The Evolution of the Smartphone Markets - Essay Example

? The Evolution of the Smartphone Markets The Evolution of the Smartphone Markets Introduction In the contemporary world Smartphones have become the necessity of life for millions of people (Molina, 2013:6). They actually fall under the category of differentiated products as most of them have similar features with very little variations. For instance, all the Smartphones are used for communication purposes but they all are available in different shapes, colors, battery time and other electronic characteristics. In addition to this, the different Smartphone brands are offering unique applications and ecosystem of software (Himmelsbach, 2013:3), for example Samsung has its platform of Android whereas iPhone uses the iOS operating platform but both the companies are able to provide distinguished features. This paper aims to discuss the evolution of Smartphone markets with reference to the model of monopolistic competition as it deals with the differentiated products. On the other hand discussion will cover the theory of network externalities because different Smartphone companies are offering entirely different operating platforms. More specifically the paper will discuss questions pertaining to the current competition in the Smartphone market and its potential to evolve in future. How Smartphone manufacturing firms will be competing over the time, what would be their business strategies, which of the firms are expected to rule the Smartphone market and how firms will generate profits in the long run? Markets of differentiated products are primarily dominated by competition over simple features and functions. However, over the time the nature of competition transforms and hence the competitors have to advance the operating platforms so as to gain competitive edge (Barrows, 2009:110). In broader terms it can be said that the evolution of Smartphone markets underwent two phases, for instance, the competition started with variations in the physical features and then it led to the significant changes in operating systems. Thus it is important to analyze this subject with respect to the above mentioned questions. In order to do this secondary data sources are used including books, journals and websites. Initially the type of market for which Smartphones are manufactured is specified. This is followed by the critical analysis with the help of economic models. The Monopolistic Competition Model It basically defines the first stage of the evolution of Smartphone market. It refers to particular economic setting where companies manufacture similar products with slight variations (Barrows, 2009:110). For instance, Smartphones are differentiated on the basis of functions, features, color, design etc. however, their fundamental purpose is to connect people and smooth the communication channels. Hence in this way the consumers are given an advantage of using the comparable products with some differences (Himmelsbach, 2013:3). One of the factors influencing monopolistic competition is elasticity which actually plays a major role in the overall evolution of Smartphone market. The demand cross price elasticity of two unrelated products is either zero or near to zero, for example, the increase in demand of water will have no impact over the demand of shoes. But when the nature of products is differentiated then the cross price elasticity has significantly positive results (Barrows, 2009:110). For example, the demand of Android phones impact the demand of iOS Smartphones. This can be further substantiated on the basis of the fact that differentiated products can be used as substituted and therefore the demand of one product directly influences the demand of its close substitute. The Theory of Network Externalities As the monopolistic market of Smartphones develops it enters into a phase where the economic profit of existing firms reduces due to the increasing number of firms. Hence the companies are then required to employ the theory of Network Externalities. Literally, network externalities relates to the extra benefits firms avail by altering the agent drivers or the operating platforms of their products (Bayer, 2008:2). Consider the case of Smartphones, as the iPhone I gained recognition in the market and new firms started producing similar phones then Apple updated the initial version with more advanced technology, new graphics and cell phone features. This has been done in order to secure the market share in the increasing competition. Firms operating in the Smartphone markets are extensively needed to comply with the technical standards while maintaining compatibility and increasing the efficiency of products in the long run (Lin, 2009:617). Moreover, they have to concentrate over the quality and pricing of operating platforms. The Core Business Strategies Companies manufacturing the differentiated products such as Smartphones must have core business strategies integrated with network externalities. Here, the firms are required to consider few important perspectives, for instance, the customers buy Smartphone only at the prices lower or equal to their value. This can be better understood as the basic human psyche which does not allow us to spend money over things which are less valuable. Furthermore, the case of Smartphone market evolution is particularly dependent upon the user-base i.e. the value customers are gaining in the form of advanced cell phone features (Lin, 2009:617). With reference to these concepts future firms dealing in Smartphone will have following business strategies (Smartphone Markets and Technologies, 2013): Introducing tipping point or the critical mass which related to the user-base of a Smartphone. It actually increases the value of product above the price. The firms would have to identify the dominant companies in the Smartphone market in order to successfully compete. This further refers to the development of such technical features which are nonexistent currently. However, the compatibility between the existing and new products should be very strong as it will give an edge to the competitive firms. Finally the firms would have to give extensive compensations to their customers so that they can easily leave the dominant firm in the Smartphone market. In addition to these, firm are needed to continuously develop their products while encouraging marketing and advertisement. This is necessary in terms of creating awareness about the differentiated features of their products. Smartphone Market Evolution through Economic Graphs Following graphs represents the monopolistic competition: The above figure depicts that monopolistic firms operate in a distinguished market and consumers do not have the exact substitute of their products. Hence the Smartphone manufacturing firms have a downward demand curve which is not very steep because of similar products in the same market. Another important aspect related to the monopolistic competition if that there are no particular entry requirements. Here, assume that the existing firms in the Smartphone market are making substantial profits but since there are no barriers to the entry of competitors therefore in the long run Smartphone companies would not be able to charge prices higher than their average cost. This is primarily because of the fact that new entrants will reduce the market share of existing companies while on the other hand the downward slopping demand curve will become tangent to the curve of average costs. Consequently, the presently operating firms would not be able to earn the economic profits in future. This is further illustrated in the following graph: In future the demand curve of Smartphones is expected to move leftwards because of the highly monopolistic competition which allows a great number of new entrants in to the market without any restrictions. Hence it is more feasible for the Smartphone manufactures to stay in the short run position through continuous innovations and improvements. This eventually leads the Smartphone firms to compete over the operating platforms which basically initiate the second stage of Smartphone evolution. Conditions for single or few firms’ domination In order to rule the Smartphone market while generating significant profits, firms are required to comply with the following conditions (Grimm, 2006:31): Internetwork externalities It refers to the close association between different operating platforms. The better is the relationship of platforms the higher is the probability of the firm in regard to rule the market. This is because the installed base increases the value of products over its price which significantly influences customer to buy it. Economies of Scale The economies of scale successfully reduce the competition for bigger firms which are readily equipped to supply product in larger quantities. This also includes the smooth supply chain networks, distribution channels and the overall sales objective. Platform Differentiation Smartphone firms would have to increase the differentiation between their products and its close substitutes. This can be done through effective advantages such as cell phone applications and online software. Switching Costs This actually creates problems for the firms because if it is easier for the consumers to switch from Android to iOS then companies such as Samsung cannot rule the Smartphone market. Conclusion The evolution of Smartphone markets can be widely categorized into two phases. The first phase deals with the monopolistic competition where firms manufacturing differentiated products compete with one another on the basis of physical features or slight variation. However, in the long run these firms start losing their profits due to the new entrants. Hence they need to step into the next phase i.e. the application of theory of network externalities. This signifies that Smartphone firms are required to continuously improve their operating platforms and the user interface. Moreover, in the long run they would have to employ different business strategies while increasing the value of products above the price. This is important to dominate the Smartphone market while generating maximum profits. References Barrows, D & Smithin, J N 2009, ‘Fundamentals of economics for business’, Captus Press, Concord, Ont. Bayer, RC & Chan, M 2008, ‘Network Externalities, Demand Inertia and Dynamic Pricing in an Experimental Oligopoly Market’, University of Adelaide University, Australia, viewed 11 December 2013, < https://economics.adelaide.edu.au/research/papers/doc/wp2004-08.pdf> Grimm, C M, Lee, H, & Smith, K G 2006, ‘Strategy as action competitive dynamics and competitive advantage’, Oxford University Press, New York.  Himmelsbach, T 2013, ‘Survey on today's smartphone usage’, Grin Verlag, [S.l.]. Lin, F & Ye, W 2009, ‘Operating System Battle in the Ecosystem of Smartphone Industry’, Information Engineering and Electronic Commerce, vol. 6, no. 9, pp. 617-621. Molina, M & Jones, G 2013, ‘The Mobile Economy’, A.T. Kearney, pp. 4-99. Smartphone Markets and Technologies 2013, NGT Research Series, Sweden, viewed 11 December 2013, Read More