War of Samsung and Apple: Can game theory precisely

elucidate practical question?

Sejun Lee
Executive Summary

Game theory can help to make better decisions. Many areas use game theory including the
military, economics, business, and world diplomacy. However, game theory has some
limitations. For example in the economy, there are variables such as cooperation, inflation,
taxation and weather. It also has limitations in making optimal decisions.

To better understand what game theory is, as well as its advantages and restrictions in the
real world, this study will apply it to the Samsung and Apple lawsuits dating from April 2011.
In addition, it uses ethnographic qualitative research involving observation without collecting
statistical information. Secondary qualitative research helps to gather value information. In
addition, there is strict filtering for data validity and reliability.

Samsung and Apple are still pursuing their lawsuits. These companies had cooperated to
evolve the smartphone market, which has increased dramatically in the world. However, they
could not be colleagues because they each want to survive and obtain leadership in that
market. Samsung and Apple often spend exorbitant amounts on patent lawsuits. It is
unknown how these expenditures will return to them and their customers.

There are four conditions in which Samsung and Apple can choose to optimize profits:

1. Samsung and Apple continue their lawsuits, as well as reinstitute lawsuits against
any unfavourable judgements;
2. Samsung continues its lawsuit but Apple withdraws abruptly;
3. Samsung withdraws its lawsuit but Apple continues its suit against Samsung;
4. Both Samsung and Apple withdraw their lawsuits.

Game theory is used to assess the benefits or damage to both parties depending on their
choices. The examples show what they should do to act for themselves, for customers and
for society. They are also proof of the limitations of game theory when applied in an
empirical situation. Game theory cannot make certain a win in the competitive market.
Contents
1. Introduction .......................................................................................................... 1

2. Literature Review ................................................................................................. 2

2.1 Kinds of Game Theory .................................................................................. 2

2.2 Type of Games.............................................................................................. 3

2.2.1 Zero-sum game and non-zero-sum game .............................................. 3

2.2.2 Two-player game and N-player game .................................................... 3

2.2.3 Cooperation game and non-cooperation game ...................................... 3

2.3 Usefulness of Game Theory.......................................................................... 4

2.4 Limitations of Game Theory .......................................................................... 4

3. Methodology ........................................................................................................ 6

3.1 Methodological Structure .............................................................................. 6

3.2 Qualitative Research Methods ..................................................................... 6

3.3 Selecting Samsung and Apple Cases ........................................................... 6

4. Findings and Analysis .......................................................................................... 7

4.1 Market Position ............................................................................................. 7

4.2 Legal Actions................................................................................................. 8

4.3 Game Theory Strategies ............................................................................. 10

4.4 Game Theory Outcomes Table - Samsung vs. Apple ................................. 12

4.4.1 First condition ....................................................................................... 13

4.4.2 Second condition .................................................................................. 13

4.4.3 Third condition ...................................................................................... 14

4.4.4 Fourth condition .................................................................................... 15

4.5 Matrix of Game Theory Simulation .............................................................. 15

5 Conclusions ....................................................................................................... 17

References ............................................................................................................... 18
`

1. Introduction

The global smartphone market has grown dramatically in the last 5 years. According to
writer Nick Wingfield, the arrival of the original Apple iPhone in 2007 was a quantum leap for
mobile phone; many believe it began the age of smartphones. On the other hand, some
claim that other companies first created the smartphone, such as LG‟s Prada phone 1.0.

In April 2011, judicial disputes began as Apple filed lawsuits against Samsung, and vice
versa, that are still ongoing. The overall strategy was to use one firm‟s enforcement of
patents to limit the sales of the other firm‟s products. Shortly after Steve Jobs passed away
in October 2011, many people guessed that their judicial disputes would soon come to an
end, but they didn‟t.

In August 2012, Jeff Jarvis in Googlenomics (2012) pointed out the need for innovation of
the patent system because Samsung and Apple had spent around 20 billion dollars (13
billion pounds) attempting to protect themselves without any innovation and growth. Google
similarly spent about 14.5 billion dollars fighting Motorola Mobility (Megee, 2012).

Situations where patents are being aggressively enforced intimidate many technology
companies. Apple and Samsung not only instituted patent lawsuits against each other, but
also against other enormous companies. Therefore, developing a mutual understanding for
systematically and logically solving such situations is required.

This report will discuss the advantages and disadvantages of game theory as applied to the
Samsung and Apple lawsuits. First, its use solely focuses on the benefits that depend on
their behaviours. Second, this report will examine processes such as game tables and
strategic schemes for solutions and recommendations.

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 2. Literature Review

In their research on game theory, John von Neumann and Oskar Morgenstern (1947)
pointed out that both sides have different understandings and goals, so one side‟s decision
will directly influence the other side‟s decision; namely, it influences their damage or benefits.
Companies will not get expected results from their behaviours because, at the same time,
other businesses with other behaviours will affect the results (McMillan, 1996). If people
want to solve a conflict of interest, they should know what game theory is and try to build a
correct and rational strategy based on it (Rabin, 1993; Myerson, 1997). This means that if
anyone selects an extraordinary strategy, a player can be damaged and negatively affect
other players.

Game theory began after von Neumann verified the basic logic of the zero-sum game in
1920 (Kaplan, 2005). Basic game theory developed by von Neumann and Morgenstern,
along with utility theory, were combined in their Theory of Game and Economic Behaviour
(1944). A systematic analysis system was developed with this combination (Neumann and
Morgenstern, 1947). Game theory is often applied to military operation areas, and is
nowadays applied to economics, management, politics and psychology (Rapoport, 1999).
Myerson (1997) claimed: “Real proof of the power of game theory has come in recent years
from a prolific development of important applications, especially in economics.”

There are two participants with their behaviours affecting each other with regard to decision
making for player benefits. Therefore, even though people have different ideologies, game
theory can deal with their decision making (Alvin, 2002). Outcomes and damage will depend
on which strategies competitors select, so each will choose a strategy that makes maximum
profits (McMillan, 1996; Victor and Carol, 2012). This situation is usually in the economic
field, with each company assuming that their capability to influence the whole market is
significantly small. However, the actual market is oligopolistic (Schelling, 2006). Therefore,
each company (player) needs to forecast interaction with the main company. After checking
rules and reviewing their strategy, they check how the game is progressing.

2.1 Kinds of Game Theory

First, in normative theory, a rational person must act based on utility measures and utilisable
strategy in game situations (Gintis, 2009; Kreps, 2011; Myerson, 1997). This means that this
theory is not how people act in actual situations.

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Second, static theory means that during the procession of the game theory, the utility of a
player, the game rules and available information are not being changed; thus, the game
character is identity (Barsar and Olsder, 1999; Gibbons, 1992; Weibull, 1995; Norman, 2006).

Third, there is rational selection theory. Rational behaviour is when players have clear and
cohesive goals and only act for maximum profit among a variety of alternative selections.

2.2 Type of Games

Game theory deals with disputes, discords, cooperation, or all three in one situation. The
following subsections describe several common game types.

2.2.1 Zero-sum game and non-zero-sum game

ZSG is where one player has a profit while the other side has the same damage. For
examples, there are chess and battle (Tucker, 1959; McMillan, 1996). Tucker (1959) pointed
out that there are not only zero-sum games in the world, but also non-zero-sum games. In
contrast, NZSG is where there are no winners or losers. Namely, it is a variable profits game.
This means that discord and cooperation are occasionally combined to create positive
results (Tucker, 1959; McMillan, 1996). The prisoner‟s dilemma game and an armaments
race are suitable examples. Non-zero-sum games are still not well developed (Eitan, 1994).

2.2.2 Two-player game and N-player game

This is where two players or two groups play a game. Two players act simply for their profits,
but N-players is difficult to forecast or make decisions for maximum profits (Nash, 1952;
Gibbons, 1992). The N-player game is where there are at least three people or groups so
they can conspire. The North Atlantic Treaty Organization (NATO) is a good example.
Levine (2008, n.p.) states: “Although game theory is relevant to parlour games such as
poker or bridge, most research in game theory focuses on how groups of people interact.”
However, N-player games are still not well developed, like the non-zero-sum game (Eitan,
1994).

2.2.3 Cooperation game and non-cooperation game

Barsar and Olsder (1999) pointed out that CG is where players can negotiate their strategy
before a game. NCG is where players cannot negotiate with each other. Sometimes in N-
player games, players conspire to create a joint achievement (Masahiko, 1984; Gibbons,
1992; Myerson, 1997). However, despite sharing a negative relationship, players cooperate
and create a united front for profit.

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 2.3 Usefulness of Game Theory

Boulding (2009, n.p.) positively pointed out: “Game theory is intellectual x-ray. It reveals the
skeletal structure of those social systems where decisions interact, and it reveals, therefore,
the essential structure of both conflict and collaboration.” This means that this theory
improves clarity of thought in their position.

Game theory could help solve conflicts of interest in every area. It can also solve problems
using numerical values, so the third party can easily understand the situation (Camerer,
2003). Gintis (2009, p. 6) pointed out: “Understand the world. For example, game theory
helps understand why animals sometimes fight over territory and sometimes don‟t….”

People experience game theory in many places. This means that it is easy to apply to their
circumstances. For example in international politics, game theory could explain South Korea
and North Korea, the Cold War between U.S.A. and the Soviet Union, and Israel and
Palestine (Friedman, 1994). In addition, game theory could explain business-to-business
conflicts. For instance, when a competitive company expands into a competitive market,
which strategy should it use? Should it select a cost-leadership strategy? (Friedman, 1994).
Gintis (2009, p. 7) claimed: “Respond to the world. For example, game theory has been
used to develop strategies to win money at poker.”

Moreover, a company can apply game theory to indicate an optimal decision to current
customers and potential customers for improved maximum profit (Wilkinson and Klaes,
2012).

2.4 Limitations of Game Theory

Many people know that game theory is a useful tool for improving their payoffs. However,
there are some limitations. Kelly (2009, p. 1) stated: “Although game theory has been
outstandingly successful at developing a deeper understanding of how rational players make
decisions under interdependent circumstances, several criticisms have been made of some
of its assumptions.”

First, when people apply game theory for obtaining results, there are no formulas for
straining out untruths and threats (Myerson, 1997). Therefore, accuracy will decrease
because the experimenter does not know how the players think and make decisions.

Second, a player can forecast other players‟ strategies (Myerson, 1997). For example, if
someone wanted to sell a second-hand car for emergency money, the condition of the car
may be very good. However, if someone wants to sell a second-hand car because he or she

4
has used it for a long time, the condition of the car could be very bad. In the first situation,
the buyer does not hurry to buy the second-hand car because it is possible to seek a
discount in price by the seller.

Rapoport (1962, p. 118) claimed: “It is impossible to prescribe a best strategy in a game.”
This means that in game theory, it is assumed that players select the best strategy before
the start of a game, but this also may not be the best strategy. Therefore, their result is also
doubtable. In addition, one side cannot control the whole situation in the game.

As a third limitation, it cannot express human psychology. When a human makes decisions,
they are usually not made with a numerical value. This means that a person is not a Homo
Economicus. For example in society, there is no perfect answer that one plus one is two.
Although people make decisions based on circumstances and complex concepts, the game
theory cannot cover all of these factors. Deutsch (1954, p. 6) pointed out: “Human beings
are thus not „single-game‟ or „single-purpose‟ units, and any single-purpose calculation is
thus likely to underestimate seriously their overall value.”

Fourth, there is almost a static game in the real world. It could not cope with the question of
novelty, innovation and growth (Deutsch, 1954). This means that game theory may be
biased with decisions over giving suitable weight to dynamic factors such as domestic or
international relations.

A fifth limitation is that it cannot manage major changes. This means that game theory finds
it difficult to deal with problems that find fast relevant solutions to be of use. Game theory
does not allow the time and cost needed for obtaining information (Deutsch, 1954; Myerson,
1997). Original theory assumed that players can assess all information under no limitations
of cost or time in making decisions.

Rapoport (1999) claimed: “Although game theory employs a mathematical approach to

conflict resolution, the present column avoids all but the minimum of mathematical notion.
The result is an accessible, easy-to-follow treatment....” This means that a mathematical
approach in game theory is not significant.

Players must understand that game theory does not guarantee an unconditional win
(Myerson, 1997; Alvin, 2002). This means that although game theory significantly helps in
making current decisions, they do not ensure a win against another player.

5
3. Methodology

3.1 Methodological Structure

Orlikowski and Baroudi (2000) recommended that more critical and interpretative research is
needed to clearly explain an organisation. Bryman and Bell (2011 p, 397) claimed that
“triangulation” offers a process of mixing more than one method of research in a study. This
means that research should involve both face-to-face interviews and field observations to
collect valuable information. However, this study has limitations since it is not possible to
conduct face-to-face interviews with the Presidents of Samsung and Apple.

Quantitative research generally includes a varying number of cases in less depth, using
statistics or measuring frequency Therefore, the secondary qualitative research approach
were adopted to collect analysis data. Punch (1998: 4) pointed out “secondary qualitative
research is empirical research where the data are not in the form of numbers”. Samsung and
Apple have a conflict of interest that does not compute as a numerical value.

3.2 Qualitative Research Methods

Ethnography is a qualitative research method used in this study, which puts it on a collision
course with Samsung and Apple. According to Bryman and Bell (2011), ethnography collects
its value data from internet-based research that allows the observer to research and
examine personal behaviours in the real world. Ethnography can surface conflicts of interest
between Samsung and Apple. Such research can be an observation without collecting
statistical information.

As a research method, ethnography has some advantages. First, ethnography can explain
about inter-relationships in various types of people interactions, complex behaviours of
people, and can offer a context of behaviour. Second, ethnography is able to indicate
qualities that people experience. Those advantages can help to determine the types of
follow-up research and future questions that need to be asked.

On the other hand, ethnography has several disadvantages. First, it requires a well trained
researcher and is time consuming. Second, a researcher who is biased can influence both
the collection and design of the study as well as the interpretation of data.

3.3 Selecting Samsung and Apple Cases

Secondary qualitative research method in this study began with general public articles.
Almost all were journals, newspapers, university blogs, and personal blogs. Therefore, four

6
criteria were applied to filter out less qualified information. First, chosen articles should
disclose endorsement data with high reliability and validity of information that makes for clear
evaluation. Second, articles should include both commercial and sponsored payments,
excluding university sponsorship (Scholar Google). Third, articles should be popular with
high agreement, viewing and a citation number. Fourth, newspapers and a professor`s
personal blogs with a higher number of comments should be considered. This is because
more comments may indicate richer information for analysing and generating reliable data.

4. Findings and Analysis

4.1 Market Position

This chart shows the market shares of Apple and Samsung. The two companies have
about 60% of the U.S. smartphone market (Barrett, 2012).

This table shows Samsung‟s leading world market share. Last year, its market share

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dramatically increased. This is one reason why Apple watched Samsung‟s repercussions.

There are about 7,000 patents on smartphones in the U.S. In March 2011, Apple started to
sue HTC about a patent. This lawsuit was full-scale declaration of a patent war. Other
companies entered the patent war, such as Microsoft and Google. Samsung also has 16,786
patents in the U.S.

4.2 Legal Actions

On 19 April 2011, Android, a software platform with bundles of implemented systems,

middleware and applied programs, was extended, Apple started a lawsuit against Samsung
in the U.S. citing infringement of 16 patents, including design of round edge, design of
package, and icon of picture and call (Lee, 2012). At the same time, Samsung instituted a
lawsuit about encroachment on 10 technologies in communication patents and sought
compensation for damages in Korea, Japan and Germany (Fiegerman, 2012; Osborne,
2012). On 25 June 2011, Apple again sued about design infringement of internal and

8
external parts against the Samsung Galaxy S2 product in the Seoul Supreme Court in Korea.
It cited the general sharpness of long perpendicular rectangles, rounded edges, design of
the bottom of the middle button, and arrangement of the icon being violated (Lee, 2012;
Osborne, 2012). Apple also asserted infringement of patents, wherein Samsung violated a
photo-flicking patent and another patent that covered when you push an icon for a long time,
it can be deleted from the user interface (U.K. High Court of Justice, 2012).

On 29 June 2011, Samsung litigated against Apple regarding encroachment of its patents,
and also initiated a lawsuit in the International Trade Commission (The Economist, 2012;
Osborne, 2012). Samsung also started a lawsuit against Apple‟s use of 3G UMTS (Universal
Mobile Telecommunications System) in the iPhone 3G, 3GS, 4, and iPad 1 & 2 products in a
local court of justice in Paris, France in July 2011. Apple also opened a lawsuit regarding
prohibition of Samsung products in Australia.

In August 2011, Apple insisted that Samsung copied the iPad 2 when creating the Galaxy
Tab 10.1 (Osborne, 2012), so a German court recognised the claim of Apple. Thereafter,
Samsung withdrew that product and instead released the Galaxy Tab 8.9 in the IFA 2011
show (Brian, 2012). A Netherlands court recognised Apple‟s claim, but the court judged that
only photo flicking was copied. So Samsung removed photo flicking and then sold the
Galaxy S2 in the Netherlands. Nokia supported Apple against Samsung in 2012. In August
2012 in San Jose, U.S. District Judge Koh (2012) ruled: “Samsung was found guilty of
wilfully infringing on Apple's patent relating to scroll back, one for multi touch gestures, one
for zooming, a design patent and a patent related to icons.” Samsung were ordered to pay
6.2 billion pounds (Kessler, 2012). However, Samsung reinstituted an appeal to the court,
reducing the penalty to 450 million dollars (Gullo, 2013).

Summary of Lawsuits

Date Country (region) Process

15.04.11 U.S. (San Jose) Apple sues for infringement of patent(s)

21.04.11 Korea (Seoul) Samsung sues for infringement of patent(s)

Germany (Manheim) Samsung sues for infringement of patent(s)

Japan (Tokyo) Samsung sues, applying provisional disposition

16.06.11 Germany (Manheim) Apple sues for infringement of patent(s)

17.06.11 Japan (Tokyo) Apple sues for infringement of patent(s) and provisional
disposition
22.06.11 Korea (Seoul) Apple sues for infringement of patent(s)

23.06.11 Netherlands (Hague) Apple sues, applying provisional disposition

9
28.06.11 U.S. (ITC) Samsung seeks import prohibition of Apple products

29.06.11 U.K. (London) Samsung sues for infringement of patent(s)

30.06.11 U.S. (San Jose) Samsung files cross-action against Apple (15.04.11)

Netherlands Samsung sues for infringement of patent(s)

France

Italy

05.07.11 U.S. (ITC) Apple seeks import prohibition of Samsung products

28.07.11 Australia (New South Apple sues, applying provisional disposition

Wales)

04.08.11 Germany (Düsseldorf) Apple sues, applying provisional disposition

09.08.11 Germany (Düsseldorf) Galaxy tab 10.1 gains provisional disposition

24.08.11 Netherlands (Hague) Approval of 1 out of 10 patents

09.09.11 Germany (Düsseldorf) Rejection of protest Galaxy tab 10.1 provisional disposition

12.09.11 U.K. (London) Apple sues for infringement of patent(s)

16.09.11 Australia (New South Samsung sues for infringement of patent(s)

Wales)

05.10.11 France Samsung, applying provisional disposition (iPhone 4S)

Italy

13.10.11 Australia (New South Galaxy tab 10.1 provisional disposition

Wales)
Suspension of application of Apple provisional disposition
U.S. (San Jose)

14.10.11 Netherlands (Hague) Rejection of provisional disposition of Samsung

17.10.11 Japan (Tokyo) Samsung, applying provisional disposition (iPhone 4S)

Appeal Galaxy tab 10.1 provisional disposition

19.10.11 Processing of lawsuit

in 9 countries about 30
patents

2012 No second lawsuit war Suspension and waiting results

Source: author

4.3 Game Theory Strategies

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The game theory participants in this study were Samsung and Apple. Alternative strategies
was required by each in their selection.

Samsung and Apple have the same five alternative strategies against each other:

 One firm withdraws current processing of lawsuits against the other.

 One firm continues to process its lawsuits against the other.
 In the process, one firm recognises lawsuit judgment from judge.
 In the process, one firm continues to institute lawsuit against judgment from judge.
 When one firm withdraws or recognise judgement, its position:
1) Oppression
- It continues to press and threaten the other firm, such as through media,
marketing, products, and craft.
2) Softness
- It concedes and surrenders to the other firm to improve trust and relationship.
3) Collaboration
- It shares and develops technology patent(s) with the other firm for their
mutual benefit.

The outcome of these alternative actions will depend on Samsung‟s or Apple‟s decisions.

Many people have strong loyalties towards their favourite companies. These loyalties would
provide blind support favouring one company more than the other. Consequently, they want
their favourite company to win in a lawsuit. They think that if their favourite company wins a
lawsuit, that company‟s profits will increase and offer more benefits to them (Cornell
University, 2011, 2012).

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 4.4 Game Theory Outcomes Table - Samsung vs. Apple

Apple
Substitute
Processing Withdrawal

Samsung: Samsung:

1. Save possibility of technology 1. Selling of Galaxy series and

maintenance reduced variables in selling of next
generation products
2. Occurrence of financial loss
2. Exiting pressure of social
3. Fall in image because circumstances
customers cannot choose a
range of products 3. Loss of collaboration
Processing

Apple: Apple:

1. Possibly a monopoly in 1. Loss of monopoly in patents and

mobile market industrial standard

2. Secure higher position of 2. Sunk cost

competition
Samsung

3. Apparent limitations in next-

3. Pressure from competitors generation development

Samsung: Samsung:

1. Increasing market threat 1. Clearing up potential customer

dissatisfaction
2. Loss of patents and industrial
standard 2. Increasing financial liquidity

3. Economics of factories in 3. Loss of monopoly of patents

Withdrawal

regions will impact negatively

Apple:

Apple: 1. Obtain positive relationship

1. Leading standard mobile 2. Loss of monopoly of patents and

market industrial standard

2. Possibility of patent monopoly 3. Opportunity for collaboration

3. Achieve high ROE

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This game outcomes table shows that Samsung and Apple will obtain benefits or receive
damage depending on their selections. It is very complicated to compute the precision of
their mutual relationship. Therefore, the table shows the main benefits and damages and the
outcomes depend on four different conditions.

4.4.1 First condition

The first condition assumes that Samsung and Apple continue to pursue their current
lawsuits. In addition, they also continue to reinstitute lawsuits against unfavourable
judgements. Whatever Samsung sued Apple for during the lawsuit process, it can ensure
and exercise this right (Osborne, 2012; Williams, 2012). This means that this opportunity
dictates that Samsung can show its capabilities and that there is a possibility of possessing
patented technologies. However, Samsung should take note of its financial problems. This
means that negative judgements and extending the lawsuits will affect their financial balance
sheet (Fred, Certsen, and Cees, 2006). For example, Google has major financial problems
because it spent huge sums of money extending its market and obtaining positive platforms
against competitors (Jackson, 2012). Samsung will need to spend extra money on
extraordinary costs and investments due to increased lawsuit costs against Apple in many
countries. The patent bubble will also increase steadily.

Finally, Samsung‟s image will be worse because there is the possibility of reducing customer
selection (McNutt 2012; Osborne, 2012; Tam, 2012; Williams, 2012). A lot of customers and
potential customers favour Apple products because they respected Steve Jobs. However,
Samsung is acting against those customers. From 2011, Samsung instituted lawsuits about
sales prohibition of Apple products in many countries. This situation will tarnish Samsung‟s
image because if it wins against Apple, it will prohibit sales of Apple products. This means
that Samsung can protect its patents, but customers will suffer from a lack of “freedom of
selection” (Osborne, 2012).

Apple will get the opportunity to establish an industrial standard. Apple began lawsuits
against Samsung, Nokia and Microsoft because of its industrial standard. Microsoft created
the MS-DOS system and Windows programs, which are now industrial standards (Megee,
2012). Van and Chau (2012) pointed out that Apple also wants to create an industrial
standard through a monopoly of patents to reduce R&D costs and rental fees.

4.4.2 Second condition

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The second condition assumes that Samsung continue to pursue the lawsuits, but Apple
withdraws abruptly. Samsung can protect its sales rights and the sales market. But
unexpected country judgements threaten Samsung. Brady and Honey (2012) pointed out
that unexpected results create unstable circumstances, such as the sales market and sales
rates in factories, marketing, and employers. However, if Apple withdraws all lawsuits, the
Galaxy series and next-generation products will be less influenced on unexpected factors.
Therefore, Samsung could benefit from expected circumstances, wherein they can organise
liquidly and flexibly (Williams, 2012). This means that Samsung can get benefits from
expected variables without a lawsuit.

However, when Samsung solely continues to institute lawsuits, it will be pressured by social
circumstances such as clients and competitors (Steven, 2011). Samsung can get long-term
benefits from the maintenance of patents, but there are still a lot of people that remain
potential customers in the mobile market. Customers who want to buy Apple products will be
a dangerous factor for Samsung. In addition, continuing the lawsuit looks like oppression
posed without cooperation. This means that Samsung refuses collaboration with Apple, so
they will lose some significant opportunities (Cheng, 2012).

Apple will experience sunk costs such as for lawyers. This will negatively affect their balance
sheet. Another significant problem is that Apple will have limitations on the next generation
of products, so they may lose market share and huge profits. In addition, they will lose their
chance of becoming an industrial standard.

4.4.3 Third condition

This condition supposes that Samsung withdraws their lawsuits, but Apple continues its suits
against Samsung. Samsung does not sue Apple, so they will have prohibitions of their
products. This means that Samsung would give up capability and then essential give the
mobile market leadership to Apple. The U.K., U.S., Germany, Japan, Italy, France, and
Australia are extremely large markets that give many positive benefits to Samsung. If
Samsung gave up in these countries, they would have inefficient results such as rental fees,
sales transfers and weaknesses in patent rights and standards (Cheng, 2012).

After Samsung withdraws its lawsuits, it would lose its IT patent(s) rights against Apple. IT
companies can require fixed patent fees. Some companies have a lot of patents, which
means that these companies have core skills and high technology, and many companies are
using their patents. Actually in a California court, a judge accepted Samsung‟s patent of a
transceiver, rejecting Apple‟s insistence that Samsung abused a transceiver of Apple (Slivka,
2011; Brodkin, 2012). Now Samsung demands 2.4% of the net profit of iPhone sales to use

14
that data transceiver. This situation shows how patents can be used defensively in the
market (Brodkin, 2012).

On the other hand, Apple could create a mobile industrial standard, so it can easily enforce
its legal patents against other companies without Samsung. Patrick McNutt, who currently
teaches in Manchester Business School, pointed out that Apple can easily spread its
products with sustainable competitive advantage and build infrastructure around the world.
So Apple ensures the possibility of creating an industrial standard like Microsoft (McNutt,
2012). Apple will gain monopoly power and use this power to remove other companies.
Entner (2012, n.p.) claimed: "If Apple wins, they now go and knock on every door of a
company that builds a smartphone," which will negatively affect customers.

4.4.4 Fourth condition

This condition assumes that Samsung and Apple both withdraw their lawsuits. If they
continue to process their lawsuits, they will be pressured into spending huge amounts of
money in investments and extraordinary costs in the market. One company will probably be
hugely damaged from competition due to limitation of its resources (Tam, 2012). Therefore,
withdrawing the lawsuits will release them both from the prospect of a financial crisis.
Samsung could remove the threat to potential customers who like Apple products, and then
supply a wide range of its products to that market (Cheng, 2012; Slivka, 2011; Brodkin,
2012). Both firms would also have collaboration opportunities to improve their technology,
labour and R&D (Cheng, 2012). It is called the synergy effect.

Combinations of all four conditions show that there is not strictly a dominant strategy choice
for Samsung and Apple. This means that both suing and not suing will have advantages and
disadvantages and payoffs at the same time for Samsung and Apple (Cornell University,
2012). Consequently, there is not a best strategy choice that will offer one great payoff. All
aspects of the strategies should be identically considered.

4.5 Matrix of Game Theory Simulation

Apple

No suit Sues

No suit S+10, A+10 S0, A+15

Samsung Sues S+15, A0 S+5, A+5

(Source: Cornell University 2012)

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This table shows the random numerical results of a game simulation done at Cornell
University for the Samsung and Apple patent war. Samsung and Apple can earn profits from
selling their smartphones peacefully. However, when Samsung sues Apple and then wins,
Samsung gains extra profit from the sales ban. However, when Apple counterattacks
Samsung, they will spend a lot of money for lawsuits. Therefore, the earning is +15 instead
of +20. When both companies litigate each other, both cannot earn a profit. However, they
just spend -5 (15-10=5) of their profit, if both companies do not sue each other. Therefore,
they can earn +10 of profit.

This game simulation represents their situations in a simplified model. Since both companies
sued each other, they are spending money for lawyers to protect themselves. The dominant
strategy is suits seeking maximum profits because both companies feel they do not have
other choices. This situation (sues, sues) and profits are not changed in the short and long
term because both companies want to resolve the situation whether Samsung copied Apple
products or not. After finishing the lawsuits, Samsung and Apple will know that with
continued copying or not, which is more profitable in the future. Consequently, both
companies chose litigation in the present situation. The game simulation indicated that
withdrawing all legal actions (no suit, no suit) has the greatest potential profit of +20.
However in the current case, it is only +10 for each firm. This means that they do not care
about maximum profits; they only care for their own interest. Although the table show a
simple result with numbers, the real lawsuits mix advantages and disadvantages as well
(Cornell University, 2012).

Regarding Samsung and Apple, game theory also reveals its benefits and limitations. It is
believed that game theory explains their conflict of interest. However, this explanation does
not clearly show a solution and a correct direction. This is because game theory still has
limitations on finding which strategies and decisions are optimal in the real world (Rapoport,
1962).

It is difficult to ascertain their true behaviours because it is not certain whether their
motivation is product marketing or that they truly want to protect their rights. It is also difficult
to derive a numerical result with mathematic techniques. In this study, it was impossible to
interview the companies‟ bosses or senior managers to determine their future strategies and
behaviours. If it is possible to gain such additional information, it would provide clear results.

16
5 Conclusions

Samsung supplied CPUs to Apple. However, an extensive mobile market and development
of Android greatly affected the CPU composition. Apple did not order Samsung CPUs
anymore, instead choosing to cooperate with TSMC, which is a Taiwanese semiconductor
company. After this change, their competition increased dramatically. Samsung and Apple
sued each other over prohibition of sales of the Samsung Galaxy Tab 10.1 and iPhone 4S
smartphones. Each company is very sensitive to a reduction in their market share because
this situation would seriously affected their growth, profits and future investments.

When Samsung and Apple continued to sue, the possibility of guaranteeing different high
technology products increased dramatically, with Apple also gaining a competitive
advantage from guarantees of mobile communication and technology. However, both
companies will receive pressure from customers, other companies and variable factors such
as media. On one hand, if Samsung and Apple withdrew their lawsuits, although their
guarantee of high technology will be reduced, they could form other collaborations. For such
companies, information and technology are core to their business, and collaboration and
affiliation are alternative methods for improving the synergy effects with small resources. On
19 October 2011, Jea-Yong Lee, Managing Director of Samsung Electronics, mentioned
their attitude at Steve Jobs‟ funeral service. Lee (2011) pointed out that Samsung and Apple
are still colleagues and competitors, although they keep suing, and Samsung will expand to
supply parts of a mobile device in the long term.

Decisions based on game theory cannot make certain a win in the competitive market. This
means that game theory can only help to make the best decision. However, this decision
does not mean a win in the market. Although the game theory cannot guarantee a win, it can
function like a compass. If a company uses game theory correctly, this can be very useful.

17
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