Consider the following highly simplified picture of the personal computer 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 $1000 per computer; (2) the Windows operating system, available only from Microsoft, at a price PM, and (3) a Pentium microprocessor, available only from Intel, at a price a P,. the demand for a computer is given by Q= 100000 - 50 P where P is the final good price. The marginal cost of a computer to an OEM is of the form a + bP, + cPM what is the value for al V for b V, and for c V Assume 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 $0. Also assume that Intel is the sole supplier of microprocessors for personal computers. The marginal cost to Intel of a Pentium microprocessor for one more computer system is $400 Suppose that Microsoft and Intel simultaneously and independently set the prices for Windows and Pentium chips, PM and P, The marginal revenue for Microsoft is of the form a - bQ + CP, what is the value for a [ V for b V and for c V The marginal revenue for Intel is of the form a - bQ+ cPM what is the value for a V for b V and for c What is the price that Microsoft will charge the OEM What is the price that Intel will charge the OEM V What is the final price the consumer will pay V What is the total number of computers sold V What are the OEM profits V What are Microsoft's profits What are Intel's profitsNow suppose that Intel and Microsoft merged together. Assume that Intel and Microsoft do not have any synergies and therefore no economies of scope from producing the operating system and chips together. What is the price charged by the OEM to consumers V What profits will the merged firm achieve V Are industry profits higher when Intel and Microsoft merge ONO OYES ONot Known because we do not know how the OEM will behave Are the consumers better off when Intel and Microsoft merge ONot Known because we do not know how the OEM will behave OYES ONO Finally suppose Intel and Microsoft merge and buy out all the OEM, how will the price paid by consumers change Odecreases and consumer surplus decreases OIncrease but consumer surplus increases Ostays the same but consumer surplus increases Olt stays the same
