Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics

Transcription

1 Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Dr. Markus Thomas Münter Collège des Ingénieurs Stuttgart, June, 03

2 SNORKELING VS. DOING THE DEEP DIVE

3 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 regional variations)

4 APPLE VS. SAMSUNG PROFITS But: they do not only take 50% plus of the market Apple and Samsung also capture 00% of the industry profits, all firms making zero or negative profit 3

5 APPLE VS. SAMSUNG: KEY ISSUES Key issues in understanding Apple vs. Samsung Where do profits come from? What is a profit function? 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? 4

6 OBJECTIVES AND FOCUS FOR TODAY gain some basic understanding why economics can prove quite helpful for managers assessing situations of strategic competition 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 5

7 AGENDA What is managerial economics? Where do profits come from? 3 Deriving optimum competitive behavior using game theory 4 Application to the Apple vs. Samsung case 5 Key learnings & discussion 6

8 WHAT IS ECONOMICS, WHAT IS MANAGEMENT? economics 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 how economies work. Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or 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. management Management encompasses all business and organizational activities that coordinate the efforts of people to accomplish desired goals 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. 7

9 WHAT IS MANAGERIAL ECONOMICS? economics management managerial economics 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 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 8

10 AGENDA What is managerial economics? Where do profits come from? 3 Deriving optimum competitive behavior using game theory 4 Application to the Apple vs. Samsung case 5 Key learnings & discussion 9

11 APPLE VS. SAMSUNG Apple and Samsung dominate the market for smartphones currently with their models iphone and Galaxy Both models are offered as (subsidized) packages from telcos as well as unlocked stand alones From a consumer s perspective what is your willingness to pay for any of these two alternatives? 0

12 WILLINGNESS TO PAY maximum 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 0 number of individuals

13 PRICE DEMAND SCHEDULE price p The willingness to pay can be translated easily into a demand curve also termed price demand schedule 0 quantity q

14 PRICE DEMAND SCHEDULE price p a p = p ( q) = a bq p p A S = = a a A S b b A S q q A S 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 p: price q: quantity a: maximum willingness to pay 0 -b quantity q /b: measure for size of the market Price demand schedule can be identified doing market research 3

15 REVENUES revenues R R = R( q) = pq = ( a bq) q = aq bq a 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 line" due to its position on the income statement not to be mixed up with profits, which is bottom line 0 -b quantity q 4

16 COST STRUCTURE costs C ( q) = cq F C = C + 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 0 costs C variable costs cq fixed costs F quantity q variable costs are 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 5

17 PROFITS () SINGLE FIRM profits π revenues R costs C revenues R π = R C = aq bq costs C cq F in managerial economics, profit is just revenues minus costs (cash flow perspective) in business, there are lots of other profitconcepts (Earnings Before Interest, Taxes, Depreciation, and Amortization EBITDA, Earnings Before Interest and Taxes EBIT, etc.) mainly for tax and depreciation issues 0 π = R C quantity q 6

18 STRATEGY, PROFITS, SHAREHOLDER VALUE strategy 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 profits 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, ) shareholder value 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 7

19 PROFITS () SINGLE FIRM () () (3) p = a bq R = pq C = cq + F Maximum profits are derived choosing a strategy (a strategic variable), here: quantity FOC and SOC give optimum profits (4) π = R C = aq bq cq π (5) = a bq c = 0 q a c (6) q* = b q * q * q * > 0, < 0, < 0. a c b F max! Solving for strategic 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, (/b) is a measure of market size 8

20 MONOPOLY EQUILIBRIUM Monopoly: one firm in the market, no competition monopoly a b 500 c F q* 45 p* R C pi Given a, b, c and F, choose optimum q to maximize profits pi*

21 AGENDA What is managerial economics? Where do profits come from? 3 Deriving optimum competitive behavior using game theory 4 Application to the Apple vs. Samsung case 5 Key learnings & discussion 0

22 ANALYSIS OF MARKET STRUCTURE homogenous products one firm (monopoly) national football leagues some firms (oligopoly) transportation, energy, railway, banking, telco,. many firms free services, groceries, 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 most relevant and frequent case heterogeneous products - automobiles, gadgets, technical consumer products,. music

23 STRATEGY AND COMPETITION homogenous products one firm (monopoly) location some firms (oligopoly) entry barriers many firms single-product vs. multi-product strategies quantity vs. price 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 down to quantity versus price heterogenous products degree of product differentiation innovation vs. imitation simultaneous vs. sequential decision making

24 QUANTITY VS. PRICE COMPETITION strategic characteristic evidence big picture Quantity as strategic variable Price as strategic variable All firms decide on quantity, price is determined in the market (Cournot- competition) All firms decide on price, quantity is determined in the market (Bertrandcompetition) Strong evidence in all markets and industries, where capacity is relevant and capacity adjustments are costly or take a long time Some evidence in markets, where capacity is quickly adjustable (and low investments needed) market structure and results differ with respect to type of competition both from a theoretical and 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 3

25 GAME THEORY BASIC IDEA Areas and typical situations Game theory is a study of strategic decision making in conflict and cooperation (interactive decision theory) trying to identify some optimal behavior or strategy given strategies or options of others 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 &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. 4

26 GAME THEORY REQUIREMENTS FOR APPLICATION Game theory from a theoretical perspective implementation requires some substantial efforts and information: () an unambiguous and quantifiable objective function is necessary () rationally acting players have to 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 from a practical perspective List of players List of strategies or actions available Description of payoffs or profits for each strategy Rules of the game 5

27 GAME THEORY A TYPICAL GAME (STRATEGIES) Player Two players: player (called column player) and player (called row player) strategy A of player strategy B of player Two strategies (a strategy profile) for each player: A and B for player, C and D for player Player strategy C of player strategy D of player A / C A / D B / C B / D Each combination of strategies is possible, A / 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 6

28 GAME THEORY A TYPICAL GAME (PAYOFFS) Player For each strategy combination, payoffs (profits) must be identified strategy A of player strategy B of player These payoffs are compared to identify the optimum strategy for each player Player strategy C of player strategy D of player π () A/C π () A/D π () A/C π () A/D π () B/C π () B/D π () B/C π () B/D the mode of comparing different strategic alternatives is called solution concept to a game 7

29 GAME THEORY A TYPICAL GAME (EXAMPLE ) strategy A of player Player strategy B of player Given the following payoffs what would be the best strategy for player, what would be the best strategy for player? strategy C of player Player strategy D of player 9 6 8

30 GAME THEORY A TYPICAL GAME (EXAMPLE ) Player strategy C of player strategy D of player strategy A of player 9 4 Player strategy B of player 3 The best strategy for player would be B, for player 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 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)

31 GAME THEORY A TYPICAL GAME (EXAMPLE ) strategy A of player Player strategy B of player Given the payoffs in example what would be, applying the maximin rule, the best strategy for player, what would be the best strategy for player? strategy C of player Player strategy D of player

32 GAME THEORY A TYPICAL GAME (EXAMPLE ) Player The best strategy for player would be B, for player it would be D Player strategy C of player strategy D of player strategy A of player strategy B of player 3 6 The solution can be found applying maximin But: here, for player, strategy D is always (independent of what player does) better than strategy C Such a strategy is called dominant 3 3

33 GAME THEORY A TYPICAL GAME (EXAMPLE 3) strategy A of player Player strategy B of player Given the payoffs in example 3 are there dominant strategies, what would be a solution applying maximin? strategy C of player Player strategy D of player

34 GAME THEORY A TYPICAL GAME (EXAMPLE 3) strategy A of player Player strategy B of player There are no dominant strategies, and applying maximin gives B / C as a Nash equilibrium But: what is strange about this equilibrium found by maximin? strategy C of player Player strategy D of player

35 GAME THEORY A TYPICAL GAME (EXAMPLE 3) Player Looking at B / C, it is obvious, that both players have an incentive to deviate Player strategy C of player strategy D of player strategy A of player strategy B of player Inspection of A / C and B / D shows, that these equilibria are indeed possible hence: a game can have more than one equilibrium, and even more than one Nashequilibrium Solution concept here would be: trigger a mixed strategy 3 34

36 GAME THEORY APPLICATION GUIDE () Identify all players () Identify all possible strategies How to apply game theory (quick and easy): (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 35

37 AGENDA What is managerial economics? Where do profits come from? 3 Deriving optimum competitive behavior using game theory 4 Application to the Apple vs. Samsung case 5 Key learnings & discussion 36

38 APPLE VS. SAMSUNG WITH GAME THEORY Players are easily identified Samsung Continuum of quantity strategies Apple Continuum of quantity strategies π S π A q S Obviously, they have a large number of feasible quantity strategies What we have to do now is identify the optimum solutions to the Apple and Samsung strategies in quantities q A 37

39 QUANTITY COMPETITION WITH TWO FIRMS ( q + q ) () p = a bq = a b () Ri = pqi, i = ; (3) Ci = cqi + F (4) π = R C = aq b π (5) = a b( q + q ) bq c = a c bq q a c q (6) q* = b q * q * q * q * > 0, < 0, < 0, < 0. a c b q ( q + q ) q cq F max! bq = 0 Suppose now two firms of course now, competition happens Firm has to take into account the action taken by firm and vice versa analyzing these situations is 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 38

40 OPTIMUM QUANTITY OF FIRM GIVEN QUANTITY OF FIRM quantity q (5) = a b ( q + q ) Firm (6) π q a c q* = b a c bq q bq bq c = 0 = For each quantity of firm, we can determine some optimum own strategy In a sense, this a reaction hence we call this curve a reaction curve q 0 a c b quantity q 39

41 OPTIMUM QUANTITY OF FIRM GIVEN QUANTITY OF FIRM quantity q π (5') = a b( q + q ) a c b Firm q a c bq a c q (6' ) q * = b bq bq = 0 c = The same is true for firm for every quantity chosen by firm, it determines some optimum quantity So: what is the correct quantity? q 0 quantity q 40

42 COURNOT-NASH EQUILIBRIUM FOR HOMOGENOUS FIRMS quantity q a c b Firm 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 equilibrium strategies of the other players q * 0 q * q q a c b Firm quantity q 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 4

43 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 b and b: each firm has now some local demand / market max! (4) (3) ;, (),, () F q c q q b b q a q C R F q c C i p q R b b b q b q b a p q b b q a p i i i i i i β β β β π = = + = = = > = = 4 demand / market b(beta): denotes relation between local markets (b(beta)=0: separate markets, b(beta)=: perfect substitutes) c and c: firms differ in variable costs again, choosing quantity profits are maximized * * (6) 0 (5) max! (4) b q b b c a q b q b b c a q c q b b q a q F q c q q b b q a q C R β β β β π π = = = = = =

44 COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS () quantity q a c b * q 0 q * Firm a c b b β q b (6) q * = q * = b β q b a c b a c b b Firm β b b q β q b quantity q Resulting strategy pair is again Nash, however not symmetric (due to c, c, etc.) So, firm is larger than firm! 43

45 COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS () quantity q If costs of firm increase, firm shrinks and firm grows Firm a c b * q q *' ' c c Firm 0 q * q *' quantity q 3 44

46 COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (3) quantity q If willingness to pay for products of firm increase, firm grows, firm shrinks Firm ' a a 3 q * q *' Firm 0 q * q *' a c b quantity q 45

47 COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (4) quantity q Firm If the market of firm grows (i.e., the reaction curve of firm is getting steeper) firm grows and firm shrinks q * q * b b ' b β q b b β q b ' Firm 0 q *' q * quantity q 3 46

48 APPLE VS. SAMSUNG KEY DIFFERENCES () Apple and Samsung differ in their strategies Apple strategic characteristic Innovator - consumers love innovativeness Being innovative requires R&D that s high fixed costs modeling approach High willingness to pay, however smaller customer base Industry specific fixed costs, significantly higher marginal costs We have to depict these differences in our model Samsung Imitator and follower In all industries, Samsung as a cost leader Lower willingness to pay, however larger customer base Industry specific fixed costs, drastically lower marginal costs 47

49 APPLE VS. SAMSUNG KEY DIFFERENCES () Price-demand schedule Cost function Suppose we did some decent market research and we analyzed balance sheets: Apple a() = 00 b() = 0,7 b(beta) = 0,5 (market specific) c() = 400 F = 0000 (industry specific) Apple customers are keen on Apple (higher a), but customer base is smaller (larger b) Samsung a() = 000 b() = 0,6 b(beta) = 0,5 (market specific) c()= 360 F = 0000 (industry specific) Samsung customers are not dedicated, yet customer base is larger Apple has about 0% higher marginal costs than Samsung (c() vs. c()) 48

50 APPLE VS. SAMSUNG EQUILIBRIA () Apple vs Samsung input firm level results statistics (A) two separate monopolies Apple a () 000,00 Samsung a () 000,00 Apple c () 400,00 Samsung c () 400,00 Apple b () 0,70 Samsung b () 0,70 b (beta) (market specific) 0,00 F (industry specific) 0000,00 Apple q* () 48,57 Samsung q* () 48,57 Apple p* () 700,00 Samsung p* () 700,00 Apple pi* () 857,43 Samsung pi* () 857,43 Apple R () ,00 Samsung R () ,00 Apple C () 848,57 Samsung C () 848,57 Q 857,4 average p 700,00 Apple market share () 50,00% Samsung market share () 50,00% Apple profit share () 50,00% Samsung profit share () 50,00% Apple profit margin () 39,5% Samsung profit margin () 39,5% () p = a bq bβ q p = a bq bβ q, b, b > bβ () Ri = piqi, i = ; (3) Ci = ciqi + F (4) π = R C = a q b q b q q c q F max! a c q* = b a c b q (6) q* = b b β b q b β π (5) = a bq bβ q c q β = 0 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 ever consider buying Samsung) Applying formulas () to (6) gives equilibrium values 49

51 APPLE VS. SAMSUNG EQUILIBRIA () Apple vs Samsung input firm level results statistics (A) two separate monopolies (B) perfect substitutes (b(beta)=) Apple a () 000,00 000,00 Samsung a () 000,00 000,00 Apple c () 400,00 400,00 Samsung c () 400,00 400,00 Apple b () 0,70 0,70 Samsung b () 0,70 0,70 b (beta) (market specific) 0,00,00 F (industry specific) 0000, ,00 Apple q* () 48,57 50,00 Samsung q* () 48,57 50,00 Apple p* () 700,00 575,00 Samsung p* () 700,00 575,00 Apple pi* () 857, ,00 Samsung pi* () 857, ,00 Apple R () , ,00 Samsung R () , ,00 Apple C () 848, ,00 Samsung C () 848, ,00 Q 857,4 500,00 average p 700,00 575,00 Apple market share () 50,00% 50,00% Samsung market share () 50,00% 50,00% Apple profit share () 50,00% 50,00% Samsung profit share () 50,00% 50,00% Apple profit margin () 39,5% 3,48% Samsung profit margin () 39,5% 3,48% Case (B) Firms are identical in demand and costs Firms have no separate local markets, i.e., products are perfect substitutes (b(beta) =, customers are completely indifferent between the two brands) Comparing (A) and (B), firms are smaller, profits are lower, prices are lower 50

52 APPLE VS. SAMSUNG EQUILIBRIA (3) Apple vs Samsung input firm level results statistics (A) (B) (C) two separate monopolies perfect substitutes (b(beta)=) imperfect subsititutes Apple a () 000,00 000,00 000,00 Samsung a () 000,00 000,00 000,00 Apple c () 400,00 400,00 400,00 Samsung c () 400,00 400,00 400,00 Apple b () 0,70 0,70 0,70 Samsung b () 0,70 0,70 0,70 b (beta) (market specific) 0,00,00 0,50 F (industry specific) 0000, , ,00 Apple q* () 48,57 50,00 35,79 Samsung q* () 48,57 50,00 35,79 Apple p* () 700,00 575,00 6,05 Samsung p* () 700,00 575,00 6,05 Apple pi* () 857, , ,09 Samsung pi* () 857, , ,09 Apple R () , ,00 96,88 Samsung R () , ,00 96,88 Apple C () 848, , ,79 Samsung C () 848, , ,79 Q 857,4 500,00 63,58 average p 700,00 575,00 6,05 Apple market share () 50,00% 50,00% 50,00% Samsung market share () 50,00% 50,00% 50,00% Apple profit share () 50,00% 50,00% 50,00% Samsung profit share () 50,00% 50,00% 50,00% Apple profit margin () 39,5% 3,48% 30,49% Samsung profit margin () 39,5% 3,48% 30,49% Case (C) Firms are identical in demand and costs b(beta) = 0,5, customers have a tendency for one of the brands Comparing (A), (B) and (C), firm size, profits and prices are in-between, however identical across firms 5

53 APPLE VS. SAMSUNG EQUILIBRIA (4) Apple vs Samsung input firm level results statistics (D) cost and demand differences Apple a () 00,00 Samsung a () 000,00 Apple c () 400,00 Samsung c () 360,00 Apple b () 0,70 Samsung b () 0,60 b (beta) (market specific) 0,50 F (industry specific) 0000,00 Apple q* () 363,64 Samsung q* () 38,8 Apple p* () 654,55 Samsung p* () 589,09 Apple pi* () 856,98 Samsung pi* () 7747,07 Apple R () 3806,53 Samsung R () 495,6 Apple C () 55454,55 Samsung C () 47454,55 Q 745,45 average p 6,0 Apple market share () 48,78% Samsung market share () 5,% Apple profit share () 5,59% Samsung profit share () 48,4% Apple profit margin () 34,69% Samsung profit margin () 34,44% Apple Samsung strategic characteristic Innovator - consumers love innovativeness Being innovative requires R&D that s high fixed costs Imitator and follower In all industries, Samsung as a cost leader modeling approach High willingness to pay, however smaller customer base Industry specific fixed costs, significantlyhigher marginal costs Lower willingness to pay, however larger customer base Industry specific fixed costs, drastically lower marginal costs Case (D) Firms are now different: Apple having higher willingness to pay, Samsung lower marginal costs and a somewhat larger market Differences in inputs leads to differences in output: Apple is smaller, yet having higher profits than Samsung due to much higher equilibrium prices 5

54 APPLE VS. SAMSUNG EQUILIBRIA (5) Apple vs Samsung input firm level results statistics (D) cost and demand differences Apple a () 00,00 00,00 Samsung a () 000,00 000,00 Apple c () 400,00 400,00 Samsung c () 360,00 30,00 Apple b () 0,70 0,70 Samsung b () 0,60 0,60 b (beta) (market specific) 0,50 0,50 F (industry specific) 0000, ,00 (E) cost reduction of Samsung Apple q* () 363,64 349,65 Samsung q* () 38,8 40,98 Apple p* () 654,55 644,76 Samsung p* () 589,09 57,59 Apple pi* () 856, ,76 Samsung pi* () 7747, ,00 Apple R () 3806, ,90 Samsung R () 495,6 4047,9 Apple C () 55454, ,4 Samsung C () 47454, ,9 Q 745,45 770,63 average p 6,0 605,33 Apple market share () 48,78% 45,37% Samsung market share () 5,% 54,63% Apple profit share () 5,59% 43,96% Samsung profit share () 48,4% 56,04% Apple profit margin () 34,69% 33,53% Samsung profit margin () 34,44% 39,96% Case (E) Suppose due to pressure by shareholders Samsung is realizing some cost cutting at ~ 0 % (decrease of c()) 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) 53

55 APPLE VS. SAMSUNG EQUILIBRIA (6) Apple vs Samsung input firm level results statistics (D) (E) (F) cost and demand differences cost reduction of Samsung introduction of iphone6 Apple a () 00,00 00,00 400,00 Samsung a () 000,00 000,00 000,00 Apple c () 400,00 400,00 400,00 Samsung c () 360,00 30,00 30,00 Apple b () 0,70 0,70 0,70 Samsung b () 0,60 0,60 0,60 b (beta) (market specific) 0,50 0,50 0,50 F (industry specific) 0000, , ,00 Apple q* () 363,64 349,65 60,40 Samsung q* () 38,8 40,98 36,08 Apple p* () 654,55 644,76 80,98 Samsung p* () 589,09 57,59 509,65 Apple pi* () 856, , ,9 Samsung pi* () 7747, , ,43 Apple R () 3806, , ,63 Samsung R () 495,6 4047,9 609,8 Apple C () 55454, , ,44 Samsung C () 47454, ,9 46,85 Q 745,45 770,63 97,48 average p 6,0 605,33 73,7 Apple market share () 48,78% 45,37% 65,55% Samsung market share () 5,% 54,63% 34,45% Apple profit share () 5,59% 43,96% 8,96% Samsung profit share () 48,4% 56,04% 7,04% Apple profit margin () 34,69% 33,53% 49,5% Samsung profit margin () 34,44% 39,96% 3,00% Case (F) Suppose Apple is now releasing a new iphone as an answer to cost cutting of Samsung (increase of a()) Key results: drastic 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 54

56 APPLE VS. SAMSUNG EQUILIBRIA (7) Apple vs Samsung input firm level results statistics (D) (E) (F) (G) cost and demand differences cost reduction of Samsung introduction of iphone6 catching with Galaxy S5 Apple a () 00,00 00,00 400,00 400,00 Samsung a () 000,00 000,00 000,00 00,00 Apple c () 400,00 400,00 400,00 400,00 Samsung c () 360,00 30,00 30,00 30,00 Apple b () 0,70 0,70 0,70 0,70 Samsung b () 0,60 0,60 0,60 0,60 b (beta) (market specific) 0,50 0,50 0,50 0,50 F (industry specific) 0000, , , ,00 Apple q* () 363,64 349,65 60,40 53,47 Samsung q* () 38,8 40,98 36,08 5,89 Apple p* () 654,55 644,76 80,98 77,03 Samsung p* () 589,09 57,59 509,65 67,3 Apple pi* () 856, , ,9 877,6 Samsung pi* () 7747, , ,43 477,66 Apple R () 3806, , , ,57 Samsung R () 495,6 4047,9 609,8 30,86 Apple C () 55454, , ,44 587,4 Samsung C () 47454, ,9 46, ,0 Q 745,45 770,63 97,48 043,36 average p 6,0 605,33 73,7 700,94 Apple market share () 48,78% 45,37% 65,55% 50,94% Samsung market share () 5,% 54,63% 34,45% 49,06% Apple profit share () 5,59% 43,96% 8,96% 56,05% Samsung profit share () 48,4% 56,04% 7,04% 43,95% Apple profit margin () 34,69% 33,53% 49,5% 45,75% Samsung profit margin () 34,44% 39,96% 3,00% 45,86% Case (G) Suppose Samsung is catching up, yet not completely, with a new version of Galaxy (increase of a()) Key results: Apple still able to charger higher prices, but Samsung drastically growing Market shares are like equal with Apple staying ahead in profits, especially due to much higher prices 55

57 AGENDA What is managerial economics? Where do profits come from? 3 Deriving optimum competitive behavior using game theory 4 Application to the Apple vs. Samsung case 5 Key learnings & discussion 56

58 KEY TERMS LEARNED () 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 57

59 KEY TERMS LEARNED () 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 58

60 BACK UP 59

61 FURTHER READING Fisher, T.C.G., Prentice, D. and Washik, R., Managerial economics: a strategic approach, Milton Park 00. Besanko, D., Dranove, D., Schaefer, S. and Shanley, M., Economics of strategy, Boston 007. Mansfield, E., Allen, W.B., Doherty, N., and Weigelt, K., Managerial economics: theory, applications, and cases, New York

62 APPLE VS. SAMSUNG EQUILIBRIA Apple vs Samsung input firm level results statistics (A) (B) (C) (D) (E) (F) (G) two separate imperfect introduction monopolies subsititutes of iphone6 perfect substitutes (b(beta)=) cost and demand differences cost reduction of Samsung catching with Galaxy S5 Apple a () 000,00 000,00 000,00 00,00 00,00 400,00 400,00 Samsung a () 000,00 000,00 000,00 000,00 000,00 000,00 00,00 Apple c () 400,00 400,00 400,00 400,00 400,00 400,00 400,00 Samsung c () 400,00 400,00 400,00 360,00 30,00 30,00 30,00 Apple b () 0,70 0,70 0,70 0,70 0,70 0,70 0,70 Samsung b () 0,70 0,70 0,70 0,60 0,60 0,60 0,60 b (beta) (market specific) 0,00,00 0,50 0,50 0,50 0,50 0,50 F (industry specific) 0000, , , , , , ,00 Apple q* () 48,57 50,00 35,79 363,64 349,65 60,40 53,47 Samsung q* () 48,57 50,00 35,79 38,8 40,98 36,08 5,89 Apple p* () 700,00 575,00 6,05 654,55 644,76 80,98 77,03 Samsung p* () 700,00 575,00 6,05 589,09 57,59 509,65 67,3 Apple pi* () 857, , ,09 856, , ,9 877,6 Samsung pi* () 857, , , , , ,43 477,66 Apple R () , ,00 96, , , , ,57 Samsung R () , ,00 96,88 495,6 4047,9 609,8 30,86 Apple C () 848, , , , , ,44 587,4 Samsung C () 848, , , , ,9 46, ,0 Q 857,4 500,00 63,58 745,45 770,63 97,48 043,36 average p 700,00 575,00 6,05 6,0 605,33 73,7 700,94 Apple market share () 50,00% 50,00% 50,00% 48,78% 45,37% 65,55% 50,94% Samsung market share () 50,00% 50,00% 50,00% 5,% 54,63% 34,45% 49,06% Apple profit share () 50,00% 50,00% 50,00% 5,59% 43,96% 8,96% 56,05% Samsung profit share () 50,00% 50,00% 50,00% 48,4% 56,04% 7,04% 43,95% Apple profit margin () 39,5% 3,48% 30,49% 34,69% 33,53% 49,5% 45,75% Samsung profit margin () 39,5% 3,48% 30,49% 34,44% 39,96% 3,00% 45,86% 6