Luca Mucelli s242487

The Apple-Samsung rivalry analyzed with a

Game theory
Abstract.

This paper is made in order to apply the basic theoretical elements in terms of Game Theories (learned in
the course of Business Economics and Organization) in a real situation.

The case study that I have chosen as the famous competition between the two most important firms in
producing electronic devices, in this case mobile phones. Is known that Apple and Samsung have been
rivals in the cellular phone industry for almost a decade. Apple released its first iPhone model in 2007,
while Samsung was making phones already since 1985, but the problem was that Apple created a
completely innovative product and began to dominate the market with their new modern device.

To avoid disgrace, Samsung has released its first Samsung Galaxy in 2009 to compete against Apple's
market dominating iPhone.

Hand by hand, modifications were made to each companys product and newer generations of the iPhone
and the Samsung Galaxy were constantly being released every year or so.

The story.

On January 4, 2007, four days before the iPhone was introduced to the world, Apple filed a suite of four
design patents covering the basic shape of the iPhone. It is from these documents along with Apple's utility
patents, registered trademarks and other rights, that Apple selected the particular intellectual property to
enforce against Samsung.

Apple sued its component supplier Samsung, because the Nexus S, Epic 4G, Galaxy S 4G, and the Samsung
Galaxy Tab, have infringed Apples intellectual property: its patents, trademarks, user interface and style.
Apple's evidence submitted to the court included side-by-side image comparisons of iPhone 3GS and Galaxy
S to illustrate the alleged similarities in packaging and icons for apps.

However, the images were later found to have been tampered with in order to make the dimensions and
features of the two different products seem more similar, and counsel for Samsung accused Apple of
submitting misleading evidence to the court. Samsung counter-sued Apple on April 22, 2011, filing federal
complaints in courts in Seoul, Tokyo and Mannheim, Germany, alleging Apple infringed Samsung's patents
for mobile-communications technologies. By summer, Samsung also filed suits against Apple in the British
High Court of Justice, and in the United States.

After all these law battles, the two firms have paid a lot of money and have harmed themselves.
Definition and Basic theoretical elements on Game theories.

Game theory is for definition the study of human conflict and cooperation within a competitive situation.
In other words, game theory is the science of strategy, or at least the optimal decision-making of
independent and competing actors in a strategic setting.
The key pioneers of game theory were mathematicians John von Neumann and John Nash.

Even though game theory applies to recreational games, the concept of game simply means any
interactive situation in which independent actors share more-or-less formal rules and consequences.
Game theories are very important in economics by addressing crucial problems in prior mathematical
economic models.

In game theory, every decision-maker must anticipate the reaction of those affected by the decision. In
business, this means economic agents must anticipate the reactions of rivals, employees, customers and
investors.

Nash Equilibrium: Nash Equilibrium is a term used in game theory to describe an equilibrium where each
player's strategy is optimal given the strategies of all other players. A Nash Equilibrium exists when there is
no unilateral profitable deviation from any of the players involved. In other words, no player in the game
would take a different action as long as every other player remains the same. Nash Equilibria are self-
enforcing; when players are at a Nash Equilibrium they have no desire to move because they will be worse
off.

A dominant strategy occurs when one strategy yields a higher payoff than all other strategies, regardless of
which strategies the other player choose.

We have dominated strategy if, regardless of what any other players do, the strategy earns a player a
smaller payoff than some other strategy. Hence, a strategy is dominated if it is always better to play some
other strategy, regardless of what opponents may do. If a player has a dominant strategy than all others are
dominated, but the converse is not always true. A strictly dominant strategy is always played in equilibrium,
and thus strictly dominated strategies never are.

The case study.

Now lets try to implement the Game theory to this practical situation.

One can observe that both the companies face prisoners dilemma when they wish to make a move against
the other in their patent war. As you read further, you would see the Nash Equilibrium and Nash Solution
for the Patent war.

Two words about scenario: the situation can depict as a Duopolistic market because only a couple of firm
provide a lot of the output. In this particular kind of market, firms pay a lot of attention on rivals behavior
and how him react. This interest is one of the drivers behind the Apple and Samsung Patent war.
Decision making in these situations requires strategic thinking and implies that companies take each others
decisions into account. On similar lines as the Prisoners Dilemma, each of the two companies would have
to decide on whether or not to file a lawsuit against the other.

Assuming that a company that files a lawsuit also wins it against its competitor, the competitor would have
to either license the technology or invest heavily in R&D for alternate technologies. This would push up the
price of its products resulting in a drop in profits.
The following would be consequences of each companys individual choice on whether or not to file a law
suit against the other. In this following comfortable table we can represent the game theory:

Samsung Files a Suit Samsung Doesnt File a Suit

Apple Files a Suit (4, 2) (8, 1)

Apple Doesnt File a Suit (3, 7) (7, 5)

The numbers represent the profits made by a firm. The higher the number, the greater the profits made.

If Apple files a suit against Samsung, Samsungs profits maximise if it files a suit in response.

This is supported by the previous part, Samsung had to pay $ 1 Billion in damages to Apple. The cost
incurred on its products would increase in future because of licensing/R&D. Also there would be a shift in
customers from Samsung to Apple due to loss of reputation. (This explains greater profits to Apple when
Samsung does not respond by filing a suit).

If Apple does not file a suit against Samsung, Samsungs profits maximize if it files a suit in
response.

So, if or not Apple files a suit, Samsung files a suit in response. So, filing a suit is Apples Dominant strategy.

If Samsung files a suit against Apple, Apples profits maximize if it files a suit in response.

If Samsung does not file a suit against Apple, Apples profits maximize if it files a suit in response.

So, whether or not Samsung files a suit, Apple files a suit in response. So, filing a suit is Samsungs
Dominant strategy.

The Nash equilibrium is for both companies to file a suit. Given the payoffs, it is always in the interest of
each firm to increase output and their actions are non- cooperative
The Nash solution is for both companies to collude and restrain from filing a suit thus increasing their joint
profits.
Conclusions.
Both companies have the option to either file a suit against the other or not.

For Samsung, if Apple files a suit, file a suit in response would be most profitable. This is most likely because
Samsung may generate some money from the counter sue to perhaps lessen the weight of Apples lawsuit.
Also, in the future, Samsung will attempt to release even more revolutionary features in their phones that
surpass Apples patented technology without having as many similarities.
If Apple doesnt file a suit, then Samsungs dominant strategy is to, of course, file a suit. This allows
Samsung to gain ground, credibility, and money from their nemesis.

Similarly, Apples dominant strategy is to also file a suit in both cases regarding Samsungs actions. This
gives a Nash Equilibrium in which both companies file a lawsuit. However, this Nash Equilibrium is not the
best strategy in this game. The Nash equilibrium in this situation occurs when the companies refuse to
cooperate with each other and take maximizing their own profit as supreme (when taking in account the
possible actions of the competition).

The best strategy for both players is for them to not file any sort of lawsuit against their competitor. This
allows both companies to fully focus on improving their product without worrying about lost funds. It also
allows both companies to continue without losing credibility due to having reproduced someone elses
intellectual property. Sometimes, cooperation between firms is what needs to occur in order for the firms
to grow at a higher rate.

About Apples strategy, that is not to compete on cost but on differentiation. The company needs to
protect its products uniqueness, securing its capabilities of positional advantage through patents that cover
Design and Operating System features. Patents and licenses are restrictions that protect Apples
innovations from being copied. They provide the firm a great market power and also the first mover
advantage, the result of pioneering certain market segments.

Apple and Samsung should focus on improving their products, introducing fast charging batteries and trying
to equip their devices of an autonomy that exceeds at least six hours.
There are many other points that should be improved, which are not hardware, and design. Samsung and
Apple should spend its resources in improving rather than in profit wars, as well as the game theory has
shown.

Bibliography.

www.Johnsmithk.wordpress.com

www.economist.com

www.wikipedia.it

Cornell University - Course blog for INFO 2040/CS 2850/Econ 2040/SOC 2090

www.gametheory.net

www.economics.fundamentalfinance.com