But is Apple’s premium, proprietary platform strategy best generating max-
imum iPhone profits in the long run? Industry skeptics point to the platform
battle in personal computers waged 20 years ago between Apple’s Macintosh (a
closed bundle of hardware and software) and Microsoft’s Windows’ operating
system available and operable on any compatible PC—a battle won convincingly
by the Microsoft-PC camp. The proprietary strategy embedded in Apple’s iPod
has been largely a success. The combination of the iPod and the iTunes online
store remains far and away the market leader. However, despite its significant
head start, the iphone (and Apple’s mobile OS system) has seen significant com-
petitive inroads by Google’s Android mobile operating system—a platform open
to any handset producer and available to any cellular service provider. Android
users, attracted by comparable performance and cheaper prices, are growing
much more rapidly than iPhone users as are Android apps. Allied with the hand-
set maker Nokia, Microsoft is a third major player to promote a competing cel-
lular platform. All three firms have the staying power backed by significant cash
resources, and all three are committed to spending on research and develop-
ment. All three are vying for a new source of revenue: the potential untapped
riches to be generated by mobile advertising. Rather than a “winner take all”
outcome, it’s likely that two or more mobile standards will continue to coexist.
Finally, a second platform battle was sounded with the birth of the tablet
computer market in 2010. Once again, Apple’s. iPad, backed by a propriety
platform strategy, was first to market. But a crowded field of tablets, offered by
companies such as Research in Motion (maker of the Blackberry), Acer,
Samsung, Dell, Lenovo, and others, represents fierce competition for Apple.Market Entry
Consider once again Chapter 1’s example of market competition between the
two giants of the book business—Barnes & Noble and Borders Group. For two
decades, each chain aggressively expanded its number of superstores across
the country, often in direct competition with the other. Often the chains were
jockeying for the same real estate sites in the same cities.
To model the competition between the chains, suppose that both are
considering a new superstore in a midsize city. Although the city is currently
underserved by the area’s bookstores, each chain recognizes that book-buying
demand is sufficient to support only one superstore profitably. There is not
enough market room for two stores. If both chains erect new superstores and
split the market, both will suffer losses. (Each firm’s net cash flow will be insuf-
ficient to cover the high fixed costs of opening a new store.) Table 10.5 shows
the firms’ payoffs. If one firm stays out, it earns zero profit. If it enters, its profit
is $4 million or $4 million depending on whether the other firm enters.
Clearly, neither firm has a dominant strategy. However, it is easy to identify the
two off-diagonal outcomes as equilibria. If firm 1 enters, firm 2’s best response414 Chapter 10 Game Theory and Competitive Strategyc10GameTheoryandCompetitiveStrategy.qxd 9/29/11 1:33 PM Page 414