HW’s and SW’s Profit Functions Each Period Depend Upon

• The portion of users who have adopted the new system during previous periods, that is, the installed base of users for the new system;
• The portion of users who adopt the new system during the current period, which will depend on the price at which HW chooses to set for new system hardware during the current period; and
• The portion of resources SW chooses to dedicate to the production of new system content during the current period.

HW's Profit Surfaces

HW’s profit surfaces indicate that

• HW’s profits will be low or negative during early periods of adoption, before many users have adopted the new system.
• HW will start to earn large profits only if and when there is a sufficient amount of content available for the new system.

SW's Profit Surfaces

SW’s profit surfaces indicate that

• During earlier periods

• SW’s profits will be higher when SW provides more content for the old system;

• As users begin to switch over to the new system, SW’s profits will decrease until a certain threshold of users have adopted the new system.

• During later periods, SW’s profits will be higher as more users and content switch over to the new system.