Competition in Smartphone Markets

Competition in Smartphone Markets

Introduction

Recent decades have seen the increasing competition among smartphones markets where high-technology firms are keen on developing strategies to engage the competition. Smartphones collapsed, “the boundaries between previously distinct devices” (Kenney and Pon, 2011, 240). Surprisingly, few previous studies have investigated that the underlying idea behind smartphone competition leads to monopolistically competitive market. With the maturity of monopolistic competition, it is considerable that whether the competition over physical cell phones will ultimately shift towards to the competition among platforms. Michael (2010) argues that the winner of the smartphone competition is the one with the most effective platform and core strategies.

This essay attempts to identify the nature and the future of monopolistic competition in smartphone markets by using economic models and theories. Theories employed to address this issue include monopolistic competition, network externalities and multi-sided platforms. Subsequently, the central business strategies employed by smartphone companies will be analysed. The final part will investigate whether and why eventually a platform would dominate this area. Relevant graphs and concepts will provide support as well.

The Concept of Monopolistic Competition

There are two of the most significant features of monopolistically competitive competition. First of all, smartphones are identified as differentiated products, with network effects, which means they have different brand characteristics with quite similar purposes. For example, the main aim for both iPhones and Samsung phones is communication. Simultaneously, they are different in the appearance design and most importantly, ecosystems. Apple owns its powerful iOS platform while Google uses Android platform. Each differentiated platform has a great number of various apps. Hence, there are two types of consumers in this market: application developers and users. The more developers who create appealing and attractive apps work for the platform, the more benefits users would gain from this platform.

The second critical feature of monopolistically competitive market is that there are no barriers to entry. Initially, in 2007, Apple Inc. shifted its emphasis from PC to mobile devices by launching the first iPhone to introduce the innovation of the smartphone market. At that time, there were few close substitutes of unique iPhones, thus the Price Elasticity of Demand (PED) is relatively low and the demand line is downward and steep as shown in (Figure 1). When P0 > ATC, Apple Inc. earned all the profits.

[pic 1]

Figure 1: Demand line in monopolistic competition. Figure obtained from: Note 2 The Theory of Monopolistic Competition, Blackboard.

Nevertheless, the absence of barriers allowed new entrants to the market, for instance, Samsung. Apple Inc. faces market share losses as well as margin profit erosion. Consequently, the demand curve continuously shifts inward, becoming gradually flatter whereas ATC shifts upward. They are finally tangent to each other as shown in (Figure2). When P=ATC, firms in this market are no longer profitable. Chamberlin (1933) observed that equilibrium leads to Excess capacity and Mark up as well, which means in the long-run equilibrium, price exceeds marginal cost.

[pic 2]

Figure 2: Demand curve in monopolistic competition when there are entrants in the market.

Figure obtained from: Lecture slides 13: Monopolistic Competition, Blackboard.

Therefore, there are several principal strategies employed by the firm to restore economic profit in this competitive situation.

Firstly, it is pivotal to further continuous product differentiation through research and innovation on both the specification of their physical products and platforms. Technological advances will reduce production costs and possibly prevent the demand line from shifting leftwards. New differentiated products that provide the corporate a competitive edge to stay in advance of imitators results in a less elastic demand for its products (Parkin, Powell and Matthews, 2008, 292). Those principal means may make ATC curve shift downward as well.

Secondly, at the end of innovation and production development, actual physical differences are fairly small, which necessitates advertising and packaging to attract and persuade buyers to “appreciate and value the [product differentiation]”. (Parkin, Powell and Matthews, 2008, 292)

Thirdly, smartphone industries face product convergence since the essential features that grab attention of customers can be found in all products. It leads to the decrease of price sensitivity as well as losses of profit margin. As a result, not only creating sophisticated devices, but also developing contents and applications would help the firm gain market power. Robinson (2011) emphasises that the key of Apple’s true success is “its ability to innovate and create new experiences for the customer based upon its burgeoning content base”. Eventually, the competition would evolve in to that over platforms.

The Theory of Network Externalities and Multi-sided Platform

With the growing emergence of differentiated ecosystems, to a greater extent, network externalities, as measured by the size of products’ installed bases start to take central stage in the market. Tipping point creation is the core strategy for the business to market a product with network effects and there are two principles defining the concept of it.

Firstly, as shown in (Figure3), f0L is the tipping point that firms manage to get, which means after this point, Total Value exceeds the Price and consumers assuming rational will all purchase the products and the firm possibly could become dominant. If the firm reduces the price from p0 to p1,, demand changes relatively form f0L to f1L, which means the installed base needed to create a tipping point becomes much smaller.

 [pic 3]

Figure 3: Demand Line with Network Externalities

Figure obtained from: Lecture: Network Industries Industrial Organisation & Business strategy, Blackboard.

Secondly, the value of the product with network externalities is dependent on its installed base. As illustrated in (Figure 4), a greater installed base devotes external value, which is effective to make Total Value higher than Price. Then it incentivises more potential consumers to join the installed base. This reinforcing cycle refers to feedback mechanism. Additionally, consumer expectations regarding the future installed base on the product are quite vital to determine the demand for it (Salehnejad, 2015). When the installed base increases, the future size of the installed base is expected to expand.