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Apple and Samsung with regards to patent lawsuits

Link: http://www.macrumors.com/2011/09/23/samsung-stepping-up-attacks-on-free-riding-apple-in-patent-dispute/

It seems that patent lawsuits between two major, rivaling corporations, such as Apple and Samsung, have become increasingly more common nowadays.  For instance, Apple has recently pressed charges on Samsung in regard to patent lawsuits involved in the design of Samsung’s Galaxy S2 smartphone.  As a result of this, Samsung was barred from the sale of the Galaxy in most European countries.  This, of course, degraded Samsung’s reputation, caused significant financial damage, and heightened hostility between the two companies.

However, it is not necessarily a win-win situation for Apple, since Samsung and Apple have had a close relationship for a long time in the business of component supplies.   Apple depends on Samsung for certain components, and Samsung negotiates the respective prices of the components with Apple.  According to the above link, Apple has recently strived to lessen its reliance on Samsung for their components, yet it is currently still impossible for Apple to avoid negotiating with Samsung, as Samsung provides a stable supply of high-quality components ideal for the assembly of Apple’s products, such as the iPhone.

The concept of Game Theory and “Nash Equilibrium” can be applied to reach the ideal conclusion for both companies with regard to the type of relationship they should maintain.  The two players in this game would of course be Apple and Samsung.  The two companies can choose to press charges on each other, and from doing so the two companies may benefit or may bring harm to themselves.  Again, benefits to doing so may include seeing increased profit, and harm damage may include experiencing a less favorable negotiation from the other.

Players

Samsung

Apple

Option

For patent lawsuits

Against patent lawsuits

For patent lawsuits

(0, -5)

(10, -10)

Against patent lawsuits

(-5, 10)

(5,5)

According to this predicted matrix model of the degree of benefit (positive) and harm (negative), the pure Nash equilibrium turns out to be the case where both players (Apple and Samsung) press charges towards each other, with regards to patent lawsuits (the top left entry).  This shows that perhaps this is the ideal decision, which could be made by these two companies.  This real application between Apple and Samsung shows why game theory is a very important study of economics, as it shows the best choice that the two parties can make.

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