Competition Between Apple and Samsung in The Smartphone Market in The Smartphone Market

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 21, 2013
SNORKELING VS. DOING THE DEEP DIVE
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
1
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)
2
APPLE VS. SAMSUNG PROFITS
• But: they do not only
take 50% plus of the
market – Apple and
Samsung also capture
100% of the industry
profits, all firms making
zero or negative profit
3
APPLE VS. SAMSUNG: KEY ISSUES
• Where do profits come from ? What is a profit function?

Key issues in
understanding • Which strategies are possible? What is Apple’s and Samsung’s respective strategy?
Apple vs. • How can Apple and Samsung derive the best strategy using game theory?
Samsung
• How does strategic behavior affect market shares, profitability and prices?
4
OBJECTIVES AND FOCUS FOR TODAY
• … gain some basic understanding why economics can prove quite

helpful for managers assessing situations of strategic competition
• … get some idea how to analyze the battle between Apple and Samsung in
today, you will 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
AGENDA
1 What is managerial economics?
2 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
WHAT IS ECONOMICS, WHAT IS MANAGEMENT?
economics management
• Economics is a social science that analyzes the • Management encompasses all business and
production, distribution, and consumption of organizational activities that coordinate the
goods and services – a focus of the subject is efforts of people to accomplish desired goals
how economic agents behave or interact and and objectives using available resources
how economies work. efficiently and effectively.
• Microeconomics examines the behavior of • Management comprises planning, organizing,
basic elements in the economy, including staffing, leading or directing, and controlling an
individual agents (such as households and firms organization or effort for the purpose of
or as buyers and sellers) and markets, and their accomplishing a goal. Resourcing
interactions. encompasses the deployment and
• Macroeconomics analyzes the entire economy manipulation of human resources, financial
and issues affecting it, including resources, technological resources, and natural
unemployment, inflation, economic growth, resources.
and monetary and fiscal policy.
7
WHAT IS MANAGERIAL ECONOMICS?
economics management
• 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:
managerial • production analysis – microeconomic techniques are used to analyze optimum output
economics 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
AGENDA
9
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?
10
WILLINGNESS TO PAY
• The willingness to pay
describes, how much
maximum money an individual
willingness would pay at the
to pay maximum to purchase
some product
• Most often, this sum
varies considerably
across individuals
0
number of
individuals
11
PRICE DEMAND SCHEDULE
• The willingness to pay
price p can be translated
easily into a ‘demand
curve’ also termed
price demand
schedule
0
quantity q
12
PRICE DEMAND SCHEDULE
• the price demand
price p curve is the graph
p = p(q ) = a − bq p A = a A − bA q A depicting the
relationship between
pS = aS − bS qS the price of a certain
commodity and the
amount of it that
a consumers are willing
and able to purchase
at that given price
• p: price
• q: quantity
• a: maximum willingness
to pay
• 1/b: measure for size of
-b the market
• Price demand
0 schedule can be
quantity q
identified doing
market research
13
REVENUES
• Revenue is income
revenues R R = R(q ) = pq = that a company
receives from its
(a − bq )q = aq − bq 2 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
a on the income
statement – not to be
mixed up with profits,
which is “bottom line”
-b
0
quantity q
14
COST STRUCTURE
• Costs are the sum of
costs C fixed and variable costs
C = C (q ) = cq + F • marginal cost is the
change in the total cost
that arises when the
quantity produced
changes by one unit
• variable costs are
costs C expenses that change in
proportion to the activity
of a business, i.e.,
production
variable costs cq • fixed costs are business
expenses that are not
dependent on the level
of goods or services
fixed costs F produced by the
0 business
quantity q • Costs can be identified
analyzing P&L statements
and balance sheets
15
PROFITS (1) – SINGLE FIRM
• in managerial
economics, profit is just
profits π π = R −C = revenues minus costs
(cash flow
revenues R
revenues R aq − bq 2 − cq − F perspective)
costs C • in business, there are
lots of other profit-
concepts (Earnings
costs C Before Interest, Taxes,
Depreciation, and
Amortization EBITDA,
Earnings Before Interest
and Taxes EBIT, etc.)
mainly for tax and
depreciation issues
π = R −C
0
quantity q
16
STRATEGY, PROFITS, SHAREHOLDER VALUE
• the direction and scope of an organization over the long term
strategy • 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 as revenues minus costs measure success of an organization and guarantee

survival
profits
• for simplicity and tractability, it is assumed that firms strive to maximize profits
(however, there lot of other objectives, …)
• Shareholders are the owners of a company, hence they own all equity and receive
shareholder all profits as dividends
value • Shareholder value is simply the discounted sum of all future profits and measures the
value of a company
17
PROFITS (2) – SINGLE FIRM
• Maximum profits are
derived choosing a
(1) p = a − bq strategy (a strategic
variable), here:
(2) R = pq quantity
• FOC and SOC give
(3) C = cq + F optimum profits
• Solving for strategic
(4) π = R − C = aq − bq 2 − cq − F → max! variable (6) denotes
∂π necessary action to
(5) = a − 2bq − c = 0 realize optimum profits
∂q • For (6), there is a
straight forward
a−c economic
(6) q* = interpretation: (a-c) is
2b a measure for
∂q * ∂q * ∂q * competitiveness, (1/b)
> 0, < 0, < 0. is a measure of market
∂a ∂c ∂b size
18
MONOPOLY EQUILIBRIUM
• Monopoly: one firm in
the market, no
competition
monopoly 3000 • Given a, b, c and F,
2500
choose optimum q to
maximize profits
a 100 2000
b 1 1500
R
c 10 1000
C
F 500 500
pi
0
0 20 40 60 80 100 120
q* 45 -500
p* 55 -1000
pi* 1525 -1500
19
AGENDA
20
ANALYSIS OF MARKET STRUCTURE
• Market structure
(better: industry
structure) depicts
one firm some firms
(monopoly) (oligopoly)
many firms number and size
distribution of firms and
structure of offered
products
transportation, • most interesting: some
homogenous national energy, free e-mail
football services, firms, since this is the
products railway, most relevant and
leagues banking, groceries, …
frequent case
telco, ….
automobiles,
hetero-
gadgets,
geneous - technical music
products consumer
products, ….
21
STRATEGY AND COMPETITION
• For all market
structures, it is crucial
what is the nature of
one firm some firms
(monopoly) (oligopoly)
many firms competition and what
is the main strategic
variable
• At least in the long run
single-product vs. and from a strategic
homogenous location multi-product strategies perspective, this boils
products entry barriers
down to quantity
versus price
quantity vs. price competition
degree of product differentiation

hetero-
genous simultaneous vs. sequential
products innovation vs. decision making
imitation
22
QUANTITY VS. PRICE COMPETITION
strategic
characteristic evidence big picture
• Strong evidence in all • market structure and results

• All firms decide on differ with respect to type of
markets and industries,
Quantity as quantity, price is competition
where capacity is relevant
strategic determined in the • both from a theoretical and
and capacity adjustments
variable market (Cournot- an empirical perspective,
are costly or take a long
competition) quantity competition has
time
more relevance (two stage
game: first stage capacity,
second stage price)
• All firms decide on • however, asking managers,
• Some evidence in markets, most of them think they are
Price as price, quantity is
where capacity is quickly playing price competition
strategic determined in the
adjustable (and low • game theory is the key
variable market (Bertrand-
investments needed) approach to analyze
competition)
competition
23
GAME THEORY – BASIC IDEA
Areas and typical situations
economics, political science, and psychology, as well as logic

• is a study of strategic and biology, and of course pure math:
decision making in • war (that is actually one of the origins … )
conflict and • competition (but also auctions, bargaining, mergers
cooperation &acquisitions pricing, social network formation, mechanism
(interactive decision and market design, …. )
Game theory
theory) trying to
• cooperation (formation and stability of cartels, organizations,
identify some optimal
coalitions, …. )
behavior or strategy
given strategies or • bargaining in any situation
options of others • social and private situations
• and of course: games like chess, etc.
24
GAME THEORY – REQUIREMENTS FOR APPLICATION
… from a theoretical perspective … from a practical perspective
implementation requires some substantial

efforts and information:
(1) an unambiguous and quantifiable • List of players
objective function is necessary
(2) rationally acting players have to
• List of strategies or actions available
recognize the strategic interaction as a
Game game
theory • Description of payoffs or profits for each
information needs to be given concerning
the strategy
(3) number of players
(4) the duration and • Rules of the game
(5) structure of the game and
(6) all potential and feasible strategies
25
GAME THEORY – A TYPICAL GAME (STRATEGIES)
• Two players: player 1
(called column player)
Player 1 and player 2 (called
row player)
• Two strategies (a
strategy profile) for
strategy A of strategy B of
player 1 player 1
each player: A and B
for player 1, C and D
for player 2
• Each combination of
strategy strategies is possible,
C of 1A / 2C 1B / 2C 1A / 2 D, and so on
player 2
• A description of a
Player 2 game in a matrix (if
possible) is called
strategy
normal form
D of 1A / 2D 1B / 2D • If both players are able
player 2 to draw the same
normal form game,
they have symmetric
information
26
GAME THEORY – A TYPICAL GAME (PAYOFFS)
• For each strategy
combination, payoffs
Player 1 (profits) must be
identified
• These payoffs are
‘compared’ to identify
player 1 player 1
the optimum strategy
for each player
π (1) π (1) • the mode of
1A/2C 1B/2C comparing different
strategy strategic alternatives is
C of called ‘solution
player 2 π (2) π (2)
1A/2C 1B/2C concept’ to a game
Player 2
π (1) π (1)
1A/2D 1B/2D
strategy
D of
player 2 π (2) π (2)
1A/2D 1B/2D
27
GAME THEORY – A TYPICAL GAME (EXAMPLE 1)
• Given the following
payoffs – what would
Player 1 be the best strategy
for player 1, what
would be the best
strategy for player 2?
player 1 player 1
4 3
strategy
C of
player 2 2 3
Player 2
1 6
strategy
D of
player 2 9 1
28
• The best strategy for
player 1 would be B,
Player 1 for player 2 it would be
C – the rule applied is
called “maximin” –
that is find first the
strategy A of strategy B of minimum result of
player 1 player 1 each strategy and
than choose the
maximum of these
4 3 minima
strategy
C of • This leads (typically) to
player 2 2 3 2 the best-response
strategy given all
Player 2
strategies of other
1 6 players – the
strategy combination of all
D of best-response
player 2 9 1 1 strategies is called a
Nash equilibrium (no
player can benefit by
1 3 changing strategies)
29
• Given the payoffs in
example 2 – what
Player 1 would be, applying
the maximin rule, the
best strategy for player
1, what would be the
strategy A of strategy B of best strategy for player
player 1 player 1 2?
4 3
strategy
C of
player 2 6 1
Player 2
2 6
strategy
D of
player 2 9 2
30
• The best strategy for
player 1 would be B,
Player 1 for player 2 it would be
D
• The solution can be
found applying
player 1 player 1
maximin
• But: here, for player 2,
strategy D is always
4 3 (independent of what
strategy player 1 does) better
C of than strategy C
player 2 6 1 1 • Such a strategy is
Player 2 called dominant
2 6
strategy
D of
player 2 9 2 2
2 3
31
• Given the payoffs in
example 3 – are there
Player 1 dominant strategies,
what would be a
solution applying
maximin?
player 1 player 1
5 4
strategy
C of
player 2 4 7
Player 2
2 3
strategy
D of
player 2 3 8
32
• There are no dominant
strategies, and
Player 1 applying maximin
gives 1 B / 2 C as a
Nash equilibrium
• But: what is strange
player 1 player 1
about this equilibrium
found by maximin?
5 4
strategy
C of
player 2 4 7 4
Player 2
2 3
strategy
D of
player 2 3 8 3
2 3
33
• Looking at 1 B / 2 C, it
is obvious, that both
Player 1 players have an
incentive to deviate
• Inspection of 1 A / 2 C
and 1 B / 2 D shows,
player 1 player 1
that these equilibria
are indeed possible –
hence: a game can
5 4 have more than one
strategy equilibrium, and even
C of more than one Nash-
player 2 4 7 4 equilibrium
Player 2 • Solution concept here
would be: trigger a
2 3 mixed strategy
strategy
D of
player 2 3 8 3
2 3
34
GAME THEORY – APPLICATION GUIDE
(1) Identify all players
(2) Identify all possible strategies
(3) Identify payoffs to all strategy combinations

How to apply game theory
(quick and easy):
(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
AGENDA
36
APPLE VS. SAMSUNG WITH GAME THEORY
• Players are easily
identified
Apple • Obviously, they have a
large number of
feasible quantity
strategies
Continuum of quantity
strategies • What we have to do
now is identify the
optimum solutions to
the Apple and
Samsung strategies in
πA quantities
qS
Conti- πS
Samsung nuum of
quantity
strategies
qA
37
QUANTITY COMPETITION WITH TWO FIRMS
• Suppose now two firms
– of course now,
(1) p = a − bQ = a − b(q1 + q2 ) ‘competition’ happens
• Firm 1 has to take into
(2) Ri = pqi , i = 1;2 account the action
taken by firm 2 and
(3) Ci = cqi + F vice versa – analyzing
these situations is
(4) π 1 = R1 − C2 = aq1 − b(q1 + q2 )q1 − cq1 − F → max! called game theory
• Game theory is the
∂π 1
(5) = a − b(q1 + q2 ) − bq1 − c = a − c − 2bq1 − bq2 = 0 study of strategic
∂q1 decision making in
situations of conflict
a − c q2 and cooperation
(6) q1* = − • Again, we maximize
2b 2 profits by choosing
∂q1 * ∂q * ∂q * ∂q * quantity – optimum
> 0, 1 < 0, 1 < 0, 1 < 0. quantity now depends
∂a ∂c ∂b ∂q2 on the quantity of the
competitor
38
OPTIMUM QUANTITY OF FIRM 1 GIVEN QUANTITY OF FIRM 2
• For each quantity of
∂π 1
quantity q2 (5) = a − b(q1 + q2 ) − bq1 − c = firm 2, we can
∂q1 determine some
optimum own strategy
a − c − 2bq1 − bq2 = 0 • In a sense, this a
reaction – hence we
a − c q2 call this curve a
(6) q1* = − reaction curve
2b 2
Firm 1
q2
−
2
0
a−c quantity q1
2b
39
OPTIMUM QUANTITY OF FIRM 2 GIVEN QUANTITY OF FIRM 1
• The same is true for firm
2 – for every quantity
quantity q2 chosen by firm 1, it
∂π 2 determines some
(5' ) = a − b(q1 + q2 ) − bq2 − c = optimum quantity 2
∂q2 • So: what is the correct
quantity?
a − c − 2bq2 − bq1 = 0
Firm 2 a − c q1
a−c (6' ) q2 * = −
2b 2
2b
q1
−
2
0
quantity q1
40
COURNOT-NASH EQUILIBRIUM FOR HOMOGENOUS FIRMS
• Given both reaction
curves, there is an
quantity q2 intersection where
a−c strategies match
Firm 1 • This is a Nash
2b equilibrium: a solution
to a non-cooperative
game in which each
player knows the
equilibrium strategies
of the other players
• if no player can
benefit by changing
q2 * q2 strategies (while the
− q1
2 − other players keep
2 Firm 2
theirs unchanged),
then the current set of
strategy choices and
0 the corresponding
a−c quantity q1
q1 * payoffs constitute a
Nash equilibrium
2b
41
QUANTITY COMPETITION FOR HETEROGENEOUS FIRMS
(1) p1 = a1 − b1q1 − bβ q2 • If firms are not
symmetric (i.e., they
p2 = a2 − b2 q2 − bβ q1 , b1 , b2 > bβ differ in cost or other
characteristics), we
have to apply some
(2) Ri = pi qi , i = 1;2 extensions
(3) Ci = ci qi + F • b1 and b2: each firm
has now some ‘local’
2
(4) π 1 = R1 − C2 = a1q1 − b1q1 − bβ q2 q1 − c1q1 − F → max! demand / market
• b(beta): denotes
∂π 1 relation between
(5) = a1 − 2b1q1 − bβ q2 − c1 = 0 “local” markets
∂q1 (b(beta)=0: “separate
markets”, b(beta)=1:
a1 − c1 bβ q2 perfect substitutes)
(6) q1* = −
2b1 2b1 • c1 and c2: firms differ
in variable costs
a2 − c2 bβ q1 • again, choosing
q2 * = − quantity profits are
2b2 2b2 maximized
42
COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (1)
• Resulting strategy pair
is again Nash, however
quantity q2 a1 − c1 bβ q2 not symmetric (due to
(6) q1* = − c1, c2, etc.)
2b1 2b1
Firm 1 • So, firm 2 is larger than
a2 − c2 bβ q1 firm 1!
q2 * = −
a2 − c2 2b2 2b2
2b2
q2 *
bβ q1
−
2b2
bβ q2 Firm 2
−
2b1
0
q1 * a1 − c1 quantity q1
2b1
43
• If costs of firm 2
quantity q2 increase, firm 2 shrinks
and firm 1 grows
Firm 1
a 2 − c2
2b2
q2 *
2
c2 → c2 ' ⇑
q2 *'
1 Firm 2
0
q1 * q1*' quantity q1
44
quantity q2 • If willingness to pay for
products of firm 1
increase, firm 1 grows,
firm 2 shrinks
Firm 1
1 a1 → a1 ' ⇑
q2 *
3
q2 *'
Firm 2
0
q1 * q1*' a1 − c1 quantity q1
2 2b1
45
• If the market of firm 2
grows (i.e., the
quantity q2 reaction curve of firm 2
is getting steeper) firm
Firm 1
2 grows and firm 1
shrinks
q2 *
2 1 b2 → b2 ' ⇓
q2 *
bβ q1
− bβ q1
2b2 −
2b2 '
Firm 2
quantity q1
0
q1*' q1 *
3
46
APPLE VS. SAMSUNG – KEY DIFFERENCES (1)
• Apple and Samsung
differ in their strategies
strategic modeling • We have to depict

characteristic approach these differences in our
model
• High willingness to pay,
• Innovator - consumers
however smaller customer
love innovativeness
base
Apple • Being innovative
• Industry specific fixed costs,
requires R&D – that’s
significantly higher marginal
high fixed costs
costs
• Lower willingness to pay,

• Imitator and follower however larger customer
• In all industries, base
Samsung
Samsung as a cost • Industry specific fixed costs,
leader drastically lower marginal
costs
47
APPLE VS. SAMSUNG – KEY DIFFERENCES (2)
Suppose we did some
decent market
research and we
analyzed balance
Price-demand schedule Cost function sheets:
• Apple customers are
• a(1) = 1100 “keen on Apple”
• c(1) = 400
• b(1) = 0,7 (higher a), but
Apple • F = 10000 (industry
• b(beta) = 0,5 (market customer base is
specific)
specific) smaller (larger b)
• Samsung customers
are not dedicated, yet
customer base is larger
• a(2) = 1000
• c(2)= 360 • Apple has about 10%
• b(2) = 0,6
Samsung • F = 10000 (industry higher marginal costs
• b(beta) = 0,5 (market
specific) than Samsung (c(2) vs.
specific)
c(1))
48
APPLE VS. SAMSUNG – EQUILIBRIA (1)
(A) Case (A)
Apple vs two separate
Samsung monopolies • Firms are identical in

demand and costs
Apple a (1) 1000,00
Samsung a (2) 1000,00
• Firms have completely
Apple c (1) 400,00 (1) p1 = a1 − b1q1 − bβ q2 separate ‘local’
input
Samsung c (2) 400,00 p2 = a2 − b2 q2 − bβ q1 , b1 , b2 > bβ

Apple b (1) 0,70
markets, i.e., that’s two
( 2) Ri = pi qi , i = 1;2
Samsung b (2) 0,70 monopolies
b (beta) (market specific)
(3) Ci = ci qi + F
0,00
F (industry specific) 10000,00
2
( 4) π 1 = R1 − C2 = a1q1 − b1q1 − bβ q2 q1 − c1q1 − F → max!
(b(beta) = 0, i.e., no
Apple q* (1) 428,57 ∂π 1 Apple customer would
(5) = a1 − 2b1q1 − bβ q2 − c1 = 0
Samsung q* (2) 428,57 ∂q1 ever consider buying
firm level results
Apple p* (1) 700,00

Samsung p* (2) 700,00 (6) q1* =
a1 − c1 bβ q2
− Samsung)
2b1 2b1
Apple pi* (1) 118571,43
Samsung pi* (2) 118571,43 a2 − c2 bβ q1 • Applying formulas (1)
q2 * = −
Apple R (1) 300000,00 2b2 2b2 to (6) gives equilibrium
Samsung R (2) 300000,00
Apple C (1) 181428,57
values
Samsung C (2) 181428,57
Q 857,14
average p 700,00
Apple market share (1) 50,00%
statistics
Samsung market share (2) 50,00%

Apple profit share (1) 50,00%
Samsung profit share (2) 50,00%
Apple profit margin (1) 39,52%
Samsung profit margin (2) 39,52%
49
(A) (B) Case (B)
Apple vs two separate perfect
Samsung monopolies substitutes • Firms are identical in

(b(beta)=1)
demand and costs
Apple a (1) 1000,00 1000,00
Samsung a (2) 1000,00 1000,00
• Firms have no
Apple c (1) 400,00 400,00 separate ‘local’
input
Samsung c (2) 400,00 400,00

Apple b (1) 0,70 0,70
markets, i.e., products
Samsung b (2) 0,70 0,70 are perfect substitutes
b (beta) (market specific) 0,00 1,00 (b(beta) = 1,
F (industry specific) 10000,00 10000,00
Apple q* (1) 428,57 250,00
customers are
Samsung q* (2) 428,57 250,00 completely indifferent
firm level results
Apple p* (1) 700,00 575,00

Samsung p* (2) 700,00 575,00
between the two
Apple pi* (1) 118571,43 33750,00 brands)
Samsung pi* (2) 118571,43 33750,00
Apple R (1) 300000,00 143750,00 • Comparing (A) and
Samsung R (2) 300000,00 143750,00 (B), firms are smaller,
Apple C (1) 181428,57 110000,00
Samsung C (2) 181428,57 110000,00 profits are lower, prices
Q 857,14 500,00 are lower
average p 700,00 575,00
Apple market share (1) 50,00% 50,00%
statistics
Samsung market share (2) 50,00% 50,00%

Apple profit share (1) 50,00% 50,00%
Samsung profit share (2) 50,00% 50,00%
Apple profit margin (1) 39,52% 23,48%
Samsung profit margin (2) 39,52% 23,48%
50
(A) (B) (C) Case (C)
Apple vs two separate perfect imperfect
monopolies substitutes subsititutes • Firms are identical in
Samsung (b(beta)=1) demand and costs
Apple a (1) 1000,00 1000,00 1000,00
Samsung a (2) 1000,00 1000,00 1000,00
• b(beta) = 0,5,
Apple c (1) 400,00 400,00 400,00 customers have a
input
Samsung c (2) 400,00 400,00 400,00 tendency for one of

Apple b (1) 0,70 0,70 0,70
Samsung b (2) 0,70 0,70 0,70 the brands
b (beta) (market specific) 0,00 1,00 0,50
F (industry specific) 10000,00 10000,00 10000,00 • Comparing (A), (B)
Apple q* (1) 428,57 250,00 315,79 and (C), firm size,
Samsung q* (2) 428,57 250,00 315,79
profits and prices are
firm level results
Apple p* (1) 700,00 575,00 621,05

Samsung p* (2) 700,00 575,00 621,05 in-between, however
Apple pi* (1) 118571,43 33750,00 59806,09 identical across firms
Samsung pi* (2) 118571,43 33750,00 59806,09
Apple R (1) 300000,00 143750,00 196121,88
Samsung R (2) 300000,00 143750,00 196121,88
Apple C (1) 181428,57 110000,00 136315,79
Samsung C (2) 181428,57 110000,00 136315,79
Q 857,14 500,00 631,58
average p 700,00 575,00 621,05
Apple market share (1) 50,00% 50,00% 50,00%
statistics
Samsung market share (2) 50,00% 50,00% 50,00%

Apple profit share (1) 50,00% 50,00% 50,00%
Samsung profit share (2) 50,00% 50,00% 50,00%
Apple profit margin (1) 39,52% 23,48% 30,49%
Samsung profit margin (2) 39,52% 23,48% 30,49%
51
(D) Case (D)
Apple vs cost and
Samsung demand • Firms are now different:

differences
Apple having higher
Apple a (1) 1100,00 willingness to pay,
Samsung a (2) 1000,00
Apple c (1) 400,00
Samsung lower
marginal costs and a
input
Samsung c (2) 360,00 strategic modeling

characteristic approach
Apple b (1) 0,70 somewhat larger
Samsung b (2) 0,60
b (beta) (market specific) 0,50 Apple
• Innovator - consumers love
innovativeness
• High willingness to pay, however
smaller customer base market
• Being innovative requires R&D • Industry specific fixed costs,
F (industry specific) 10000,00 – that’s high fixed costs significantly higher marginal costs
Apple q* (1) 363,64

• Differences in inputs
Samsung q* (2) 381,82 leads to differences in
firm level results
Apple p* (1) 654,55 • Lower willingness to pay, however
Samsung p* (2) 589,09 Samsung

• Imitator and follower
• In all industries, Samsung as a
larger customer base
• Industry specific fixed costs,
output: Apple is
cost leader
Apple pi* (1) 82561,98
drastically lower marginal costs
smaller, yet having
Samsung pi* (2) 77471,07 higher profits than
Apple R (1) 238016,53
Samsung R (2) 224925,62 Samsung due to much
Apple C (1) 155454,55 higher equilibrium
Samsung C (2) 147454,55
Q 745,45
prices
average p 621,02
Apple market share (1) 48,78%
statistics
Samsung market share (2) 51,22%

Apple profit share (1) 51,59%
Samsung profit share (2) 48,41%
Apple profit margin (1) 34,69%
Samsung profit margin (2) 34,44%
52
(D) (E) Case (E)
Apple vs cost and cost
Samsung demand reduction of • Suppose – due to

differences Samsung
pressure by
Apple a (1) 1100,00 1100,00 shareholders –
Samsung a (2) 1000,00 1000,00
Apple c (1) 400,00 400,00
Samsung is realizing
some cost cutting at ~
input
Samsung c (2) 360,00 320,00

Apple b (1) 0,70 0,70 10 % (decrease of
Samsung b (2) 0,60 0,60
b (beta) (market specific) 0,50 0,50 c(2))
F (industry specific) 10000,00 10000,00
Apple q* (1) 363,64 349,65
• Key results: Samsung is
Samsung q* (2) 381,82 420,98 growing, Apple is
firm level results
Apple p* (1) 654,55 644,76

Samsung p* (2) 589,09 572,59
shrinking, and now
Apple pi* (1) 82561,98 75578,76 Samsung is more
Samsung pi* (2) 77471,07 96334,00 profitable
Apple R (1) 238016,53 225438,90
Samsung R (2) 224925,62 241047,29 • Following the cost
Apple C (1) 155454,55 149860,14
Samsung C (2) 147454,55 144713,29 reduction, Apple has
Q 745,45 770,63 to reduce prices (in
average p 621,02 605,33 order to maximize
Apple market share (1) 48,78% 45,37%
statistics
Samsung market share (2) 51,22% 54,63% profits)

Apple profit share (1) 51,59% 43,96%
Samsung profit share (2) 48,41% 56,04%
Apple profit margin (1) 34,69% 33,53%
Samsung profit margin (2) 34,44% 39,96%
53
(D) (E) (F) Case (F)
Apple vs cost and cost introduction
Samsung demand reduction of of iPhone6 • Suppose Apple is now

differences Samsung
releasing a new
Apple a (1) 1100,00 1100,00 1400,00 iPhone as an answer to
Samsung a (2) 1000,00 1000,00 1000,00
Apple c (1) 400,00 400,00 400,00
cost cutting of
Samsung (increase of
input
Samsung c (2) 360,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70
Samsung b (2) 0,60 0,60 0,60
a(1))
b (beta) (market specific) 0,50 0,50 0,50 • Key results: drastic
F (industry specific) 10000,00 10000,00 10000,00
Apple q* (1) 363,64 349,65 601,40 increase in quantity
Samsung q* (2) 381,82 420,98 316,08 and price for Apple,
firm level results
Apple p* (1) 654,55 644,76 820,98

Samsung p* (2) 589,09 572,59 509,65
Samsung lowering
Apple pi* (1) 82561,98 75578,76 243176,19 prices at the same
Samsung pi* (2) 77471,07 96334,00 49945,43
Apple R (1) 238016,53 225438,90 493735,63
time and also reducing
Samsung R (2) 224925,62 241047,29 161092,28 quantity
Apple C (1) 155454,55 149860,14 250559,44
Samsung C (2) 147454,55 144713,29 111146,85 • Apple is now
Q 745,45 770,63 917,48 dominating market
average p 621,02 605,33 713,72
Apple market share (1) 48,78% 45,37% 65,55%
share and captures
statistics
Samsung market share (2) 51,22% 54,63% 34,45% more than 80 % of

Apple profit share (1) 51,59% 43,96% 82,96%
Samsung profit share (2) 48,41% 56,04% 17,04%
profits
Apple profit margin (1) 34,69% 33,53% 49,25%
Samsung profit margin (2) 34,44% 39,96% 31,00%
54
(D) (E) (F) (G) Case (G)
Apple vs cost and cost introduction catching
demand reduction of of iPhone6 with Galaxy • Suppose Samsung is
Samsung differences Samsung S5
catching up, yet not
Apple a (1) 1100,00 1100,00 1400,00 1400,00 completely, with a
Samsung a (2) 1000,00 1000,00 1000,00 1200,00
new version of Galaxy
Apple c (1) 400,00 400,00 400,00 400,00
(increase of a(2))
input
Samsung c (2) 360,00 320,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70 0,70
Samsung b (2) 0,60 0,60 0,60 0,60 • Key results: Apple still
b (beta) (market specific) 0,50 0,50 0,50 0,50 able to charger higher
F (industry specific) 10000,00 10000,00 10000,00 10000,00
Apple q* (1) 363,64 349,65 601,40 531,47
prices, but Samsung
Samsung q* (2) 381,82 420,98 316,08 511,89 drastically growing
firm level results
Apple p* (1) 654,55 644,76 820,98 772,03

Samsung p* (2) 589,09 572,59 509,65 627,13 • Market shares are like
Apple pi* (1) 82561,98 75578,76 243176,19 187721,16 equal with Apple
Samsung pi* (2) 77471,07 96334,00 49945,43 147217,66
Apple R (1) 238016,53 225438,90 493735,63 410308,57 staying ahead in
Samsung R (2) 224925,62 241047,29 161092,28 321021,86 profits, especially due
Apple C (1) 155454,55 149860,14 250559,44 222587,41
Samsung C (2) 147454,55 144713,29 111146,85 173804,20 to much higher prices
Q 745,45 770,63 917,48 1043,36
average p 621,02 605,33 713,72 700,94
Apple market share (1) 48,78% 45,37% 65,55% 50,94%
statistics
Samsung market share (2) 51,22% 54,63% 34,45% 49,06%

Apple profit share (1) 51,59% 43,96% 82,96% 56,05%
Samsung profit share (2) 48,41% 56,04% 17,04% 43,95%
Apple profit margin (1) 34,69% 33,53% 49,25% 45,75%
Samsung profit margin (2) 34,44% 39,96% 31,00% 45,86%
55
AGENDA
56
KEY TERMS LEARNED (1)
• 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
KEY TERMS LEARNED (2)
• 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
BACK UP
59
FURTHER READING
• Fisher, T.C.G., Prentice, D. and Washik, R., Managerial economics: a strategic approach, Milton Park 2010.
• Besanko, D., Dranove, D., Schaefer, S. and Shanley, M., Economics of strategy, Boston 2007.
• Mansfield, E., Allen, W.B., Doherty, N., and Weigelt, K., Managerial economics: theory, applications, and
cases, New York 2009.
60
APPLE VS. SAMSUNG – EQUILIBRIA
(A) (B) (C) (D) (E) (F) (G)
Apple vs two separate perfect imperfect cost and cost introduction catching
monopolies substitutes subsititutes demand reduction of of iPhone6 with Galaxy
Samsung (b(beta)=1) differences Samsung S5
Apple a (1) 1000,00 1000,00 1000,00 1100,00 1100,00 1400,00 1400,00
Samsung a (2) 1000,00 1000,00 1000,00 1000,00 1000,00 1000,00 1200,00
Apple c (1) 400,00 400,00 400,00 400,00 400,00 400,00 400,00
input
Samsung c (2) 400,00 400,00 400,00 360,00 320,00 320,00 320,00

Apple b (1) 0,70 0,70 0,70 0,70 0,70 0,70 0,70
Samsung b (2) 0,70 0,70 0,70 0,60 0,60 0,60 0,60
b (beta) (market specific) 0,00 1,00 0,50 0,50 0,50 0,50 0,50
F (industry specific) 10000,00 10000,00 10000,00 10000,00 10000,00 10000,00 10000,00
Apple q* (1) 428,57 250,00 315,79 363,64 349,65 601,40 531,47
Samsung q* (2) 428,57 250,00 315,79 381,82 420,98 316,08 511,89
firm level results
Apple p* (1) 700,00 575,00 621,05 654,55 644,76 820,98 772,03

Samsung p* (2) 700,00 575,00 621,05 589,09 572,59 509,65 627,13
Apple pi* (1) 118571,43 33750,00 59806,09 82561,98 75578,76 243176,19 187721,16
Samsung pi* (2) 118571,43 33750,00 59806,09 77471,07 96334,00 49945,43 147217,66
Apple R (1) 300000,00 143750,00 196121,88 238016,53 225438,90 493735,63 410308,57
Samsung R (2) 300000,00 143750,00 196121,88 224925,62 241047,29 161092,28 321021,86
Apple C (1) 181428,57 110000,00 136315,79 155454,55 149860,14 250559,44 222587,41
Samsung C (2) 181428,57 110000,00 136315,79 147454,55 144713,29 111146,85 173804,20
Q 857,14 500,00 631,58 745,45 770,63 917,48 1043,36
average p 700,00 575,00 621,05 621,02 605,33 713,72 700,94
Apple market share (1) 50,00% 50,00% 50,00% 48,78% 45,37% 65,55% 50,94%
statistics
Samsung market share (2) 50,00% 50,00% 50,00% 51,22% 54,63% 34,45% 49,06%
Apple profit share (1) 50,00% 50,00% 50,00% 51,59% 43,96% 82,96% 56,05%
Samsung profit share (2) 50,00% 50,00% 50,00% 48,41% 56,04% 17,04% 43,95%
Apple profit margin (1) 39,52% 23,48% 30,49% 34,69% 33,53% 49,25% 45,75%
Samsung profit margin (2) 39,52% 23,48% 30,49% 34,44% 39,96% 31,00% 45,86%
61

Competition Between Apple and Samsung in The Smartphone Market in The Smartphone Market

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Competition Between Apple and Samsung in The Smartphone Market in The Smartphone Market

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Competition between Apple and Samsung

in the smartphone market

Dr. Markus Thomas Münter

• Where do profits come from ? What is a profit function?

• … gain some basic understanding why economics can prove quite

• … (hopefully) become curious in learning more about

1 What is managerial economics?

2 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

• Managerial economics is concerned with application of economic concepts and

1 What is managerial economics?

2 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

• the direction and scope of an organization over the long term

• profits as revenues minus costs measure success of an organization and guarantee

pi* 1525 -1500

1 What is managerial economics?

2 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

degree of product differentiation

• Strong evidence in all • market structure and results

Areas and typical situations

economics, political science, and psychology, as well as logic

… from a theoretical perspective … from a practical perspective

implementation requires some substantial

(1) Identify all players

(2) Identify all possible strategies

(3) Identify payoffs to all strategy combinations

(5) Apply a solution concept, preferably maximin

(6) Identify the Nash-equilibrium, check if it is unique

1 What is managerial economics?

2 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

strategic modeling • We have to depict

• Lower willingness to pay,

Samsung monopolies • Firms are identical in

Samsung c (2) 400,00 p2 = a2 − b2 q2 − bβ q1 , b1 , b2 > bβ

Apple p* (1) 700,00

Samsung market share (2) 50,00%

Samsung monopolies substitutes • Firms are identical in

Samsung c (2) 400,00 400,00

Apple p* (1) 700,00 575,00

Samsung market share (2) 50,00% 50,00%

Samsung c (2) 400,00 400,00 400,00 tendency for one of

Apple p* (1) 700,00 575,00 621,05

Samsung market share (2) 50,00% 50,00% 50,00%

Samsung demand • Firms are now different:

Samsung c (2) 360,00 strategic modeling

Apple q* (1) 363,64

Apple p* (1) 654,55 • Lower willingness to pay, however

Samsung p* (2) 589,09 Samsung

Samsung market share (2) 51,22%

Samsung demand reduction of • Suppose – due to

Samsung c (2) 360,00 320,00