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
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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)
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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APPLE VS. SAMSUNG: KEY ISSUES
Key issues in
understanding
Apple vs.
Samsung
• Where do profits come from ? What is a profit function?
• Which strategies are possible? What is Apple’s and Samsung’s respective strategy?
• How can Apple and Samsung derive the best strategy using game theory?
• How does strategic behavior affect market shares, profitability and prices?
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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OBJECTIVES AND FOCUS FOR TODAY
• … gain some basic understanding why economics can prove quite
helpful for managers assessing situations of strategic competition
today, you will
…
• … get some idea how to analyze the battle between Apple and Samsung in
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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WHAT IS ECONOMICS, WHAT IS MANAGEMENT?
economics
management
• Economics is a social science that analyzes the
production, distribution, and consumption of
goods and services – a focus of the subject is
how economic agents behave or interact and
how economies work.
• Management encompasses all business and
organizational activities that coordinate the
efforts of people to accomplish desired goals
and objectives using available resources
efficiently and effectively.
• Microeconomics examines the behavior of
basic elements in the economy, including
individual agents (such as households and firms
or as buyers and sellers) and markets, and their
interactions.
• Management comprises planning, organizing,
staffing, leading or directing, and controlling an
organization or effort for the purpose of
accomplishing a goal. Resourcing
encompasses the deployment and
manipulation of human resources, financial
resources, technological resources, and natural
resources.
• Macroeconomics analyzes the entire economy
and issues affecting it, including
unemployment, inflation, economic growth,
and monetary and fiscal policy.
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
economics
• production analysis – microeconomic techniques are used to analyze optimum output
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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?
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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WILLINGNESS TO PAY
• The willingness to pay
describes, how much
money an individual
would pay at the
maximum to purchase
some product
maximum
willingness
to pay
• Most often, this sum
varies considerably
across individuals
0
number of
individuals
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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PRICE DEMAND SCHEDULE
• The willingness to pay
can be translated
easily into a ‘demand
curve’ also termed
price demand
schedule
price p
0
quantity q
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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PRICE DEMAND SCHEDULE
price p
p = p(q ) = a − bq
p A = a A − bA q A
pS = aS − bS qS
a
• the price demand
curve is the graph
depicting the
relationship between
the price of a certain
commodity and the
amount of it that
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
the market
-b
0
quantity q
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Price demand
schedule can be
identified doing
market research
13
REVENUES
R = R(q ) = pq =
revenues R
(a − bq )q = aq − bq 2
• Revenue is income
that a company
receives from its
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
on the income
statement – not to be
mixed up with profits,
which is “bottom line”
a
-b
0
quantity q
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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COST STRUCTURE
costs C
• Costs are the sum of
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
expenses that change in
proportion to the activity
of a business, i.e.,
production
costs C
variable costs cq
• fixed costs are business
expenses that are not
dependent on the level
of goods or services
produced by the
business
fixed costs F
0
quantity q
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Costs can be identified
analyzing P&L statements
and balance sheets
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PROFITS (1) – SINGLE FIRM
profits
π
revenues R
costs C
π = R −C =
revenues R
aq − bq 2 − cq − F
costs C
• in managerial
economics, profit is just
revenues minus costs
(cash flow
perspective)
• in business, there are
lots of other profitconcepts (Earnings
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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STRATEGY, PROFITS, SHAREHOLDER VALUE
• the direction and scope of an organization over the long term
strategy
profits
shareholder
value
• 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
• 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
all profits as dividends
• Shareholder value is simply the discounted sum of all future profits and measures the
value of a company
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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PROFITS (2) – SINGLE FIRM
(2) R = pq
• Maximum profits are
derived choosing a
strategy (a strategic
variable), here:
quantity
(3) C = cq + F
• FOC and SOC give
optimum profits
(1) p = a − bq
(4) π = R − C = aq − bq 2 − cq − F → max!
∂π
(5)
= a − 2bq − c = 0
∂q
a−c
(6) q* =
2b
∂q *
∂q *
∂q *
> 0,
< 0,
< 0.
∂a
∂c
∂b
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Solving for strategic
variable (6) denotes
necessary action to
realize optimum profits
• For (6), there is a
straight forward
economic
interpretation: (a-c) is
a measure for
competitiveness, (1/b)
is a measure of market
size
18
MONOPOLY EQUILIBRIUM
• Monopoly: one firm in
the market, no
competition
monopoly
• Given a, b, c and F,
choose optimum q to
maximize profits
3000
2500
a
b
c
F
100
1
10
500
2000
1500
R
1000
C
500
pi
0
q*
p*
pi*
45
55
1525
-500
0
20
40
60
80
100
120
-1000
-1500
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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ANALYSIS OF MARKET STRUCTURE
homogenous
products
heterogeneous
products
one firm
(monopoly)
some firms
(oligopoly)
many firms
• Market structure
(better: industry
structure) depicts
number and size
distribution of firms and
structure of offered
products
national
football
leagues
transportation,
energy,
railway,
banking,
telco, ….
free e-mail
services,
groceries, …
• most interesting: some
firms, since this is the
most relevant and
frequent case
-
automobiles,
gadgets,
technical
consumer
products, ….
music
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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STRATEGY AND COMPETITION
one firm
(monopoly)
homogenous
products
some firms
(oligopoly)
location
entry barriers
many firms
single-product vs.
multi-product strategies
• For all market
structures, it is crucial
what is the nature of
competition and what
is the main strategic
variable
• At least in the long run
and from a strategic
perspective, this boils
down to quantity
versus price
quantity vs. price competition
degree of product differentiation
heterogenous
products
innovation vs.
imitation
simultaneous vs. sequential
decision making
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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QUANTITY VS. PRICE COMPETITION
strategic
characteristic
evidence
Quantity as
strategic
variable
• All firms decide on
quantity, price is
determined in the
market (Cournotcompetition)
• Strong evidence in all
markets and industries,
where capacity is relevant
and capacity adjustments
are costly or take a long
time
Price as
strategic
variable
• All firms decide on
price, quantity is
determined in the
market (Bertrandcompetition)
• Some evidence in markets,
where capacity is quickly
adjustable (and low
investments needed)
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
big picture
• market structure and results
differ with respect to type of
competition
• both from a theoretical and
an empirical perspective,
quantity competition has
more relevance (two stage
game: first stage capacity,
second stage price)
• however, asking managers,
most of them think they are
playing price competition
• game theory is the key
approach to analyze
competition
23
GAME THEORY – BASIC IDEA
Areas and typical situations
Game theory
• is a study of strategic
decision making in
conflict and
cooperation
(interactive decision
theory) trying to
identify some optimal
behavior or strategy
given strategies or
options of others
economics, political science, and psychology, as well as logic
and biology, and of course pure math:
• war (that is actually one of the origins … )
• competition (but also auctions, bargaining, mergers
&acquisitions pricing, social network formation, mechanism
and market design, …. )
• cooperation (formation and stability of cartels, organizations,
coalitions, …. )
• bargaining in any situation
• social and private situations
• and of course: games like chess, etc.
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – REQUIREMENTS FOR APPLICATION
… from a theoretical perspective
Game
theory
implementation requires some substantial
efforts and information:
(1) an unambiguous and quantifiable
objective function is necessary
(2) rationally acting players have to
recognize the strategic interaction as a
game
information needs to be given concerning
the
(3) number of players
(4) the duration and
(5) structure of the game and
(6) all potential and feasible strategies
… from a practical perspective
• List of players
• List of strategies or actions available
• Description of payoffs or profits for each
strategy
• Rules of the game
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (STRATEGIES)
Player 1
strategy A of
player 1
strategy
C of
player 2
1A / 2C
strategy
D of
player 2
1A / 2D
strategy B of
player 1
1B / 2C
• Two players: player 1
(called column player)
and player 2 (called
row player)
• Two strategies (a
strategy profile) for
each player: A and B
for player 1, C and D
for player 2
• Each combination of
strategies is possible,
1A / 2 D, and so on
• A description of a
game in a matrix (if
possible) is called
normal form
Player 2
1B / 2D
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• If both players are able
to draw the same
normal form game,
they have symmetric
information
26
GAME THEORY – A TYPICAL GAME (PAYOFFS)
• For each strategy
combination, payoffs
(profits) must be
identified
Player 1
strategy A of
player 1
strategy
C of
player 2
strategy B of
player 1
π (1)
π (1)
1A/2C
1B/2C
π (2)
1A/2C
π (2)
1B/2C
• These payoffs are
‘compared’ to identify
the optimum strategy
for each player
• the mode of
comparing different
strategic alternatives is
called ‘solution
concept’ to a game
Player 2
strategy
D of
player 2
π (1)
π (1)
1A/2D
1B/2D
π (2)
π (2)
1A/2D
1B/2D
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 1)
• Given the following
payoffs – what would
be the best strategy
for player 1, what
would be the best
strategy for player 2?
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
4
3
2
3
Player 2
1
strategy
D of
player 2
9
6
1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 1)
• The best strategy for
player 1 would be B,
for player 2 it would be
C – the rule applied is
called “maximin” –
that is find first the
minimum result of
each strategy and
than choose the
maximum of these
minima
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
4
3
2
3
2
Player 2
1
strategy
D of
player 2
9
6
1
1
1
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• This leads (typically) to
the best-response
strategy given all
strategies of other
players – the
combination of all
best-response
strategies is called a
Nash equilibrium (no
player can benefit by
changing strategies)
29
GAME THEORY – A TYPICAL GAME (EXAMPLE 2)
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
4
3
6
• Given the payoffs in
example 2 – what
would be, applying
the maximin rule, the
best strategy for player
1, what would be the
best strategy for player
2?
1
Player 2
2
strategy
D of
player 2
9
6
2
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 2)
• The best strategy for
player 1 would be B,
for player 2 it would be
D
Player 1
strategy A of
player 1
strategy B of
player 1
4
strategy
C of
player 2
6
• The solution can be
found applying
maximin
3
1
1
Player 2
2
strategy
D of
player 2
9
• Such a strategy is
called dominant
6
2
2
• But: here, for player 2,
strategy D is always
(independent of what
player 1 does) better
than strategy C
2
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 3)
• Given the payoffs in
example 3 – are there
dominant strategies,
what would be a
solution applying
maximin?
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
5
4
4
7
Player 2
2
strategy
D of
player 2
3
3
8
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 3)
• There are no dominant
strategies, and
applying maximin
gives 1 B / 2 C as a
Nash equilibrium
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
5
4
4
7
• But: what is strange
about this equilibrium
found by maximin?
4
Player 2
2
strategy
D of
player 2
3
3
8
2
3
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – A TYPICAL GAME (EXAMPLE 3)
• Looking at 1 B / 2 C, it
is obvious, that both
players have an
incentive to deviate
Player 1
strategy
C of
player 2
strategy A of
player 1
strategy B of
player 1
5
4
4
7
4
• Solution concept here
would be: trigger a
mixed strategy
Player 2
2
strategy
D of
player 2
3
3
8
2
• Inspection of 1 A / 2 C
and 1 B / 2 D shows,
that these equilibria
are indeed possible –
hence: a game can
have more than one
equilibrium, and even
more than one Nashequilibrium
3
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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GAME THEORY – APPLICATION GUIDE
(1) Identify all players
(2) Identify all possible strategies
How to apply game theory
(quick and easy):
(3) Identify payoffs to all strategy combinations
(4) Check, whether there are dominant strategies
(5) Apply a solution concept, preferably maximin
(6) Identify the Nash-equilibrium, check if it is unique
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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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
πA
Samsung
Continuum of
quantity
strategies
πS
qS
• What we have to do
now is identify the
optimum solutions to
the Apple and
Samsung strategies in
quantities
qA
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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QUANTITY COMPETITION WITH TWO FIRMS
(1) p = a − bQ = a − b(q1 + q2 )
(2) Ri = pqi , i = 1;2
(3) Ci = cqi + F
(4) π 1 = R1 − C2 = aq1 − b(q1 + q2 )q1 − cq1 − F → max!
∂π 1
(5)
= a − b(q1 + q2 ) − bq1 − c = a − c − 2bq1 − bq2 = 0
∂q1
a − c q2
(6) q1* =
−
2b
2
∂q1 *
∂q *
∂q *
∂q *
> 0, 1 < 0, 1 < 0, 1 < 0.
∂a
∂c
∂b
∂q2
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Suppose now two firms
– of course now,
‘competition’ happens
• Firm 1 has to take into
account the action
taken by firm 2 and
vice versa – analyzing
these situations is
called game theory
• Game theory is the
study of strategic
decision making in
situations of conflict
and cooperation
• Again, we maximize
profits by choosing
quantity – optimum
quantity now depends
on the quantity of the
competitor
38
OPTIMUM QUANTITY OF FIRM 1 GIVEN QUANTITY OF FIRM 2
∂π 1
(5)
= a − b(q1 + q2 ) − bq1 − c =
∂q1
quantity q2
a − c − 2bq1 − bq2 = 0
a − c q2
(6) q1* =
−
2b
2
• For each quantity of
firm 2, we can
determine some
optimum own strategy
• In a sense, this a
reaction – hence we
call this curve a
reaction curve
Firm 1
q2
−
2
0
a−c
2b
quantity q1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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OPTIMUM QUANTITY OF FIRM 2 GIVEN QUANTITY OF FIRM 1
quantity q2
∂π 2
(5' )
= a − b(q1 + q2 ) − bq2 − c =
∂q2
a − c − 2bq2 − bq1 = 0
a−c
2b
Firm 2
(6' ) q2 * =
• So: what is the correct
quantity?
a − c q1
−
2b
2
−
0
• The same is true for firm
2 – for every quantity
chosen by firm 1, it
determines some
optimum quantity 2
q1
2
quantity q1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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COURNOT-NASH EQUILIBRIUM FOR HOMOGENOUS FIRMS
• Given both reaction
curves, there is an
intersection where
strategies match
quantity q2
a−c
2b
• This is a Nash
equilibrium: a solution
to a non-cooperative
game in which each
player knows the
equilibrium strategies
of the other players
Firm 1
q2
−
2
q2 *
0
q1 *
−
a−c
2b
q1
2
Firm 2
quantity q1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• if no player can
benefit by changing
strategies (while the
other players keep
theirs unchanged),
then the current set of
strategy choices and
the corresponding
payoffs constitute a
Nash equilibrium
41
QUANTITY COMPETITION FOR HETEROGENEOUS FIRMS
(1) p1 = a1 − b1q1 − bβ q2
p2 = a2 − b2 q2 − bβ q1 , b1 , b2 > bβ
(2) Ri = pi qi , i = 1;2
(3) Ci = ci qi + F
2
(4) π 1 = R1 − C2 = a1q1 − b1q1 − bβ q2 q1 − c1q1 − F → max!
∂π 1
(5)
= a1 − 2b1q1 − bβ q2 − c1 = 0
∂q1
a1 − c1 bβ q2
(6) q1* =
−
2b1
2b1
a2 − c2 bβ q1
q2 * =
−
2b2
2b2
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• If firms are not
symmetric (i.e., they
differ in cost or other
characteristics), we
have to apply some
extensions
• b1 and b2: each firm
has now some ‘local’
demand / market
• b(beta): denotes
relation between
“local” markets
(b(beta)=0: “separate
markets”, b(beta)=1:
perfect substitutes)
• c1 and c2: firms differ
in variable costs
• again, choosing
quantity profits are
maximized
42
COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (1)
a1 − c1 bβ q2
(6) q1* =
−
2b1
2b1
quantity q2
Firm 1
a2 − c2 bβ q1
q2 * =
−
2b2
2b2
a2 − c2
2b2
q2 *
−
−
0
q1 *
bβ q2
a1 − c1
2b1
• Resulting strategy pair
is again Nash, however
not symmetric (due to
c1, c2, etc.)
• So, firm 2 is larger than
firm 1!
bβ q1
2b2
Firm 2
2b1
quantity q1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
43
COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (2)
• If costs of firm 2
increase, firm 2 shrinks
and firm 1 grows
quantity q2
Firm 1
a 2 − c2
2b2
q2 *
c2 → c2 ' ⇑
2
q2 *'
0
1
q1 *
q1*'
Firm 2
quantity q1
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
44
COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (3)
• If willingness to pay for
products of firm 1
increase, firm 1 grows,
firm 2 shrinks
quantity q2
Firm 1
1
a1 → a1 ' ⇑
q2 *
3
q2 *'
Firm 2
0
q1 *
2
q1*' a1 − c1
2b1
quantity q1
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
45
COURNOT-NASH EQUILIBRIUM FOR HETEROGENEOUS FIRMS (4)
• If the market of firm 2
grows (i.e., the
reaction curve of firm 2
is getting steeper) firm
2 grows and firm 1
shrinks
quantity q2
Firm 1
q2 *
2
1
q2 *
b2 → b2 ' ⇓
−
bβ q1
2b2
−
bβ q1
2b2 '
Firm 2
0
quantity q1
q1*'
q1 *
3
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
46
APPLE VS. SAMSUNG – KEY DIFFERENCES (1)
• Apple and Samsung
differ in their strategies
Apple
Samsung
strategic
characteristic
modeling
approach
• Innovator - consumers
love innovativeness
• Being innovative
requires R&D – that’s
high fixed costs
• High willingness to pay,
however smaller customer
base
• Industry specific fixed costs,
significantly higher marginal
costs
• Imitator and follower
• In all industries,
Samsung as a cost
leader
• Lower willingness to pay,
however larger customer
base
• Industry specific fixed costs,
drastically lower marginal
costs
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• We have to depict
these differences in our
model
47
APPLE VS. SAMSUNG – KEY DIFFERENCES (2)
Price-demand schedule
Apple
Samsung
• a(1) = 1100
• b(1) = 0,7
• b(beta) = 0,5 (market
specific)
• a(2) = 1000
• b(2) = 0,6
• b(beta) = 0,5 (market
specific)
Cost function
• c(1) = 400
• F = 10000 (industry
specific)
Suppose we did some
decent market
research and we
analyzed balance
sheets:
• Apple customers are
“keen on Apple”
(higher a), but
customer base is
smaller (larger b)
• Samsung customers
are not dedicated, yet
customer base is larger
• c(2)= 360
• F = 10000 (industry
specific)
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Apple has about 10%
higher marginal costs
than Samsung (c(2) vs.
c(1))
48
APPLE VS. SAMSUNG – EQUILIBRIA (1)
(A)
Case (A)
1000,00
1000,00
400,00
400,00
0,70
0,70
0,00
10000,00
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
428,57
428,57
700,00
700,00
118571,43
118571,43
300000,00
300000,00
181428,57
181428,57
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
857,14
700,00
50,00%
50,00%
50,00%
50,00%
39,52%
39,52%
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
firm level results
two separate
monopolies
statistics
Apple vs
Samsung
• Firms are identical in
demand and costs
(1) p1 = a1 − b1q1 − bβ q2
p2 = a2 − b2 q2 − bβ q1 , b1 , b2 > bβ
( 2) Ri = pi qi , i = 1;2
(3) Ci = ci qi + F
2
( 4) π 1 = R1 − C2 = a1q1 − b1q1 − bβ q2 q1 − c1q1 − F → max!
(5)
∂π 1
= a1 − 2b1q1 − bβ q2 − c1 = 0
∂q1
(6) q1* =
a1 − c1 bβ q2
−
2b1
2b1
q2 * =
a2 − c2 bβ q1
−
2b2
2b2
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Firms have completely
separate ‘local’
markets, i.e., that’s two
monopolies
(b(beta) = 0, i.e., no
Apple customer would
ever consider buying
Samsung)
• Applying formulas (1)
to (6) gives equilibrium
values
49
APPLE VS. SAMSUNG – EQUILIBRIA (2)
(A)
(B)
two separate
monopolies
perfect
substitutes
(b(beta)=1)
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
1000,00
1000,00
400,00
400,00
0,70
0,70
0,00
10000,00
1000,00
1000,00
400,00
400,00
0,70
0,70
1,00
10000,00
firm level results
Case (B)
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
428,57
428,57
700,00
700,00
118571,43
118571,43
300000,00
300000,00
181428,57
181428,57
250,00
250,00
575,00
575,00
33750,00
33750,00
143750,00
143750,00
110000,00
110000,00
statistics
Apple vs
Samsung
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
857,14
700,00
50,00%
50,00%
50,00%
50,00%
39,52%
39,52%
500,00
575,00
50,00%
50,00%
50,00%
50,00%
23,48%
23,48%
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Firms are identical in
demand and costs
• Firms have no
separate ‘local’
markets, i.e., products
are perfect substitutes
(b(beta) = 1,
customers are
completely indifferent
between the two
brands)
• Comparing (A) and
(B), firms are smaller,
profits are lower, prices
are lower
50
APPLE VS. SAMSUNG – EQUILIBRIA (3)
(B)
(C)
two separate
monopolies
perfect
substitutes
(b(beta)=1)
imperfect
subsititutes
1000,00
1000,00
400,00
400,00
0,70
0,70
0,00
10000,00
1000,00
1000,00
400,00
400,00
0,70
0,70
1,00
10000,00
1000,00
1000,00
400,00
400,00
0,70
0,70
0,50
10000,00
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
428,57
428,57
700,00
700,00
118571,43
118571,43
300000,00
300000,00
181428,57
181428,57
250,00
250,00
575,00
575,00
33750,00
33750,00
143750,00
143750,00
110000,00
110000,00
315,79
315,79
621,05
621,05
59806,09
59806,09
196121,88
196121,88
136315,79
136315,79
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
857,14
700,00
50,00%
50,00%
50,00%
50,00%
39,52%
39,52%
500,00
575,00
50,00%
50,00%
50,00%
50,00%
23,48%
23,48%
631,58
621,05
50,00%
50,00%
50,00%
50,00%
30,49%
30,49%
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
firm level results
(A)
statistics
Apple vs
Samsung
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
Case (C)
• Firms are identical in
demand and costs
• b(beta) = 0,5,
customers have a
tendency for one of
the brands
• Comparing (A), (B)
and (C), firm size,
profits and prices are
in-between, however
identical across firms
51
APPLE VS. SAMSUNG – EQUILIBRIA (4)
(D)
Case (D)
1100,00
1000,00
400,00
360,00
0,70
0,60
0,50
10000,00
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
363,64
381,82
654,55
589,09
82561,98
77471,07
238016,53
224925,62
155454,55
147454,55
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
745,45
621,02
48,78%
51,22%
51,59%
48,41%
34,69%
34,44%
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
firm level results
cost and
demand
differences
statistics
Apple vs
Samsung
Apple
Samsung
strategic
characteristic
modeling
approach
• Innovator - consumers love
innovativeness
• Being innovative requires R&D
– that’s high fixed costs
• High willingness to pay, however
smaller customer base
• Industry specific fixed costs,
significantly higher marginal costs
• Imitator and follower
• In all industries, Samsung as a
cost leader
• Lower willingness to pay, however
larger customer base
• Industry specific fixed costs,
drastically lower marginal costs
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Firms are now different:
Apple having higher
willingness to pay,
Samsung lower
marginal costs and a
somewhat larger
market
• Differences in inputs
leads to differences in
output: Apple is
smaller, yet having
higher profits than
Samsung due to much
higher equilibrium
prices
52
(D)
(E)
cost and
demand
differences
cost
reduction of
Samsung
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
1100,00
1000,00
400,00
360,00
0,70
0,60
0,50
10000,00
1100,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
firm level results
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
363,64
381,82
654,55
589,09
82561,98
77471,07
238016,53
224925,62
155454,55
147454,55
349,65
420,98
644,76
572,59
75578,76
96334,00
225438,90
241047,29
149860,14
144713,29
statistics
APPLE VS. SAMSUNG – EQUILIBRIA (5)
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
745,45
621,02
48,78%
51,22%
51,59%
48,41%
34,69%
34,44%
770,63
605,33
45,37%
54,63%
43,96%
56,04%
33,53%
39,96%
Apple vs
Samsung
Case (E)
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Suppose – due to
pressure by
shareholders –
Samsung is realizing
some cost cutting at ~
10 % (decrease of
c(2))
• Key results: Samsung is
growing, Apple is
shrinking, and now
Samsung is more
profitable
• Following the cost
reduction, Apple has
to reduce prices (in
order to maximize
profits)
53
APPLE VS. SAMSUNG – EQUILIBRIA (6)
(D)
(E)
(F)
cost and
demand
differences
cost
reduction of
Samsung
introduction
of iPhone6
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
1100,00
1000,00
400,00
360,00
0,70
0,60
0,50
10000,00
1100,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
1400,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
363,64
381,82
654,55
589,09
82561,98
77471,07
238016,53
224925,62
155454,55
147454,55
349,65
420,98
644,76
572,59
75578,76
96334,00
225438,90
241047,29
149860,14
144713,29
601,40
316,08
820,98
509,65
243176,19
49945,43
493735,63
161092,28
250559,44
111146,85
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
745,45
621,02
48,78%
51,22%
51,59%
48,41%
34,69%
34,44%
770,63
605,33
45,37%
54,63%
43,96%
56,04%
33,53%
39,96%
917,48
713,72
65,55%
34,45%
82,96%
17,04%
49,25%
31,00%
statistics
firm level results
input
Apple vs
Samsung
Case (F)
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
• Suppose Apple is now
releasing a new
iPhone as an answer to
cost cutting of
Samsung (increase of
a(1))
• Key results: drastic
increase in quantity
and price for Apple,
Samsung lowering
prices at the same
time and also reducing
quantity
• Apple is now
dominating market
share and captures
more than 80 % of
profits
54
(D)
(E)
(F)
(G)
cost and
demand
differences
cost
reduction of
Samsung
introduction
of iPhone6
catching
with Galaxy
S5
input
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
1100,00
1000,00
400,00
360,00
0,70
0,60
0,50
10000,00
1100,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
1400,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
1400,00
1200,00
400,00
320,00
0,70
0,60
0,50
10000,00
firm level results
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
363,64
381,82
654,55
589,09
82561,98
77471,07
238016,53
224925,62
155454,55
147454,55
349,65
420,98
644,76
572,59
75578,76
96334,00
225438,90
241047,29
149860,14
144713,29
601,40
316,08
820,98
509,65
243176,19
49945,43
493735,63
161092,28
250559,44
111146,85
531,47
511,89
772,03
627,13
187721,16
147217,66
410308,57
321021,86
222587,41
173804,20
statistics
APPLE VS. SAMSUNG – EQUILIBRIA (7)
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
745,45
621,02
48,78%
51,22%
51,59%
48,41%
34,69%
34,44%
770,63
605,33
45,37%
54,63%
43,96%
56,04%
33,53%
39,96%
917,48
713,72
65,55%
34,45%
82,96%
17,04%
49,25%
31,00%
1043,36
700,94
50,94%
49,06%
56,05%
43,95%
45,75%
45,86%
Apple vs
Samsung
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
Case (G)
• Suppose Samsung is
catching up, yet not
completely, with a
new version of Galaxy
(increase of a(2))
• Key results: Apple still
able to charger higher
prices, but Samsung
drastically growing
• Market shares are like
equal with Apple
staying ahead in
profits, especially due
to much higher prices
55
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
58
BACK UP
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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.
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
60
APPLE VS. SAMSUNG – EQUILIBRIA
(C)
(D)
(E)
(F)
(G)
imperfect
subsititutes
cost and
demand
differences
cost
reduction of
Samsung
introduction
of iPhone6
catching
with Galaxy
S5
input
(B)
perfect
substitutes
(b(beta)=1)
Apple a (1)
Samsung a (2)
Apple c (1)
Samsung c (2)
Apple b (1)
Samsung b (2)
b (beta) (market specific)
F (industry specific)
1000,00
1000,00
400,00
400,00
0,70
0,70
0,00
10000,00
1000,00
1000,00
400,00
400,00
0,70
0,70
1,00
10000,00
1000,00
1000,00
400,00
400,00
0,70
0,70
0,50
10000,00
1100,00
1000,00
400,00
360,00
0,70
0,60
0,50
10000,00
1100,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
1400,00
1000,00
400,00
320,00
0,70
0,60
0,50
10000,00
1400,00
1200,00
400,00
320,00
0,70
0,60
0,50
10000,00
firm level results
(A)
two separate
monopolies
Apple q* (1)
Samsung q* (2)
Apple p* (1)
Samsung p* (2)
Apple pi* (1)
Samsung pi* (2)
Apple
R (1)
Samsung
R (2)
Apple C (1)
Samsung C (2)
428,57
428,57
700,00
700,00
118571,43
118571,43
300000,00
300000,00
181428,57
181428,57
250,00
250,00
575,00
575,00
33750,00
33750,00
143750,00
143750,00
110000,00
110000,00
315,79
315,79
621,05
621,05
59806,09
59806,09
196121,88
196121,88
136315,79
136315,79
363,64
381,82
654,55
589,09
82561,98
77471,07
238016,53
224925,62
155454,55
147454,55
349,65
420,98
644,76
572,59
75578,76
96334,00
225438,90
241047,29
149860,14
144713,29
601,40
316,08
820,98
509,65
243176,19
49945,43
493735,63
161092,28
250559,44
111146,85
531,47
511,89
772,03
627,13
187721,16
147217,66
410308,57
321021,86
222587,41
173804,20
statistics
Apple vs
Samsung
Q
average p
Apple market share (1)
Samsung market share (2)
Apple profit share (1)
Samsung profit share (2)
Apple profit margin (1)
Samsung profit margin (2)
857,14
700,00
50,00%
50,00%
50,00%
50,00%
39,52%
39,52%
500,00
575,00
50,00%
50,00%
50,00%
50,00%
23,48%
23,48%
631,58
621,05
50,00%
50,00%
50,00%
50,00%
30,49%
30,49%
745,45
621,02
48,78%
51,22%
51,59%
48,41%
34,69%
34,44%
770,63
605,33
45,37%
54,63%
43,96%
56,04%
33,53%
39,96%
917,48
713,72
65,55%
34,45%
82,96%
17,04%
49,25%
31,00%
1043,36
700,94
50,94%
49,06%
56,05%
43,95%
45,75%
45,86%
COMPETITION BETWEEN APPLE AND SAMSUNG - CASE STUDY / Dr. Markus Thomas Münter
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