Assume that the marginal cost to Microsoft of supplying its operating system for one more computer is zero. Denote by PM the price charged by Microsoft for its operating system.
Various computer manufacturers produce homogenous computers. Cost of production per computer is equal to $1000 + PM where the $1000 captures other computer component costs, such as the microprocessor, monitor, etc. Finally, assume that the downstream computer industry is perfectly competitive and aggregate demand is given by Q = 50,000,000 - 10,000P .
a. For any given price, PM , of operating systems, what will be the price and sales of computers?
b. What price PM should Microsoft set for its operating system? How much money will downstream manufactuers make? What will be the final price of a computer?
c. How much money would a vertically integrated firm controlling both the supply of Windows and the assembly of computers make? What price would such a firm charge for its computers?
d. Should Microsoft integrate downstream with computer manufacturers?