Study of Duopoly Between Intel and Amd free essay sample

This is similar to monopolies  in which only one  company  controls  the market and oligopolies  in which multiple companies are allowed to trade in the market. The duopoly theory looks at the interplay of two  companies  in  a market: each firms prices and production are set by the decisions of the other. Webster defines duopoly as,  an oligopoly limited to two sellers. The concept of a duopoly was proposed by French economist  Antoine Augustin Cournot  (1801-1877) and we use the Cournot’s model to study the same. Features of a duopoly as per Cournot’s model. . Two firms competing with each other. Price leadership by the larger of the two firms may exist – the smaller firm follows the price lead of the larger one. 2. Homogenous good 3. High barriers to entry. 4. The output of the other firm is assumed to be fixed 5. Firms decide simultaneously how much to produce. Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm. We will write a custom essay sample on Study of Duopoly Between Intel and Amd or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 5. The microprocessor market As concerning the microprocessor industry, it is well known that Intel and AMD are the two world market leaders in the production of microprocessors. The history of computer processors is replete with the battle between these two giants. These are the two behemoths of the computer processor industry, and every single machine is using one of these two chips. With each passing year, both these companies are constantly trying to outdo each other and eat into the others market share, but at the end of each financial year it seems like nothing have changed, as both of them are firmly sticking to their guns. This battle is going to continue for many more years, and this can only be advantageous to the consumers. The microprocessor market can be defined as an oligopoly with an incumbent and a fringe firm, since there are no other large microprocessor producers, and about 98. 6% of the total market share is held by the 2 companies. 5. 1 Which is better: Intel or AMD? Technology has progressed so much today that it is possible for us to change our processors easily, and still use the same hardware as before. This has made the battle between AMD vs. Intel all the more intense because there is no such thing as brand loyalty here. The customer will only use that processor which is better and faster, so this is a case of true competition based on innovation and product features. It’s rather unfortunate that until fairly recently most people associated the Personal Computer with an Intel chip, but this view has now changed. Intel has the edge as far as resources, marketing potential and computer performance are concerned, but its strong-hand and monopolistic tactics could turn the world against them. AMD, on the other hand, is the proverbial nice guy, and it is out to prove that nice guys do not always finish last, and the value for money they offer is certainly attractive. It is widely accepted that Intel processors perform better with applications such as Microsoft Office XP, Word, Excel, PowerPoint etc. AMD however performs better than Intel in games such as Quake III. Corporate users, SME’s, Schools, and universities choose the Intel processor for its superiority on applications. Gamers and people on low budgets opt for the AMD range of processors simply because they cost less. Ultimately, the choice between AMD vs. Intel is in the hands of the consumer based on his preferences and needs. 6. How it all began – A brief history Year| Event| Consequences| 1967| Robert Noyce and Gordon Moore founded Intel| | 1968| Jerry Sanders and seven others founded AMD| AMD provides Windows compatible processors alongside other devices such as memory devices and networking products| 1976| AMD and Intel sign a cross-license agreement| Led to the elimination of other competitors due to a widening technological gap. | 1987| Cross-licensing agreement between AMD and Intel was terminated| This marks the beginning of strong competition between the two companies. Through heavy competition and advances in technology, computer prices are driven below $1,000| Another competitor, Cyrix, exits the market at this time| 1998| AMD and Intel start competing in all regions| Started producing close substitutes to each one of the competitors microprocessors. | 1999| AMD stopped production of Intel compatible microprocessors| AMDs and Intels processors become less substitutable. A sense of consumer preference is developed and a sort of brand-naming’ effect occursIntel begins, at this point to use in its sales a strategy of vertical integration, which helps in establishing its dominant market share. Cournot’s Model as applied to Intel and AMD. In duopoly the producers must consider the response of competitors when choosing output and price Equilibrium in an Oligopolistic Market * Defining Equilibrium * Firms do the best they can and have no incentive to change their output or price * All firms assume competitors are taking rival decisions into account. 7. 1 Let’s analyze the Intel AMD situation using the Cournot’s Model. * Note: The values have been assigned hypothetically to show the application of Cournot’s model of duopoly between Intel and AMD. MC1 50 MR1(75) D1(75) 12. 5 If Intel thinks AMD will produce 75 units, its demand curve is shifted to the left by this amount. Intel’s Output Decision Q1 P1 D1(0) MR1(0) If Intel thinks AMD will produce nothing, its demand curve, D1(0), is the market demand curve. D1(50) MR1(50) 25 If Intel thinks AMD will produce 50 units, its demand curve is shifted to the left by this amount. AMD’s Reaction Curve Q2*(Q1) AMD’s reaction curve shows how much it will produce as a function of how much it thinks Intel will produce. Reaction Curves and Cournot Equilibrium Q2 Q1 25 50 75 100 25 50 75 100 Intel’s Reaction Curve Q*1(Q2) x x x x Intel’s reaction curve shows how much it will produce as a function of how much it thinks AMD will produce. The x’s correspond to the previous example. In Cournot equilibrium, each firm correctly assumes how much its competitors will produce and thereby maximizes its own profits. Cournot Equilibrium 7. 2 We shall now try to understand how we arrived at the graphs above, for that we need to make some assumptions. The assumptions are: 1. Intel is the single manufacturer of microprocessors. A downward sloping demand curve for Intel has the equation Q = 120 P. As shown in Figure below, the monopolist (Intel) would maximize profit by producing Q = 60 with a price = $60 and profits (revenue) = $3600. * Note, this output equals one-half of the quantity that would be demanded at a price of zero. 17 Price 120 60 MR D Output per week 60 120 0 Intel’s Monopolist’s Output Choice 2. Now let’s assume that AMD is comes into the market. * Cournot assumed that Intel, say, chooses its output level (qA) assuming the output of AMD (qB) is fixed and will not adjust to Intel’s actions. * The total market output is given by If the demand curve is linear, the marginal revenue curve will bisect the horizontal axis between the price axis and the demand curve. The first good thing such a situation will do for us, the consumers, is bring rices down. The closer the two companies can be in performance, the lower the price premium we’ll pay for our performance. Unfortunately, this is not a duopoly which can be easily broken. Entering the market as a third player is nigh impossible as the research and development costs required would run into hundreds of millions, if not billions, of dollars. On top of that, Intel holds the x86 card very close to its chest as less players in the market mean less competition which in turn means less work needs to be done and money spent to retain their current position.