Thursday, October 25, 2012

The Change in Market Structure in the Mobile Phone Market

Written by Kaiwen C.

Article is written based on information provided in this Link

“Success in business today requires real-time, mobile access to business opportunities”. In the 20th century, information is everything. Almost everyone, regardless of age would have a phone in their hands at any time. The mobile phone has a very huge market, and shown an interesting development over decades. Almost all new product starts with a monopoly. In a free market, the monopoly will break down into either an oligopoly with brands, or a perfectly competitive market. Now we will look into 3 mobile phone companies that have huge influences in the change in market structure of the mobile phone market. 

The mobile phone market is very concentrated ever since the beginning of the information era which started around the 90s. The leading mobile phone company was Nokia then, a mobile phone company originated from Finland. Nokia gained dominance for a long period of time until the evolution of normal mobile phones into smartphones which started around 2007. Smartphones became very popular after the introduction of iPhone by Apple. It monopolized the mobile phone market till the next leading substitute – Android that is installed into Samsung mobile phones recently. 

Nokia introduced the first mobile phone that’s using the GSM system on July 1st, 1991 – the second generation mobile phone. As the sole technology owner, Nokia was able to monopolize the whole mobile phone market for a significant period of time. During 1994, Nokia launched the model 2100, introducing the first ever mobile phone with their ring tone. With a target of 400, 000 units, Nokia was sold around 20 million units of the 2100 series, which is 5000% of their target. The demand for Nokia was much more than they targeted. 

After the monopoly broke down into oligopoly, Nokia was still able to maintain as the market leader. I believe Nokia’s success is due to they are able to provide affordable mobile phones to most of the public who are at the middle income group. In addition, by mass production, Nokia enjoyed the benefit of economies of scale, where the marginal cost of the product is highly reduced, which also allow them to sell their product at an acceptable price. Comparing Nokia to other competitors at that time, Nokia was able to provide their product at a lower price, and the quantity demanded for Nokia mobile phones increase. From this we can deduce that the price elasticity of demand for Nokia mobile phones is relatively elastic. In addition, I also believe that Nokia is trying to promote their phone as an income elastic normal good. A normal good will attract wider range of consumers from different income groups. Even people from the lower income group will buy the product when they can afford it as their income increases. 

Over years of development, mobile phones revolutionized into different specialized fields in order cope with the owner’s needs and preferences. Smartphone is one of the revolutionized forms of mobile phone. The first smartphone on market was Simon Personal Communicator in 1994. However, Apple was the first company to successfully incorporate its innovation into smartphones. The term smartphone only came popular after Apple introduces their first smartphone in 2007 – iPhone. I believe Apple’s biggest success was at their application section as they open up the development to everyone. Apple does not require much skilled labor and equipment to develop applications for their product. The usage of personal resources is low but the output is high, furthermore the application developed fits the consumer’s needs. Hence in their application development, Apple is allocatively efficient. 

                                                 

Unlike Nokia, Apple tries to create a premium brand image for their product. I believe this is the failure in iPhone. Apple thinks that they can at least monopolize the market for a period of time like how Nokia did. As time changes, technological factors improved, which hasten the process of imitation or creating substitutes. Nokia while monopolizing the market has already taken measures of mass production to provide mobile phones at a price even lower than oligopoly. However, Apple on another hand is seeking to sell the iPhone as a premium product, in other words a superior good. Where the demand increase by a large amount as income rises; in addition, the product is also scarce and high priced. To sum up, the income elasticity for iPhone is highly elastic for medium income group. 

Apple monopolized both the operating system and the product for smartphone using iOS and iPhone. It didn’t last long till the monopoly was infiltrated as technology factors hasten the process of creating substitutes as compared to Nokia’s time. On one hand, iOS faces Android, an operating system bought over and later on developed by Google. On the other hand, iPhone faces another strong competitor that long existed in the mobile phone market – Samsung. Instead of developing both the hardware and software like Apple did, Android and Samsung specialize in their respective field. Android is only focusing on developing the smart phone’s operating system where Samsung focuses on providing and manufacturing better hardware for the phone. This measure allows Samsung and Android to operate more efficiently than Apple. 

Even though at the beginning, the software and hardware are very far from iPhone’s technology, but the price offered by Samsung is lower than iPhone. This allows Samsung to be seen as a substitute for iPhone. Recently in the second quarter of 2012, both the software and the hardware of Android and Samsung were able to outperform Apple’s product. Samsung overtook Apple and was recognize as the market leader in the Smartphone market. In addition, Samsung also overtook Nokia as the market leader in the mobile phone market. Samsung now holds 21.6% of the total mobile phone market share, whereas Nokia only holds 19.9% of the mobile phone market share, and Apple only hold as little as 6.9% of the mobile phone market share. Samsung promotes its smartphone as a product in between a normal good and a superior good. The income elasticity of demand for Samsung smartphones are slightly more elastic compared to Nokia’s mobile phone. 

In conclusion, as technology goes, it is impossible to monopolize a market for too long. As the market breaks down from a monopoly into different market structures, the pricing of a product is crucial in regards to obtain bigger market shares. I believe Samsung is really successful in finding the equilibrium point to sell its product.

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