Consider the duopoly computer industry with consumer preferences exhibiting network externalities. Suppose that the computer brands are initially incompatible and that there are 100 A-oriented consumers and 200 B-oriented consumers, withutility functions (of eachconsumer type) given by UA def =  qA − pA buy A qB − pB − δ buy B, UB def =  qA − pA − δ buy A qB − pB buy B, where δ is the differentiation (switching cost) parameter. Assume that δ > 300.

(a) Calculate the UPE prices and profit levels assuming that in equilibrium both brands are sold in the market and the that brands are incompatible.

(b) Conclude which firm charges a higher price under incompatibility and which firm earns a higher profit. Explain in words the intuition behind your result.

(c) Calculate the UPE prices and profit levels assuming that in equilibrium both brands are sold in the market and that the brands are compatible.

(d) Conclude whether firms are better off when computers are incompatible than when they are compatible.