Through the Wintel simulation game, we study the competitive dynamics between two complementary

entities, Microsoft and Intel, and their incentives to co-operate and compete. In a system of
complements, the price of the final product depends on the prices set by individual entities and the
total value provided to customers depends on the fit between the different components. While co-
operation may seem to be the natural outcome between two complementary entities, they also indulge
in competitive behavior over pricing, R&D investments, new product launch and attempt to capture
major share of the value chain.

Individual Pricing Strategies

Total price of Wintel PC is determined by individual prices of Windows OS and Intel Microprocessor.
Both parties tried to maximize their profits by finding the right balance of price and the quantity
demanded at that price. Intel earned only from the PC sales made in a particular year. For Intel, new
launches were associated with significant price rise, earning it higher profits. However, as its product
grew older, it had to decrease its price to maximize its profits. Thus, Intel has an incentive to launch
new versions as it can reap high profits mostly during the initial years of a product. However, its
profits is truly maximized if its release is followed by a Windows release as well.

Windows initially had to start with a lower price to counter the high initial prices of Intel processor so
as to maintain the optimum demand for the Wintel PC. However, with passage of years as processor
price dropped, Microsoft Windows could charge higher prices. Windows also earned revenue from its
user base from previous years. Thus, it has a lesser incentive than Intel to come out with new launches.

Release Pattern
New releases by either Intel or Microsoft resulted in growth of the Wintel PC market, marked by a
rightward shift in the demand curve and both parties benefit from it. However, new launches are
associated with significant costs and hence there is a tendency of firms to shy away from launches and
rely on its complement to come up with new releases and piggyback on it.

Contrarily, when Microsoft and Intel come up with new releases in a planned and timely manner with
Microsoft launching its product within a year or two of Intel launch, Wintel PC market growth is
maximized with each party earning the maximum profits. It meant that Microsoft could build its
advanced OS versions by leveraging the improved capabilities of new generation Intel
microprocessors.

Signaling releases in advance by individual companies thus plays an important role here so that the
other company can plan accordingly.

Conclusion

The key takeaway from the Winter Simulation game is that the dynamics between complementary
companies, Intel and Windows has both co-operative and conflicting aspects in terms of setting prices
of their products or launching new versions. It is critical for both companies to co-operate effectively
to ensure simultaneous individual growth as well as growth of overall Wintel PC market.