Economic Analysis of the Apple iPhone - Case Study Example

Economic Analysis of the Apple iPhone Number and Number Number of Words 266 Introduction Readily available in the Smart phone market, Apple’s iPhone is considered as one of the fastest-selling telecommunications product as part of the history. In February 2010, O2 announced that it had sold 2 million Apple iPhones in UK market since the product was launched back in November 2007 (ilounge 2010). As part of examining factors that has significantly created an impact on Apple iPhone’s economic behaviour, an economic analysis of the iPhone will be conducted by identifying the type of market structure that is best represents the market of iPhone in the UK market. The research findings will be thoroughly discussed in this report. Factors that has Significantly Created an Impact on Apple iPhone’s Economic Behavior O2’s Monopolistic Right in Terms of Exclusively Selling Apple iPhone in UK Market One of the main factors that enabled O2 benefit from its partnership contract with Apple is its exclusive right to sell Apple iPhone for a two year contract which ended only last September 2009 (Mobile Magazine, 2010). In line with this, the two year partnership contract that was granted to O2 enabled the company to dominate the market for Apple iPhone as a monopolistic supplier of the said mobile technology. Having a monopoly or exclusive right to sell Apple’s iPhone in UK market gives O2 the edge to earn more profit from direct buyers of iPhone who are willing to pay premium price for this particular mobile gadget (Blinder, Baumol and Gale 2001, p. 212; Binger and Hoffman 1998, p. 391). Since willing buyers does not have any choice but to purchase their iPhone from O2, the bargaining power of buyers is generally weak for them to demand a lower price for the said unit. For this reason, O2 as the single seller of Apple’s iPhone was enjoying the exclusive market power to dictate the selling price of the mobile gadget without the need to consider allowing demand and supply curve to meet in an equilibrium point which is commonly present in a market with perfect competition (Mankiw 2007, p. 313). (See Graph I – Supply and Demand Curve of O2 as Monopoly Seller of Apple iPhone below) Graph I – Supply and Demand Curve of O2 as Monopoly Seller of Apple iPhone Since a pure monopoly does not have price elasticity, it is normal for any firm that has monopoly power to have its demand curve that is slowing downwards (Mankiw 2007). It simply means that the only way for O2 to increase its sales is to lessen the market price of Apple iPhone up to the point wherein O2’s total market revenue is at its peak. Based on graph I, it is clear that the equilibrium point where MC and MR meet is the best market price wherein O2 will be able to sell the most number of iPhone with the highest total revenue returns (Mankiw 2007, 319). For this reason, O2 was able to have the benefit of maximizing the company’s revenue out of its two years partnership contract with Apple. Oligopolistic Market in Selling Apple iPhone in UK Market Since the two year partnership contract between Apple iPhone and O2 has ended back in September 2009 (Mobile Magazine 2010), other mobile copanies like Orange and T-Mobile are free to bid for Apple iPhone’s older 3G handset but will maintain O2’s exclusive right to sell Apple iPhone’s latest 3GS version. Specifically the presence of oligopolistic market in selling Apple iPhone within UK market will make it a change on the part of O2 to compete with the market prices offered by other networks aside from the tariffs (Mobile Magazine 2010; Doku 2009). Oligopoly is a type of market wherein there is a very few sellers who are selling the same product in a given market (Pride, Hughes and Kapoor 2010, p. 22; Mankiw, 2007, pp. 347 – 348; Blinder, Baumol and Gale 2001, p. 241). Since a market that is oligopoly has a very few sellers in a common market, there is a strong possible wherein these seller may end up lobbying or enter into cartel in order to protect their own self-interest (Mankiw 2007, p. 347). Even though there is a minimal chances wherein these few sellers of Apple iPhone would enter into business agreement with regards to how much they are willing to sell the product in UK market, these sellers are still most likely to pay close attention in developing new marketing strategies that will make their company maximize its annual revenues better than other sellers. For example: Given that Orange would decrease the market price of older Apple iPhone version by £10 per unit, there is a strong possibility that T-Mobile who is also selling an older Apple iPhone version would also decrease the market price of each mobile units by £10 just to make the company not lose its potential buyers to Orange. For this reason, the supply and demand curve of oligopolistic market is normally represented by a dual demand curve. (See Graph II – Supply and Demand Curve When the Market of Apple iPhone is Oligopoly below) Graph II – Supply and Demand Curve When the Market of Apple iPhone is Oligopoly Based on graph II, it is clear that market competition among the sellers within an oligopolistic market is possible since each seller would aim at keeping the most of the market share and total revenue as high as possible. Given that the sellers within an oligopolistic market can lead to market competition when it comes to dictating the market price of Apple iPhone, most of businesses that are part of an oligopolistic market would enter into cartel with other sellers in order not to keep the market price of older Apple iPhone models from losing its prestige and market value. Another possible market situation is when Apple would accredit more sellers in selling the iPhone would increase the market competition among the sellers. When perfect competition is present, the market price of Apple iPhone would likely to decrease over time (Mankiw 2007, pp. 346 – 347; Djolov 2006, p. 15). This type of market would eventually decrease the market value of Apple iPhone in UK market. This is one of the main reason why Apply company is selecting only a very few accredited sellers of Apple iPhone. This particular business strategy will preserve the prestige which enables Apple and its partners enjoy the benefit of being able to sell this particular mobile gadget at a premium market price as compared to other mobile brands and models. Conclusion Specifically the market structure of Apple iPhone within the market could significantly affect the market price of each product. Given that Apple was able to close a two year partnership contract with O2, O2 as the exclusive seller of Apple iPhone was able to fully maximize its potential earnings out of selling this product throughout the entire market in UK. Since the two years partnership contract between Apple iPhone and O2 has already ended, it is possible for oligopolistic market to be created in the near future. Creating oligopolistic market does not necessarily mean that the consumers will have the benefit of being able to purchase Apple iPhone at a very cheap price. Although there is a possibility for perfect competition to develop in the long-run, accredited sellers can still manage to convince Apple iPhone to maintain the exclusive rights of very few sellers to sell the product in order to preserve the prestige and market value of Apple iPhone. This is possible when the few accredited sellers in UK to convince Apple not to easily accept new accredited sellers in the market. *** End *** *** End *** References Binger, B., & Hoffman, E. (1998). Microeconomics with Calculus. 2nd edition. Addison-Wesley. Blinder, A., Baumol, W., & Gale, C. (2001). Chapter 11: Monopoly" (paperback). Microeconomics: Principles and Policy. Thomson South-Western. Djolov, G. (2006). The economics of competition: the race to monopoly. Binghamton, NY: Haworth Press, Inc. Doku, E. (2009, September 30). TG Daily. Retrieved December 6, 2010, from End of O2 iPhone monopoly is good news for UK users: http://www.tgdaily.com/consumer-electronics-opinion/44138-end-of-o2-iphone-monopoly-is-good-news-for-uk-users ilounge. (2010, February 4). Retrieved December 5, 2010, from O2: 2 million iPhones sold in U.K.: http://www.ilounge.com/index.php/news/comments/o2-2-million-iphones-sold-in-u.k/?utm_source=twitterfeed&utm_medium=twitter Mankiw, G. (2007). Principles of microeconomics, Volume 10. 4th Ediction. USA: Thomson South-Western. Mobile Magazine. (2010). Retrieved December 6, 2010, from Orange and T-Mobile to break O2 exclusivity on iPhone: http://www.mobiletoday.co.uk/Apple_to_break_iPhone_exclusivity.html Pride, W., Hughes, R., & Kapoor, J. (2010). Business. Mason, OH: South-Western Cenage Learning. Read More