13.7. WINTEL. Consider the following highly simplified picture of the personal com- puter industry. A large number of price-taking firms assemble computer systems; call them "computer OEMs" (Original Equipment Manufacturers). Each of these firms must buy three inputs for each computer system that it sells: (1) a variety of components that are themselves supplied competitively and collectively cost the computer OEM $500 per computer; (2) the Windows operating system, available only from Microsoft, at a price P, to be discussed below; and (3) a Pentium microprocessor, available only from Intel, at a price p,, also to be discussed below. Since each computer system requires pre- cisely one operating system and one microprocessor, the marginal cost of a computer to an OEM is 500 + PM + P. Assume that competition among OEMs drives the price of a computer system down to marginal cost, so we have p = 500+ PM + P₁, where p is the price of a computer system. The demand for computer systems is given by Q=100,000,000 - 50,000 p. Microsoft is the sole supplier of the Windows operating system for personal computers. The marginal cost to Microsoft of providing Windows 2000rs

13.7. WINTEL. Consider the following highly simplified picture of the personal com- puter industry. A large number of price-taking firms assemble computer systems; call them "computer OEMs" (Original Equipment Manufacturers). Each of these firms must buy three inputs for each computer system that it sells: (1) a variety of components that are themselves supplied competitively and collectively cost the computer OEM $500 per computer; (2) the Windows operating system, available only from Microsoft, at a price P, to be discussed below; and (3) a Pentium microprocessor, available only from Intel, at a price p,, also to be discussed below. Since each computer system requires pre- cisely one operating system and one microprocessor, the marginal cost of a computer to an OEM is 500 + PM + P. Assume that competition among OEMs drives the price of a computer system down to marginal cost, so we have p = 500+ PM + P₁, where p is the price of a computer system. The demand for computer systems is given by Q=100,000,000 - 50,000 p. Microsoft is the sole supplier of the Windows operating system for personal computers. The marginal cost to Microsoft of providing Windows 2000rs

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

This is question 13.7

CHAPTER 13
14|1
Now suppose that Microsoft and Intel sit down to negotiate an agreement to sell
Windows and Pentium chips as a package to computer OEMs for a package price of
PM-
(b) What package price would maximize Microsoft's and Intel's combined prof-
its? By how much would an agreement between Microsoft and Intel boost
their combined profits?
(c) Would final consumers benefit from such an agreement between Microsoft
and Intel, or would they be harmed? What about computer OEMs? Relate
your answer to your calculations in parts (a) and (b), and explain the eco-
nomic principles underlying your answer.

givell
inity cost of adding a channel to the
distributor's lineup, for example the profit lost from not being able to carry a different
channel). Show that there exist values F such that the distributor will carry the network
if and only if it owns the network.
to carry a
13.7. WINTEL. Consider the following highly simplified picture of the personal com-
puter industry. A large number of price-taking firms assemble computer systems; call
them "computer OEMs" (Original Equipment Manufacturers). Each of these firms must
buy three inputs for each computer system that it sells: (1) a variety of components that
are themselves supplied competitively and collectively cost the computer OEM $500
per computer; (2) the Windows operating system, available only from Microsoft, at a
price P, to be discussed below; and (3) a Pentium microprocessor, available only from
Intel, at a price p,, also to be discussed below. Since each computer system requires pre-
cisely one operating system and one microprocessor, the marginal cost of a computer
to an OEM is 500+ PM + P. Assume that competition among OEMs drives the price
of a computer system down to marginal cost, so we have p = 500+ PM + P₁, where
p is the price of a computer system. The demand for computer systems is given by
Q=100,000,000 - 50,000 p. Microsoft is the sole supplier of the Windows operating
system for personal computers. The marginal cost to Microsoft of providing Windows
for one more computer is zero. Intel is the sole supplier of the Pentium microprocessors
for personal computers. The marginal cost to Intel of a Pentium microprocessor for one
more computer system is $300.
(a) Suppose that Microsoft and Intel simultaneously and independently set the
prices for Windows and Pentium chips, PM and p₁. What are the Nash equi-
librium prices, PM and p,?

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