Discuss about the Oligopoly Market In America Mobile’s Industry.
Oligopoly is a market structure where only few firms dominate over entire market. When a market distributed or occupied by few firms, it is called highly concentrated. As in oligopoly only few companies control the market but still some small firms operate in market ( Lipsey & Harbury, 2004, pp 340-400). Oligopoly is in existence over the world and seems to increase many folds over coming years. In oligopoly firms also bases their market policies on anticipated behaviour of its close rivals.
America smartphone industry: The smart phone is dominated by very few companies, the most two popular are Google Android and Apple iOS. Apple (I phone) is one of the worldwide leading industry bringing overwhelming gadgets often. By continuous invention, Apple generated a very rare series of creative mobile design and style.
Analysis of Apple on various market factors:
Number of buyers and sellers: Oligopoly has few sellers and acquires a significant share in overall market. Over past few years Apple has occupied dominant market share due to its visionary and new way to do business (Natanson, 2016). It is preventing other small competitor to enter market. In oligopoly there are few sellers on supply side but large number of buyers on demand side. Each buyer makes a negligible contribution on market demand. A buyer will accept market condition as present but a seller will be guessing the change in behaviour to be expected from rival sellers.
Type of product: Under Oligopoly market a firm also produces heterogeneous products as well. In this type of oligopoly producers supplying shopping good such as mobile, refrigerators, and so on are covered. One root cause for this influence is increasing returns to scale( Mazzeo, 2002, pp 21-42). This can be defined as rate in which rate of output is superior to rate on increase in input. It implies that large firms enjoy this benefit due to their long term presence and face lower cost at higher production as well. Mobile is less frequently purchased by a customer so before taking decision he will go for information available in market and alternatives. In case of Apple the customer will before purchasing mobile will analyse and compare with another brand as well.
Entry and exit barrier:
Entry barrier: If a market has major economies of scale which has been oppressed by present firms, then it is very difficult to enter market. In case of Apple Inc., as it already has achieved economies of scale so new entry are reluctant to enter (Vives, 2001, pp 240-280)
Network effects: As in case of apple already it covers significant- users so new entrants will be failing to gain sufficient number of users to have a network effect.
Copyright or patent: It gets difficult for a firm to enter in a market due to limited resources and if present firm gains copyright over that. In case of Apple, as it does not share its software in any form of contract to other firms so they have a greater control over market.
High R&D cost: Whenever a new firm enters it observes the spending on R&D of existing firm. In order to compete new companies should exceed this limit and hence is treated as barrier to entry. In case of Apple, it is already spending huge amount on R&D for its new launches. For a new firm to enter it is very difficult to compete Apple.
Exit cost: It can be defined as different cost paid by firm in advance to employees, suppliers and so on. So exiting the market is more difficult.
Legal Procedure: Sometimes procedure for exit is compels a firm to remain in market even though incurring losses. It happen when government put some procedural steps to follow and firm present condition does not allows it to fulfil.
Short run vs. long run profit:
In short run: As the number of firm is limited, profit earning totally depends on its costs and revenue. In short run due to presence of less number of firm can earn large, small, no profit, no loss and so on and it may continue to do so. In case of Apple in short run it can earn profit according to its policies like high, low or no profit. It happens as no close rivalry is present in market and buyers are ready to buy the product at price determined by them.
In long run: Due to various entry barriers like economies of scale, high R&D cost and so on, allows branded firms to earn profit in long term (Hall, &Lieberman, 2008, pp. 230-240). In case of Apple, profits rate expects to be higher as very few firms are in competition up to the level of Apple. Apple is treated as brand and no other firm will be having economies of scale for price so people in long run also will be diverted toward Apple only.
Price determination by firms:
If an industry comprising of little firm each selling homogeneous products and having a significant area of total market then the price policy of each is surely to be affect by action of other, and then firms try to promote collusion (Friedman, 1983, pp 170-200).
Apple comes in context of heterogeneous product, so for heterogeneous product a firm can take price according to his policies. Apple can raise or lower its price as well without having fear of losing its customer to others. It will not affect its price due to actions of rivalry as well.
But for oligopoly market their does not exist a perfect theory to determine price and output in market. Different models like Cournot Duopoly model, Bertrand duopoly model and so on also been developed on some assumptions about reaction of other firms.
Price determination models of oligopoly:
Kinked demand curve:
It explains non-collusive oligopolistic industries in which there are rare frequent changes in prices of products. The curve’s assumption is that the kink in curve is compulsorily at ruling price. The reason being in case of Apple is that it supplies an important share of product and has a significant influence in prevailing price. Under oligopoly firms has two options:
Increasing price of product: Each firm present is aware about fact that increasing price of product means losing customer to its rival. In that case upper part of curve is more elastic than the lower part of kink.
Decreasing price of product: In that case, total sale of firm will definitely increase but cannot go to high level due to existence of rivalry firm. If rivalry firm make large price cut than the firm who initiated it, then the firm will suffer a huge dip in sale. In oligopoly firms rather than going for price cut prefer to compete over other factors like quality, product-design, discount, gifts, offers and so on (Bloch, 1995, pp. 16-29).
Figure 1: kinked demand curve
Source: (Johnston, 2015)
Price leadership model: Under this model, one firm assumes the role of a price leader and determines the price of product for whole industry. The firms present other than deciding one simply follows the price decider and accepts the rate and output accordingly. It happens when price leadership is determined as a conclusion of price war between firms and one come out as leader.
Figure 2: price leadership model
Oligopoly would like to act as monopolies but their self-interest factor brings them closer to competition. Thus oligopolies can end up defining as monopolies or competitive market but some factors like number of firms, cooperation between them, market factor and so on distinguish them from other markets. In above case we can say that if Apple keeps on innovating new mobiles and technology then it hard for other firms to enter in oligopoly market of America. For surviving in Oligopoly, Apple should keep its product distinguished from another. The special software created by Apple makes it unique from all other mobile like Motorola, Samsung and so on. Apple policy to not to share its software with any one keeps customer more attracted towards its new launches. Every year people eagerly wait for the product manufactured by Apple.
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Vives, X. (2001). Oligopoly Pricing: Old Ideas and New Too. USA: The MIT.