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Complements in System Markets: Microsoft, Intel, and AMD

A discussion on competition and complements in the monopolistic software market of Microsoft and the duopolistic processor market of Intel and AMD, analyzing the relevance of the theoretical model and its implications for product quality and R&D competition.

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Complements in System Markets: Microsoft, Intel, and AMD

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  1. Competing Complementsby Ramon Casadesus-Masanell Barry Nalebuff and David Yoffie Discussant: Jay Pil Choi

  2. Competition in System Markets • Consider a System Market (A+B) where Market A is Monopolistic (Microsoft) while Market B is Duopolistic with Vertical Differentiation (Intel and AMD). • Comments on Theoretical Contributions • Comments on the Relevance of the Model Applied to the Software/Processor Market

  3. Main Theoretical Results • With nonnegative MC, there is no pure-strategy equilibrium with AMD active. • With a negative MC, there is an f such that AMD is active and earns positive profits in equilibrium.

  4. Summary Evaluation on Theory • A very simple and elegant model to highlight the main effects • Interesting results

  5. Proposition 7 • Monopolist in market A (Microsoft) might be better off with z (=cm + c) close to zero so that the low quality producer in market B (AMD) is not active even if this means earning less from the installed base. • Commitment to an Open Architecture?

  6. Choice of f (R&D) • “Suppose now that z is fixed and that Microsoft can choose the degree of vertical differentiation between Intel and AMD by, for example, doing R&D on behalf of AMD. What will it want to choose?” • How about the Effect of f on AMD?

  7. CNET ReviewDual-core desktop CPU bout: AMD vs. Intel • http://reviews.cnet.com/4520-10442_7-6389077-9.html?tag=btn

  8. Product Cycle with R&D Competition • The Winner is … AMD It wasn’t even close. “We're very interested to see what happens when the next generation of chips and chipsets hits the market.”

  9. Examples • “AMD pays for IBM know-how in battle with Intel” • “AMD is leaning increasingly on IBM as it battles with Intel for next-generation microprocessor manufacturing leadership.” • “AMD, Intel at it again, as both take aim at SoC”

  10. Minor Comment • Some statements on comparative statics analysis can be misleading. • “Intel may be better off with competition than without it.” • “Ceteris Paribus” assumption is not satisfied.

  11. Summary • An important contribution to the literature on competition in complementary markets • A very nice and clean model with a lot of potentials • Endogenization of f with R&D competition would be a logical next step. • Intel’s Annual R&D Budget $6B • AMD’s Annual R&D Budget $1B

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