1. Microsoft and Apple enter into negotiations with each other. What do they agree on? What is the size of the transfer from Apple to Microsoft? 2. Suppose now that the U.S. Department of Justice insists that Microsoft must publish the software code behind Windows. With this new information, Apple can create one-way compatibility by itself, by spending $2 million. What is the new agreement between the players?
The following information is relevant for Questions 1-2:
(Recall our model of bargaining: if you don't agree on a transaction, you can never reach any cooperative agreement with this person again. You do what's best for yourself.)
Apple computers have a different
- Apple estimates that it will earn $10 million in profits from selling their computers if their customers can use Office software on the Apple computers, and share documents freely with people who run Office on Windows (this is called "perfect compatibility"); Microsoft will earn $100 million.
- However, if people who run Office on Windows cannot read documents that have been edited on an Apple computer (this is called "one-way compatibility"), Apple will earn only $4.5 million in profits, and Microsoft will earn $103 million.
- If Apple customers cannot use Office software (this is called "no compatibility"), Apple will not earn any profits, and Microsoft will earn $104 million.
Suppose that Apple and Microsoft would each have to spend $1 million on software engineering to create perfect compatibility. Apple and Microsoft would each have to spend only $0.5 million to create one-way compatibility. (The profit figures above do not include that cost of software engineering to create compatibility.)
1. Microsoft and Apple enter into negotiations with each other. What do they agree on? What is the size of the transfer from Apple to Microsoft?
2. Suppose now that the U.S. Department of Justice insists that Microsoft must publish the software code behind Windows. With this new information, Apple can create one-way compatibility by itself, by spending $2 million. What is the new agreement between the players?
Step by step
Solved in 2 steps
