,00 1,00 0,50 0,50 0,50 0,50 0,50

F (industry specific) 10000,00 10000,00 10000,00 10000,00 10000,00 10000,00 10000,00

Apple q* (1) 428,57 250,00 315,79 363,64 349,65 601,40 531,47

catching

with Galaxy

S5

inp

ut

Apple vs


monopolies

perfect

substitutes

(b(beta)=1)

imperfect

subsititutes

cost and

demand

differences

cost

reduction of

Samsung

introduction

of iPhone6


Apple q* (1) 428,57 250,00 315,79 363,64 349,65 601,40 531,47

Samsung q* (2) 428,57 250,00 315,79 381,82 420,98 316,08 511,89

Apple p* (1) 700,00 575,00 621,05 654,55 644,76 820,98 772,03

Samsung p* (2) 700,00 575,00 621,05 589,09 572,59 509,65 627,13

Apple pi* (1) 118571,43 33750,00 59806,09 82561,98 75578,76 243176,19 187721,16

Samsung pi* (2) 118571,43 33750,00 59806,09 77471,07 96334,00 49945,43 147217,66

Apple R (1) 300000,00 143750,00 196121,88 238016,53 225438,90 493735,63 410308,57

Samsung R (2) 300000,00 143750,00 196121,88 224925,62 241047,29 161092,28 321021,86

Apple C (1) 181428,57 110000,00 136315,79 155454,55 149860,14 250559,44 222587,41

Samsung C (2) 181428,57 110000,00 136315,79 147454,55 144713,29 111146,85 173804,20

Q 857,14 500,00 631,58 745,45 770,63 917,48 1043,36

average p 700,00 575,00 621,05 621,02 605,33 713,72 700,94

Apple market share (1) 50,00% 50,00% 50,00% 48,78% 45,37% 65,55% 50,94%

Samsung market share (2) 50,00% 50,00% 50,00% 51,22% 54,63% 34,45% 49,06%

Apple profit share (1) 50,00% 50,00% 50,00% 51,59% 43,96% 82,96% 56,05%

Samsung profit share (2) 50,00% 50,00% 50,00% 48,41% 56,04% 17,04% 43,95%

Apple profit margin (1) 39,52% 23,48% 30,49% 34,69% 33,53% 49,25% 45,75%

Samsung profit margin (2) 39,52% 23,48% 30,49% 34,44% 39,96% 31,00% 45,86%

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