Archive for 2. Microeconomics

Patent Lawsuit: Apple, Samsung and the Prisoner’s Dilemma

Apple vs. Samsung in a Patent War

CNET News 1: “Apple vs. Samsung: 50 suits, 10 countries – and counting”

CNET News 2: “Samsung, Apple CEOs meet without coming to agreement?”

Meritz Investment Bank (Korean): PDF File

A hostile patent litigation between Apple and Samsung started ever since Apple accused Samsung of copying its designs for smartphones and tablet PCs. In response, Samsung dodged back with patent lawsuits concerning the mobile technology. According to CNET News, this litigation chaos augmented into 50 lawsuits against each other in 10 different countries. Apple became wary of Samsung’s ever-increasing market share of the smartphones and tablet PCs.

A smartphone or a tablet PC market can be said to be an oligopoly. There is only a handful of firms offering the product: Apple, Samsung, HTC, Sony, and so on. It is definitely different from a PC components market where there are lots of firms providing the identical product.

As Samsung’s market power is increasing in both the smartphone and the tablet PC market, Apple has opened a Pandora’s Box by filing a lawsuit against Samsung, as it was mentioned above. This has triggered the problem of Prisoner’s Dilemma, of which the ‘players’ in a ‘game’ are forced to choose the option that makes both of them worse off. In this case, the ‘players’ are Apple and Samsung, and the ‘game’ they are playing is the chicken game of patent litigations.

Table based on Game Theory: Prisoner’s Dilemma

This table illustrates the situation that Apple and Samsung is facing. According to the table, whatever the opponent chooses to do, the best option for a player is to file a lawsuit against the opponent. For example, for Samsung, it is the best option for it to file a lawsuit against Apple because the best-case scenario is that it will possibly kick Apple out of the market. The worst-case scenario is that both Samsung and Apple will possibly be kicked out of the market. However, this case is better than Samsung being kicked out of the market while Apple stays in the market with the market gain, in the point of view of Samsung. The reason behind choosing to file a lawsuit is the same for Apple.

As a result, they reach a Nash equilibrium, in which both of them file a lawsuit against each other, making them worse off. The patent lawsuit can be seen as a deadweight loss that is ‘wasted’ in a litigious process. Some people argue that the only people gaining from this situation are the lawyers. Consumers are the ultimate victims of this patent war because the ligation burdens are passed through higher prices for the products Apple and Samsung produce.

However, it should be noted that this ‘game’ of patent lawsuits is repeated numerously, 50 lawsuits as it was mentioned. Meritz Investment Bank’s analyst Lee Secheol anticipated in April that Apple and Samsung would stop and reconcile with each other as the ‘game’ is repeated. He anticipated that both firms would realize that this situation is making them worse off and that they would sit down at the negotiating table.

According to CNET News, CEOs of Apple and Samsung did have a meeting. However, they have never came up with an agreement. The fact that they had a meeting to reconcile showed that both of them realized they were in a situation of prisoner’s dilemma. However, their disagreement over withdrawing from a patent war also showed that this issue has become somewhat emotional, which makes it beyond the problem of prisoner’s dilemma.

Consumers should realize that this is not only doing harm to both the companies but also doing harm to themselves. This patent war will inevitably lead to an increase in the prices of products that Apple and Samsung produce and will significantly limit the number of choices that consumers can make if one of them are kicked out of the market as a result of a lawsuit. Also, the products they purchase may be limited in functions or features due to the patent constraints.

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California’s Tradable Permit on Oil Refineries

Californian Government Implements Tradable Permit on Oil Production

The Reporter: News Article

According to The Reporter, California decided to implement the tradable permit policy for the production of oil, which is responsible for the global warming. The government has budget deficit of “$9 billion” and it hopes to gain “$14 billion” by 2015, profiting from auctioning tradable permits to the oil companies.

The main reason for implementing tradable permit policy is that there is a negative externality associated with the production of oil. The social cost exceeds the private cost and this makes the society to take care of the environmental cost. In order to internalize the cost of pollution of the oil production and move the quantity supplied from Q market to Q optimum, the Californian government introduced tradable permit.

The government or EPA sets the amount of pollution allowed and auctions the pollution rights (tradable permits) to the oil companies. If the amount of tradable permit is appropriately chosen, it effectively moves the quantity supplied to Q optimum both eliminating the negative externality and increasing the government profit. The government would profit P times Q optimum amount of money.

However, some critics argue that the increase in the price of oil will increase the overall price of consumer goods. The cost of production will increase for virtually all the consumer goods that are produced from oil-running factories. Also, the means of transporting goods from city to city will be more expensive. All this will contribute in increasing the price of consumer goods. The economic size (or social welfare) would decrease also.

The overall increase in the price of oil and the price of consumer goods will lead to the decrease in the consumer spending overall. United States, especially California, is a place where the public transportation is not as advanced and popularly used as Korea. People usually drive their cars to go to work and go shopping. The increase in the price of oil will act as a disincentive for the people to go out on shopping. This will shift the demand curve from Demand 1 to Demand 2 decreasing the price of consumer goods from P2 to P1 and decreasing the quantity demanded from Q1 to Q2. Again, the economic size (or social welfare) will decrease. Some argue that the tax revenue form the taxes such as VAT will decrease countering the benefits by profits from implementing tradable permits.

In conclusion, the tradable permit will increase the profit of Californian government and at the same time cut down the level of pollution contributing to the global warming. However, the government should be fully aware of the complicated consequence or unintended effects of implementing any sort of policy distorting the market will have.

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List of Definitions for Section 2

1. Market is a place where the consumers and the suppliers meet together. Here, the resources are allocated through the price mechanism. The price and the quantity demanded are determined by the equilibrium price. However, a market does not need to be a physical place where people meet face-to-face. Online shopping is one example of how the market is formed without requiring the consumers and the suppliers to meet face-to-face.

2. Structure of Market in the spectrum of competition

  • Perfect Competition occurs where there are many competitors who produce the same product and the market sets the price.
  • Monopoly occurs when there is only one supplier for the market. These monopolists set the price and profits very highly. They may set as many barriers as they can to stop other possible competitors from entering the market they are in control of.
  • Monopolistic Competition occurs when the market has both the characteristics of perfect competition and monopoly.
  • Oligopoly occurs when there are just few competitors in the market. However, they have interdependence to each other. Also, they may spend a lot of money on advertisement and promotion.

Summary of market types

Type of Market

Number of Firms

Freedom of Entry

Nature of Product

Examples

Demand Curve for Firms

Perfect competition

Many

Unrestricted

Homogenous

(undifferentiated)

Cabbages

Carrots

Horizontal

the firm is a price-taker

Monopolistic competition

Many, Several

Unrestricted

Differentiated

Plumbers

Restaurants

Downward sloping, relatively elastic, some control over price

Oligopoly

Few

Restricted

Undifferentiated or Differentiated

Cement

Cars

Kinked

Monopoly

One

Restricted or Completely blocked

Unique

Local water companies

Downward sloping, inelastic, considerable control over pric

Table Obtained from Triple A Text

3. Demand is defined as ‘that quantity of a good or service that would be bought at each and every price over a period of time’. Must include these three factors:

  • The desire for a product
  • A willingness to pay for it
  • The ability to pay for it

4. Supply is defined as the quantity of goods and services that will be supplied to the market at various prices over a given period of time. These are some of the determinants of supply:

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Data Response: Trees

What are the external costs/benefits of trees?

(a) (i) Negative externality are the bad effects that are suffered by a third party when a good or service is produced or consumed.

(ii) Positive externalities are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed.

(b) Graph 1: Negative Externality of Tree Branch

Branches falling in a neighbor’s yard could be considered a negative externality looking at several points. If branches from trees fall in a neighbor’s yard, the neighbor would have to take his/her time to clean the branches up. Many business people think of time as money. The time the neighbor has to take to clean up the branches could be converted to a monetary value. Also, the ‘labor’ of cleaning up the branches also could be converted to a monetary value. In addition, if a neighbor suffered psycologically by the constant falling of branches from his/her neighbor tree can be conpensated by money. However, many ‘modest’ or ‘ordinary’ neighbors would not complain about it fearing the relationship with his/her neighbor could get bad. As it is illustrated in the graph, the time, labor, and psycological suffering of falling branches is not reflected in the graph. So this falling of branches from the nieghbor’s tree could be considered a negative externality.

(c) Graph 2: Government Intervention to Stop Negative Externality

Government could intervene if a neighbor complains to the local authorities about this annoying branches. A government could put a tax on a neighbor’s tree for having these ‘significant’ negative externalities and put a curve of MPC up to MSC in the graph 1. Or, the government could persuade the neighbor to cut down trees or clean up the branches him/herself and move the curve of MPB down to MSB in graph 2.

(d) If a government taxes on the neighbor for the falling of branches, it eventually lower the number of branches falling on the poor neighbor’s garden, however there are some drawbacks. The neighbor getting taxed would have monetary loss for his/her tree’s wrongful acts. To explain this graphically, in the graph 1, the number of branches falling decreases, however, cost of branches falling increases. Therefore, it is hurting the neighbor of the wrongful tree. However, if the government persuades the person to either cut down trees or clean up the branches him/herself, it will both let both neighbors to benefit. The owner of the tree can still keep the tree and the neighbor would not have to suffer from the branches falling of the tree. As illustrated in graph 2, it both lowers the cost and quantity of falling branches. So the best way for the government to do is to persuade the owener of the tree to clean up the branches falling off from the trees.

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Data Response: Clean Coal

(a) (i) Negative externality occurs when the production or the consumption of a product creates external cost to the society. For example, consumption of cigarettes can result in high possibility of cancer and air pollution.

(ii) Welfare loss occurs when there is a negative externality in the market. There is a loss of welfare when this negative externality is not reflected in the price mechanism.

(b) Graph 1:

Coal fired power stations produce negative externalities such as air pollution and acid rain. As you see in the graph, external costs of air pollution and acid rain are not reflected on the price. The production of electricity by usage of coal should be on the curve MSC, which rightfully reflects the negative externalities of the production. Instead, the curve is on MPC, which does not reflect the negative externaltities. Therefore, this engenders the welfare loss which is colored black in the middle of the graph.

(c) Graph 2:

In order to solve this problem, the government must intervene to overcome this market failure. The best solution to overcome this problem is for the demand for such polluting energy to go down. As you see in the graph 2, as demand goes down, the product becomes much cheaper and the consumption lowers down lessening the negative externalities of air pollution. The government could advertise not to excessively use the energy produced by the coal. However, this sometimes this method would not work. If this method does not work, government should use the last method of taxation on the production of the electricity by coal. This method is less-desirable than the first method. Although the consumption goes down, the price for the electricity goes up. So this would hurt the consumers.

(d) If the government taxes on the power stations producing electricity by coal, it will raise the price up from P1 to P* in the graph 1. This method will hurt the consumers. However, if the government tries to persuade the consumers to lower their consumption of electricity by advertisement, it will both lower the price of the electricity and the consumption. The best way for the government is to persuade the consumers not to consume electricity too much. The method of taxation should be considered as a last resort.

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Reflection on the Seminar

Seminar Question: Is capitalism so deeply flawed that all attempts to ensure the public good are doomed to failure?

I personally thought that I was not ready enough to be able to participate in the discussion. I was prepared with the health care system, however, I found out that the discussion did not carry out as I wanted it to be. So I was speechless for 10 minutes. I barely said some few words when the discussion was somewhat close to what I have been preparing for. I thought that the discussion would surely include health care issue because I thought it was one of the great example for public good (closer to merit good however). But, the discussion went to how capitalism created disparity between poor and rich. So I was completely unprepared.

I think that I should have been prepared for any subject that might be discussed in the seminar. I felt that I was not efficiently participating in the seminar.

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Pollution in Kobe, Japan – Taxation, Subsidization, and Tradable Permits

Voice Thread Presentation: Click Here

Although Kobe, Japan is not on the list of world’s top 10 polluted cities, southern part of the city is heavily polluted.  Southern part of this city have over 15 factories producing ships, steel, electronics and cars. It is surely a heart of Kobe’s economy and finance, however, it is causing a negative externality of air pollution.

Factories are concentrated on the southern part of Kobe, Japan.

These heavily-industrial factories release unknown chemicals into the air and pollutes the city severely. As a result of pollution, the inhabitants living around the area can suffer from several sever health problems such as respiratory problem, cancer, nausea and etc.

Then, how could we possible solve this problem? There are three solutions to solve the problem. They are taxation, subsidization, and tradable permits.

First solution to Kobe’s pollution is taxation. As you see in the graph, the pollution in Kobe is the negative externality caused by manufacturing of ships, electronics, and so on. Originally, this was not considered as a ‘cost’ to society, so this cost was not reflected. So the supply curve is on MPC initially, however, we can tax the producers to move the quantity supplied back to the optimum point of Q. The supply curve will go up to the curve of MSC which rightfully reflects the social cost of pollution. This way, the government can expect the effect of reduced pollution in the city of Kobe.

However, there is one draw back to this solution. The consumers would have to buy the product at much higher price from P1 to P2 compared to before.

The second solution is to subsidize firms that are employing more environmentally-friendly method of manufacturing their products or the firms that are developing eco-friendly technology. By subsidizing these kind of firms, the level of pollution in Kobe could decrease significantly. As you see in the graph, by subsidizing these firms, the price of these firm’s products will decrease from P to P1, and the quantity demanded will increase from Q to Q optimum. Increased demand of these products will increase the positive externality of reduced pollution in Kobe. However, this method is uncertain because we cannot quantify how much positive externality it will cause.

The last solution is issuing tradable permits. Tradable permits are permits issued by governments allowing how much of pollution firms can create. If a firm exceeds the pollution rate it is suppose to create, the firm much buy a tradable permit from other firms. If a firm succeeds in reducing pollution and they have extra permits, these firms can sell the leftover permits to other firms that exceeded the pollution level. By issuing tradable permits, we can lower the pollution level significantly. Also, it encourages the firms to be efficient and lower the pollution level. If they lower the pollution level, they can sell their extra permits and gain profit. Many countries are told to be using this system to reduce pollution.

In conclusion, taxation, subsidization, and tradable permits are possible solutions to the pollution in Kobe, Japan. The local government should now take action to reduce pollution in Kobe and make it a pollution-free city.

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