The Windows operating system from Microsoft, Inc. runs about 90% of the worlds personal computers, so it
Question:
The Windows operating system from Microsoft, Inc. runs about 90% of the world’s personal computers, so it is natural to think that Microsoft has a monopoly in the market for operating systems. According to economist Richard Schmalensee, an expert on oligopoly and monopoly, Microsoft’s profit-maximizing monopoly price is between $900 and $2,000. That’s the amount Microsoft would charge if it acted like a regular monopolist. However, Microsoft has tended to charge only $99 for Windows. Perhaps Microsoft is an insecure monopolist and picks a low price to discourage entry and preserve its monopoly. In other words, if Microsoft charged $2,000 for its operating system, there would be an incentive for other firms to develop alternative operating systems.
Suppose that the market for operating systems is initially a monopoly (Microsoft is the monopoly) with the potential for a second firm to enter the industry. Suppose Microsoft can charge a price of either $99 or $900 for its operating system. Suppose a new firm namely, Mac OS X has three options: enter the industry and charge $99, enter the industry and charge $900, and not enter in the industry. The profits that would result from these outcomes are presented in a payoff matrix below.
Microsoft (M) | |||
P = $99 | P = $900 | ||
Mac OS X (NF) | Enter, P = $99 | M = 5 NF = 5 | M = 0 NF = 10 |
Enter, P = $900 | M = 10 NF = 0 | M = 50 NF = 50 | |
No Entry | M = 10 NF = 0 | M = 100 NF = 0 |
Assume that Microsoft and the Mac OS X move simultaneously.
a) Does Microsoft have a dominant strategy? If so, what is it?
b) Does the Mac OS X have a dominant strategy? If so, what is it?
c) Find all Nash Equilibria for this game.
Now assume that Microsoft moves first and that the Mac OS X moves second.
d) Find the Stackelberg Equilibrium to a sequential-move game
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba