Entry into the Smart Phone Market… Downturn for Apple?

Competition in the electronic sector may bring about lower tech prices across the board or lead to two different pricing models within the industry. Apple products controlled most of the market share of smart technology; yet, now stock prices fall out of fear that new Indian and Chinese producers have entered the market with lower marginal costs to production.Monopoly

With the entry of these new producers prices are expected to fall; marginal revenue should shift closer and closer to the demand curve until  eventually they are one and the same. If this occurs, MR=MC for profit maximizing firms.

New Entry

 

As the graph I drew shows, entry into the market leads to prices falling and quantity produced increasing over time. Apple’s CEO argues against this happening to Apple. Apple foresees two markets developing. Apple views the market splitting into a cheap “junk” end of the market and the high end “added value market”. Brand names can keep companies from entering the market and Apple hopes to do this. Quality, customer support, and environmentalism could keep Apple from being overtaken in this “added value market”. Apple expects to loose their customers who focus on price but retain those consumers whose preferences for quality outweigh the difference in cost between companies. Even within this “added value market” Apple is no longer alone. Nokia, Motorola, and Microsoft likely will move into this section of the market and factor in to Apple’s pricing strategy.

Works Cited

http://www.businessweek.com/articles/2013-09-19/cook-ive-and-federighi-on-the-new-iphone-and-apples-once-and-future-strategy#r=rss

3 thoughts on “Entry into the Smart Phone Market… Downturn for Apple?

  1. One question about the model. Why is it that marginal revenue is shifting towards demand? I don’t think that assertion is consistent with the model of monopolies that we learned in class. When price is driven down by competition, it forces monopolists to set lower prices on their goods, so that eventually p=mc. At this point, the company is forced to sell at p=mc=d to stay competitive. It is true that the profit maximizing firm will set mr=mc, however in a perfectly competitive market the firm does not have the power to do this. Lastly, mr is always going to be lower than price, because to sell one more unit of a good the price must be lowered. Therefore, when p=mc=d, this cannot also equal mr, because p cannot equal mr. Please correct me if I’m wrong!

    • No, the drawings are wrong in that aspect: there’s nothing in the story to suggest a change in Apple’s cost structure. So the graph should be redrawn with more elastic demand at any given price [= a flatter D curve].

  2. First, a technical detail: you drew the new price in the region where marginal revenue is negative. Unless firms make a huge mistake in pricing, we’d never expect to see this in the real world, and preclude it in our empirical one.

    Now for a substantive issue. your story has two components (neither reflected in your graph), new entrants with lower MC and Apple facing lower demand. For the latter, you should conceptually show demand getting flatter, and that leads to lower prices and lower margins. But how flat? And that provides no direct way to reflect a change in MC.

    So a second substantive issue: why would the new entrants have lower MC? They will have to go to Corning for gorilla glass (or use much lower quality alternatives). They have to go to one of two suppliers of touch-screens. Chip suppliers are limited in number, too. Apple already has their iPhones assembled in China, so new entrants won’t have lower labor costs. So it’s not at all clear that new entrants would have lower costs, indeed given low volumes they might have to pay more for components and have higher costs and/or much less capable, lower quality phones.

    On the other hand, at one point Apple had 60% gross profit margins. Who cares about costs?!

    In any case, this is a good example, one we’ll analyze in the next couple weeks.

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