Question

“IBM is investing $3 billion in a private-public partnership with New York State, Global Foundries, Samsung and equipment vendors,” to create ultradense computer chips (John Markoff, New York Times, July 9, 2015).

TOTALLY MADE-UP SCENARIO: Suppose that during their affiliation, Samsung has paid IBM $200 million for creating a special version of these ultradense chips for Android products. Suppose further that the contract included certain requirements for size, speed and other qualities. Then suppose that after beta testing these chips, Samsung claimed that IBM’s efforts failed to live up to their contractual agreements.

1. Was either party earning rent? What assumptions do you have to make to assert this?

2. Was either party earning quasi-rent? What assumptions do you have to make to assert this?

3. Could IBM have held up Samsung? And/or could Samsung have held up IBM? Explain.

Answer 1

The concept of Rent and Quasi-Rent

Rent, according to economists Marshall and Ricardo is the extra earning realized in excess of attainable opportunity cost. IBM is receiving rent from Samsung for the creation of ultra-dense computer chips specifically tailored for android systems; since, IBM is receiving earning above the expected opportunity cost. Assumption, the demand for ultra-dense computer chips is perfectly inelastic; the ultra-dense computer chips are only used for one function; and lastly, the quality of ultra-dense computer chips differs.

Quasi-rent is paid by Samsung to IBM so as to be provided with ultra-dense computer chips tailored to suit android systems. Assumption, the demand for ultra-dense computer chips for android systems is only short-term; inelastic supply of ultra-dense computer chips for android system; and lastly, the ultra-dense computer chips are man-made appliances.

Samsung held up IBM because the latter had to make addition ultra-dense computer chips for android systems that possessed all of the features (e.g. size and speed) as requested. Furthermore, it can also be considered from a contractual stance that IBM held up Samsung in the sense that the latter was relaying on the new ultra-dense computer chips to release its new line of android devices i.e. smart-phones and tablets.