Expenditure on Mobile Phones - Essay Example

Expenditure on mobile phones Table of Contents Introduction 3 Trends in mobile phone usage 3 Trends in Australia 3 Trend in US 4 Factors affecting individual decision making in choice of phone brand and plans. 5 Factors affecting individual decisions about mobile phone plans 7 Conclusion 10 References 11 Introduction Mobile phone usage has drastically changed owing to the technological substitution. Changing technology has driven and influenced customer tastes and preferences. This has also led to different pricing strategies of mobile phones which have affected the demand. The growth rate of consumer income level is another factor that has driven the change. Increase in income positively affects the disposability and the real income of the consumers. Thus, all the factors above influence the consumer decision making regarding purchase of mobile phones and various mobile usage plans i.e. rates and tariff. The behavioural pattern is more obvious in groups of consumers than in individual consumers. Trends in mobile phone usage Trends in Australia The mobile phone market is expected to grow by 2% in retail volume compared to its review period which witnessed a 40% growth in the earlier period. Owing to the already high penetration rate of mobile phones in the household sector which accounts for 261% in 2013, the future CAGR of the mobile phone market is expected to remain low. Australia experienced a high penetration rate in mobile phone usage. The household penetration of mobile phones grew owing to the rise of smart phones. Consumers in Australia had the tendency to retain the old phones for spare use. This also led to the high penetration rate of mobile phone usage. This trend was observed more in case of simple mobile phones, but in case of smart phones the scenario was different. Smart phones were evolving at a high rate and consumers were less inclined to retain it for spare use as it failed to match the superior performance and feature of the new smart phones. This led to the drop in the penetration rate of smart phone in the Australian market. The penetration rate dropped from 86% in 2010 to 33% in 2013. Samsung retained its leader position in the smart phone market in Australia with more than 32% retail market share. 1 Trend in US The smart phone market in US has shown significant growth owing to the existence of low value contracts of older models of smart phones. The total shipping value in units for smart phones accounted for 134 million units in 2014. It witnessed an annual growth rate of 9% in the smart phone market in 2013 and an absolute growth rate of 37% from 2008 to 2013. The smart phone industry in US has observed the shift more in case of low priced phones than high value phones. The key focus was on volume and not on value. This was mainly observed when retailers in US offered smart phones for a contract of less than $200 for two years. The older version of the smart phones like Apple’s iphone captured new markets which were not accessible owing to its high priced products. Apple continued to be the leading player in the US smart phone market with a market share of 42% in 2013. Its retail volume also expanded which accounted for 51 million units in 2013. Apple has successfully captured a new market with the launch of its new product i.e. iphone c. Owing to its plastic body and colour variants, the demand for the product grew. The customer base widened for many other players in the US market like Samsung along with Apple’s. 2 Factors affecting individual decision making in choice of phone brand and plans. The consumer behaviour of mobile phones and tariff are highly influenced by the purchasing power, real income which indicates any price changes and technology substitution. The above economic metrics will help in explaining the behavioural pattern of the consumers in case of buying smart phones and subscriptions of mobile plans. Figure 1: Indifference map of smart phone and tariffs The above figure shows the indifference map which comprises three indifference curves. According to the theory of indifference curve consumers will buy mobile phones and subscriptions in quantities that will give them the highest utility. The utility in this case refers to the multi features of a smart phone and the extra data usage at lower tariff. Consumers will choose the bundle of commodity which will give the maximum utility. In order to have the same utility consumers will substitute a high end phone, but will sacrifice on their tariff usage to maintain the same level of utility. All such combinations of mobile phones and plans are subject to a constraint called the budget line. The budget line is the funds that are available to a consumer to make the purchase of commodities. From the above figure consumers will prefer the indifference curve that is furthest from the origin i.e. I3 as this would give the maximum utility. After the introduction of budget line consumers will purchase mobile phones and subscriptions that will be equal to their budget but at the same time provide high utility. Thus, a situation of optimality will be achieved where the budget line will be tangent to the indifference curve. The point where it will be tangent will provide the maximum utility with the combination of mobile phone and tariffs.3 The figure of budget line is provided below. Figure 2: Consumer budget line Another theory that also explains the consumer buying behaviour in case of mobile phones and mobile plans is the marginal rate of substitution. This explains how much one commodity the customer is willing to sacrifice to buy another commodity.4 With internet tariffs coming down, consumers are ready to sacrifice more of their subscriptions to buy high end smart phones. Mobile phones are not only symbolic of a fancy item, but through its varied usage it has become necessity in the modern world across all age groups. Thus, consumers are willing to sacrifice their old brand of phone for a new one with better added features and performance. The marginal substitution for smart phone is higher relative to the mobile phone plan. 5 Figure 3: Marginal rate of substitution for mobile phones The above figure shows the marginal rate of substitution for mobile phones and mobile plans. It shows the relative degree of willingness of consumers to sacrifice lower end smart phones for higher end phone brands. Factors affecting individual decisions about mobile phone plans My decisions about subscribing mobile phone plans are influenced by my level of income or my purchasing power. My demand for mobile subscriptions would change with respect to the change in tariff or with my level of income. This purchasing behaviour can be explained with the microeconomic theory of individual demand curve and Engel curve. 6 Figure 4: Individual demand curve The above figure shows the individual demand curve for mobile plans. Price and the quantity of subscription are inversely related. If the tariff rises I will reduce my subscription value. I will substitute lower packages with lower data plans and on the contrary if price reduces I will subscribe a higher data plan. If the tariff rates fall I might as well switch from prepaid plan to a rental plan. I might also avail higher tariff if the prices fall in order to cut my call rates. The fall in rate increases my purchasing power i.e. the lower price will allow me to subscribe more from the current plan or I might even move to a higher plan. 7 Thus an individual demand curve is downward sloping owing to the negative relation between price and quantity demanded of a particular commodity or a service. The price quantity relation is quite likely in the case of mobile phone plans as described above.8 Though price is not only the factor that affects the demand of the service, but the income level of individual consumers also affects the demand of mobile plans. This behaviour has been well described by the Engel curve. If my income level rises I will spend it more on buying high end phones and a high value tariff rather than spending it on necessity items like food. My incremental income would be spent more on purchases of high value subscriptions of mobile plans and high end phones. Engel’s law describes that with the rise in income individual consumers and families would spend more on luxury items than on necessities. He also introduced the standard of living of the families where a poor family with rise in income level would spend more on necessities than on luxury and a rich family would spend more on luxury items than on necessities.9 Figure 5: Engel curve The above figure shows the Engel curve. The X axis denotes the quantity consumed/purchased and the Y axis denotes the income of families and individuals. 10 Conclusion External factors like market price, income level, consumer budget are key factors that influence the buying pattern of consumers regarding purchase of mobile phones and mobile plans. Though there are other factors that affect the buyer’s black box that precipitates in varying buying decisions. Other factors include motivation, societal influence, perception, belief, personality, brand loyalty, etc. All of these factors are considered to internal influencers that affect the buying behaviour of consumers. References "Mobile Phones in Australia." Global Market Research and Analysis for Industries, Countries, and Consumers. Accessed May 16, 2015. http://www.euromonitor.com/mobile-phones-in-australia/report. "Mobile Phones in the US." Global Market Research and Analysis for Industries, Countries, and Consumers. Accessed May 16, 2015. http://www.euromonitor.com/mobile-phones-in-the-us/report Arnold, Roger. Economics. USA: Cengage Learning, 2008. Chakravarty, Satya. Microeconomics. New Delhi: Allied Publishers, 2002. Kreps, David. Microeconomic foundations I: choice and competitive markets. USA: Princeton University Press, 2012. Mankiw. Principles of economics. USA: Cengage Learning, 2014. Nicholson. and Snyder, Christopher. Microeconomic theory: basic principles and extensions. 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