Thursday, March 16, 2006

Finding the Nash Equilibrium between INTEL and AMD

From Wikipedia: "In game theory, the Nash equilibrium (named after John Nash, who proposed it) is a kind of optimal collective strategy in a game involving two or more players, where no player has anything to gain by changing only his or her own strategy. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium."

Now, because of AMD's capacity contraint and Intel's technology lag, the Nash equilibrium is reached when INTEL reduces production and hikes prices to keep revenue constant. Basically Intel must allow AMD to take the additional market share.

If Intel tries to cut prices to a point lower than AMD's, it may gain back 1-2% of market share, but it will inflict massive revenue loss on itself.

AMD already runs into capacity contraint, lowering prices only lead to lower revenue, as it can't increase the units any more.

2 Comments:

Blogger Eddie said...

Did you read my article "
If there is a price war, Intel would give AMD a valuation of $190 per share
"?

In summary, a price war is ridicule because in the current situations, Intel would have to cease to earn $7 for each $1 that it wants to prevent AMD from earning. Giving the multiplier for Intel earnings, 14, 14*7 ~= 100 P/E for AMD. Using trailing earnings, that means $40, forward, $190

12:12 PM, March 17, 2006  
Anonymous Anonymous said...

What in the world is this sentence intended to mean? Aside from the all too obvious.

"AMD already runs into capacity contraint, lowering prices only lead to lower revenue, as it can't increase the units any more."

3:15 PM, March 17, 2006  

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