Factors Influencing The Price Of Mobile Phones In A Free Market

Describe the factors that determine the price of mobile phone devices in a free market. In recent years, the price of an average mobile phone has continued to fall even in the face of increasing demand. Explain with the aid of a diagram how this has occurre?

In the world of innovation and advancements, the expansion and growth of the mobile phones and technologies has come up to the forefront and gained huge attention and recognition due to dynamic variations in the need and preferences of the consumers. Amid these advances, cell phone devices have come up as one of the fastest adoption rates at the household level given for any technology that exist in the history of today’s modern world. In fact, cell phones form a major part of a human life and important instrument of communication at today’s time. In the highly competitive international as well as domestic markets, sellers are relentlessly combating with its fellow sellers or competitors to gain a competitive advantage over the other (UKEssays, 2016). They come up with various different differentiation strategies in order to woo and persuade their consumers to choose their brand in place of its competitor’s good.  The review of literature shows us that various studies have been conducted to identify the factors that influences consumer’s decision thereby making their companies superior than their opponents. (Ekekwe and Ndubuisi, 2012)

Throughout the world, choice of consumers, with regard to the mobile phones, are greatly influenced by varied factors. Such elements could be associated with the characteristics of the buyer and/or the features connected with the mobile phones. This induces firms in the mobile industry to come up   with different series and models with some or the other unique feature in every set. In fact, empirical studies have been conducted to study the factors that influence the decision of the consumers with regard to the choice of mobile phone. Some of the few factors are cost, features, excellence, brand name, sturdiness, social factors etc (Sata, 2013).

There has been worldwide decrease in the price of the mobile phones.  As per the predictions of the IDC report, it forecasts that the average selling price of I-phone is $657 and it’s going to further plummet to $604 by 2018. Android phones have launched high as well as low end phone in order to capture greater size of the market with the falling price. However, this declining price is should not be understood as a falling quality of the phones. With the improved technology and better production inputs, firms in the mobile industries are coming up with extremely affordable models of the cell phones that offer decent features, catering to the needs to the various section of the society. The report further suggests that in the near future, there will be a huge shift from basic sets to an affordable smartphones. Further, it is predicted that major demand is expected to come from emerging markets of the world such as India, Indonesia and China. Following diagram shows the geographic-wise share of the smartphones between 2012 and 2018. It is very clear that the Asia Pacific and China, the emerging markets are the ones who would capture the major market presently as well as in the future. It is also seen that there has been declining trend of the mature markets like US in the market share of the smartphones. It is because of these reasons that lower-end smartphones are likely to be the major drivers of the growth for mobile phones in the developing countries (Hamblen, 2016).  Moreover, the diagram shown below also displays increasing trend in the mobile phone subscriptions in UK. It also reveals that even though the demand for such a good has been satiated in their country, they continue to supply the handsets in order to capture market at the international level. Hence, it is very obvious to them that their price must also internationally competitive and extremely affordable to its buyers as they are the emerging markets with comparatively less real disposable income in their hand. Therefore, in this essay, an attempt has been made in order to understand the factors guiding the demand and supply of mobile phones in the domestic as well as international markets. It even attempts to explain graphically about the impact of the each factors on the demand and supply curve and ultimately on the equilibrium price and quantity. The study looks into the factors from demand-side and supply-side individually. At the end, it explains how exactly the market behaves in the event of such factors when brought into force (Hamblen, 2016).

Analysis

In case of mobile phone industry, we understand the prices of the mobile phones are falling in spite of the increase in the demand for the mobile phones.  This is contrary to what law of demand and supply explains to us. Here, we assume that all factors are constant except price affecting the demand and supply of the mobile phones. However, in real life, there are in fact various factors that affect the level of quantity demanded and supplied to its customers. And, when this happen, we cannot assure that the law of demand and supply would behave normally under the given circumstances. In fact, it is bound to behave in the opposite way. It is why, we are observing falling mobile prices in the face of increasing demand. We would examine few of the factors affecting demand and supply of the mobile phones. This would show how demand and supply of mobile phones affects the quantity demanded and supplied and its impact on price of the mobile phones (Economicshelp.org, 2012).

The supply-side factors affecting the sale of the mobile phones are as follows:

Input prices are an important factor determining the cost of producing the mobile phones. In case of rise in the price of the inputs, production cost would also rise and thus quantity available for sale would reduce. For instance, if a firm is using a small quantity of   gold or silver in producing a phone and its cost increases, producers would not be interested to produce a higher quantity and thus supply would fall and price would increase. On the contrary, when the input prices fall, quantities supply increases Thus, marginal costs are greatly reduced and subsequently supply is augmented. Therefore, there is an enormous drop in price and quantities transacted have ascended intensely.
Therefore, a decline in input overheads changes the supply curve rightward from S1 toS2 thereby increasing the equilibrium quantity from Q1 to Q2. Thus, it causes decrease in the price from P1 to P2 (Mankiw, 2007). .

There are various factors other than price influences the number of sellers that operate in the market to change and thereby alter the supply curve of the mobile phones. For instance, let’s presume that producers of mobile phone must follow a stringent licensing rules and if these rules are relaxed, it will be easier for more companies to enter the market and supply a particular number at each given price (Karjaluoto et al., 2005). This would cause increase in the supply, from S1 to S2, of the mobile phones in the industry, thereby causing a fall in the price from P1 to P2 and increasing the quantity supplied ( Parkin, 2013).

Better technology permits companies to produce more competently with less resources to create a particular good. This way, production costs are lowered and so producers would be willing to increase the quantity producers supplied at each price. Enhanced technical know-how had a significant role in the altering the attractiveness of cell phones. With the increase in the technological improvement in the production of displays, arrays, and mobile networks as well as in the processing of electronic data has jumped frontward, there has been fall in the cost of making a phone. As a consequence, manufacturers are nowadays keen to provide additional cell phones at lesser prices.

Any change in the other factors other than price affects the level of the quantity supplied at any given price. An improvement in the technology that decreases the cost of production would lead to the increase in the supply curve, causing a shift from S1 to S2, thereby making it available to the consumers at a cheaper price. More mobile phones would be available to be sold at each price than before ( Pindyck and Rubinfield, 2004). 

Following are the demand-side factors impacting the sale of the mobile phones:

Another factor that impacts the demand for mobile phones is the price of the related goods. The goods can be substitute or complementary goods. Goods are called substitute when they can be used in place of another goods like tea and coffee. Complimentary goods are those which can be used together like a pair of socks. However, there is no close substitute for mobile phones. In fact, it has comparative advantage over fixed landlines. Therefore, if the demand increases, the demand curve shifts to the right.  In many developing countries, the cost of obtaining a fixed-line is very high and this could be the reason behind a rapid increase in the demand for the mobile phones.

These are the likes or dislikes that induces persons to be more inclined towards a particular good. At any price, some consumers derive more utility from a mobile phone than others. For a field executive, keeping a two handset of mobile phone is essential whereas, for many, a single set of mobile phone is sufficient. Moreover, the need of a cell phone was further increased due to the anti-social crime that takes place in the country in order to ensure that their family members are safe (Sata, 2013).

This is another important factor determining the level of quantity demanded of a mobile phone. For many goods, we observe that there is a direct relationship income and quality and quantity of the product he buys. Since cell phones are normal goods, its demand is likely to increase with the increase in the income. It is quite likely that a person with higher income would opt for higher end model than a basic model of mobile hand set. His ability and willingness to pay for a cell phone would determine his choice. It is also possible that there would some section of people for whom it will be not possible to buy a phone unless their income is increased. Thus, higher the level of disposable income available with the people, greater will be the demand for the particular type of a handset. Therefore, a cell phone is a normal good (Reaz Uddin, Zahan Lopa and Oheduzzaman, 2014; Mankiw 2007).

Given the factors affecting the demand and supply of the mobile phones, we see that the supply curve has increased from S1 to S2 and demand curve has also increased from D1 to D2, causing a fall in the prices of the smartphones. This is illustrated in the following diagram. In the below diagram, D1 and S1 are the initial demand and supply curve and P1 and Q1 are the initial equilibrium price and quantity. After taking various characteristics influencing the demand and supply of the smartphones, we observe that there is a fall in the equilibrium price and increase in the equilibrium quantity.

Source: https://www.economicshelp.org/blog/6279/economics/falling-price-of-mobile-phones/

Conclusion:

It is very evident from the report that there has been universal fall in the price of the mobile phones irrespective of the increasing demand throughout the world. In fact, we observe that the traditional law of supply does not hold good here in these circumstances as the sellers are providing more even the lower price which is contrary to what law of supply tells us. It says that as the prices increases, the supply of the goods by the producer also increases, given other things are constant. But practically, in real life, we cannot keep other factors constant. These factors are bound to impact the behaviour of the sellers which is quite evident in case of the mobile phones industry discussed above. The factors discussed does influences the behaviour of the sellers. Moreover, the demand curve represents the relation between price and quantity demanded keeping other factors constant. But actually we see that there are factors that do affect the demand for the product and in the report; we have seen how these factors impact the demand for the mobile phones by increasing to a greater extent. In fact, as per the reports, it is expected that this trend is likely to continue in the near future and we would further face a drop in the mobile phones and increasing demand and supply of it (Abraham, 2007; Mankiw , 2007) .

References

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Ekekwe, N. and Ndubuisi, N. (2012). Disruptive Technologies, Innovation and Global Redesign: Emerging Implications. USA: Information Science References.

Hamblen, M. (2016). Smartphone prices are dropping, and will continue to dip through '18. [online] Computerworld.

Available at: https://www.computerworld.com/article/2489944/smartphones/smartphone-prices-are-dropping--and-will-continue-to-dip-through--18.html [Accessed 7 Feb. 2016].

Karjaluoto, H., Karvonen, J., Kesti, M., Koivumäki, T., Manninen, M., Pakola, J., Ristola, A. and Salo, J. (2005). Factors Affecting Consumer Choice of Mobile Phones: Two Studies from Finland. Journal of Euromarketing, 14(3), pp.59-82.

Mankiw , G  , “Economics: Principles and Applications”, 4th edition South Western, Cengage Learning India Private Limited. (2007).

Parkin, M 2013, Microeconomics,  11^th edition, Prentice Hall.

Pindyck, RS & Rubinfeld D. 2004. Microeconomics, 6^th edition,Prentice Hall.

Reaz Uddin, M., Zahan Lopa, N. and Oheduzzaman, M. (2014). FACTORS AFFECTING CUSTOMERS’ BUYING DECISIONS OF MOBILE PHONE: A STUDY ON KHULNA CITY, BANGLADESH. International Journal of Managing Value and Supply Chains, [online] 5(2). Available at: https://airccse.org/journal/mvsc/papers/5214ijmvsc03.pdf.

Sata, M. (2013). Factors Affecting Consumer Buying Behavior of Mobile Phone Devices. Mediterranean Journal of Social Sciences, [online] 4(12). Available at: https://www.mcser.org/journal/index.php/mjss/article/viewFile/1787/1791 [Accessed 10 Feb. 2016].

UKEssays, (2016). Why the price of computers keep falling despite increasing demand. [online] Available at: https://www.ukessays.com/essays/economics/why-the-price-of-computers-keep-falling-despite-increasing-demand-economics-essay.php [Accessed 10 Feb. 2016].