Analysis on Apple iPhone

Introduction
A smartphone is an electronic device which “runs an advanced operating system that is open to installing new applications, is always connected to the internet, and which provides very diverse functionality to the consumer” (2010, Cromar S.). Singapore is ranked fourth as the highest smartphone penetration. The trend in the rise of smartphones is evident in Singapore’s telecom market, with a statistical figure of 88% of Singaporeans with a smartphone device. In view of Singapore’s market on smartphone ownership, Apple Inc. has the largest amount of the market share, which is approximately 35.2%. As iPhones have impacted the smartphone market globally and in Singapore, iPhones will be analyzed in this term paper. The outline of this report would analyze the following microeconomics theories: Key factors affecting the shifts in demand and supply curve of iPhone products; The elasticity of iPhone demands, and the effects on its substitute and complement products; Market structure of smartphone industry, highlighting the two major players in the market; and Future trends in the smartphone industry.

Factors Affecting Demand And Supply of iPhone
A demand refers to the amount of quantity of goods desired by consumers, in which consumers have the willingness to pay. Based on Figure 1, an iPhone is considered to be one of the most demanded smartphones over the years. As a luxury item, there are factors that affect the demand and supply of an iPhone.

Figure 1: Global Apple iPhone Sales. From http://www.statista.com/statistics/253725/iphone Cause Of The Shift In Demand Curve
The factor that has the most influence over the demand of Apple iPhone in Singapore is the consumers’ income and brand preferences. Income Per Capita
As an iPhone is considered a luxurious smartphone, a change in consumers’ income would have a significant impact on the iPhone demand. Based on the Economist, it explored the relationship between the demand of iPhone and the increasing income of consumers, in which the increase in iPhone demand changes proportionately with the willingness a consumer to pay.

Figure 2: Singapore GPA per capita. From: www.tradingeconomics.com In reference to Trading Economics (Refer to Figure 2), the current GPA per capita of Singapore is US$36900 annually, which is an all-time high value in Singapore. With the high purchasing power of consumers in Singapore, it will produce a rightward shift on the Apple iPhone demand curve, as illustrated on Graph 1. Preference Of Smartphone Brand

Statistical data shows that 35.2% of smartphone marketshare in Singapore is dominated by iPhone (iOS) and 15.5% by Samsung smartphones. A product brand and marketing strategy highly influences a consumer’s preference of goods, in which affects their willingness to pay for a particular good. Based on Marketing Minds, Apple Inc. incorporates their prestige brand to compete in the competitive market. As Apple Inc. produces a range of products and services that incorporate user interfaces, there is a higher chance that consumers of Apple product would purchase an iPhone due to brand loyalty. This creates a positive demand of iPhone of Apple. Currently, an approximate figure of 60% of Singapore electronic device consumers uses an Apple product. Cause Of The Shift In Supply Curve

The factor that has the most influence over the shift in the supply of Apple iPhone is the price of its relevant resources. Price Of Relevant Resources Components used for the production of an iPhone has a large influence on the selling price of the iPhone, given that with a higher cost margin, higher selling price is required to offset total cost. In view of the iPhone 6, a replacement was made on the material screen for iPhones; from the iPhone 5’s Gorilla Glass that cost $3, to iPhone 6’s Sapphire that cost $16. With an increase in component costs, Apple Inc. is expected to increase the price of an iPhone 6, as compared to the existing iPhone versions. Based on the law of supply, a higher cost of an iPhone causes an increase in the supply curve. Elasticity

The elasticity of demand is the “measure of how much quantity demanded responds to changes in price” (2013, Arnold). In this section, the elasticity of old models and new models of iPhones will be discussed and the influence on their complement and substitute goods. Price Elasticity Of iPhone Demand

Time Factor
The price elasticity of an iPhone is highly dependent on the model and phase in which the product cycle is. This is proven by the price comparison of iPhone 5S and 6 shown under Table 1. The starting price of iPhone 6 is US$649 whereby previous model, iPhone 5S, the starting price of iPhone 5S is US$100 lower than iPhone 6.

Source: http://store.apple.com/us/iphone/family/iphone/compare As iPhone 6 is new in the market, it is deemed to be inelastic as there is no substitute available. This means that the quantity demanded for new iPhones would merely respond to the changes in price. In reference to Graph 1, the price of an iPhone 6 is expected to make a significant increase in profit (from area B to area A). The increase of the price of the iPhone 6 produces a new equilibrium (P2, Q2) that even if the quantity demanded is merely less, the profits increases considerably (area A).

Graph 1: Inelastic Demand of iPhone 6
Therefore, the existing iPhone models that came out before the iPhone 6 are deemed elastic due to the availability of more advanced smartphones in the market. Apple Inc. would then lower the price of these models to make profit. With a lower price, this would produce an increase of the demand as it now attracts a larger pool of consumers, such as the lower income group. With a higher demand, the total revenue will increase from area A to area B as illustrated on Graph 2.

Graph 2: Elastic Demand of iPhone 5S
Besides the price elasticity of iPhone models, a new release of iPhone has effects on other products, which include the complement and substitute goods of an iPhone. Cross Elasticity Of Demand
The release of an iPhone 6 influences the elasticity of another good or other firms. The cross elasticity of demand is the “measure of the responsiveness in quantity demanded of one good to changes in the price of another good” (2013, Arnold). Complement Goods

Smartphone accessories are the most influenced upon the release of an iPhone 6. As the phase of iPhone model differs, phone accessories are complement goods as earpiece and USB cables usually come with a new iPhone. As the price of an iPhone declines, the demand for phone accessories also increases, vice versa. Hence, a negative cross elasticity of demand will occur as illustrated on Graph 3.

Graph 3: Negative Cross-Elasticity Demand
Substitute Goods
As Samsung dominates the second largest market share in Singapore, Samsung mobile such as the Galaxy S3 is considered to be a substitute product of iPhones due to their high-end features comparable to an iPhone. When the price of iPhone increases, there is a high possibility that consumers go for the substitute product due to the elasticity of smartphones. In reference to Graph 4, a positive cross elasticity of demand will occur where both the percentage change in quantity demand and change in price moves in the same direction.

Graph 4: Positive Cross-Elasticity Demand
Market Structure
This section of the report is an analysis of Apple Inc. on a market level. Based on the top 4 firms in the industry, there is a high concentration percentage, which shows the large amount of market power the firms in the smartphone industry. The total percentage of the top 4 firms amounted to 60% of the smartphone market share in Singapore. Under Figure 1, Apple (iPhone) and Samsung, which is Apple’s substantial competitor, have the largest market power, dominating 50.7% of the total marketshare.

Characteristics Of An Oligopoly Market
The market structure of the smartphone industry carries the characteristics of an oligopoly market. An oligopoly market involves a few sellers in which a firm’s profitability is dependent on its interactions with other firms. Based on Singapore’s smartphone industry, Apple iPhone and Galaxy models dominates the market. Besides the small number of sellers in the industry, the smartphone industry has significant barrier of entry. Factors such as a large amount of capital in a smartphone firm are needed to carry out business, which includes capital for research & development, labor cost and marketing of the product. Furthermore, there is a slight differentiated products sold by the firms, which acts as a selling point to each firm.

For example, Apple iPhone incorporates a feature named ‘Siri’ which other products of a firm do not have. Samsung, on the other hand, collaborates with Google Inc., which has similar functions as Siri. With a limited amount of firms available in the industry, an oligopolist is considered a price searcher, as a small smartphone firms have the ability to make an agreement and control over the market price of their products. Apple and Samsung therefore have the market power of determining the market price of their product. Profit Maximization Of Apple And Samsung

In order to determine the market price, a payoff matrix between Apple and Samsung is studied. A game theory refers to “the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms” (2011, The Economist). As mentioned, both Apple and Samsung firms are the major players in the market where they compete with each other to maximize their profits. Both firms have to decide on the best strategy that optimizes their revenue. In the diagram below, a payoff matrix is illustrated to show the payoff that Apple and Samsung could earn from their combination of strategies.

Apple would make the most profit ($6m vs $9m) when the firm decides to lower the price of iPhone to $450, if the price of Samsung smartphone remains. On the other hand, Samsung would make the most profit ($6m vs $9m) when the firm lowers the price of Samsung Galaxy to $450, if the price of Apple’s iPhone remains. Given the behavior of their competitors, both firms will charge $450 despite the lesser profit earned (a decrease from $6m to $4.5m). By charging a lower price, it is the ‘Nash Equilibrium’ of the product. This also illustrates that oligopolistic firms are interdependent in making decisions, in which the behavior of one firm affects the other. Price-Stickiness Of iPhone and Samsung Galaxy

Apple and Samsung are interdependent on each other’s behavior. Illustrated on Graph 5, when Apple decides to increase the price of iPhone above the equilibrium price (P2, Q2), it is assumed that Samsung will not increase their price of Samsung Galaxy, based on the game theory. The demand for Apple iPhone becomes elastic, as consumers will go for Samsung Galaxy, that is the lower-priced smartphone. If Apple decides to decrease the price of iPhone below the equilibrium price (P1, Q1), it is assumed that Samsung will imitate the action by lowering their prices of Samsung Galaxy, based on the game theory. With the same price decision, both iPhone and Samsung Galaxy becomes inelastic to price changes. Legend

MC Marginal Cost
ATC Average Total Cost
D Demand
MR Marginal Revenue
P Price Equilibrium
Q Quantity of Output

Graph 5: Kinked Demand Curve of Apple and Samsung
Conclusion And Future Trends
From the study above, as changes in consumers’ preferences for smartphones are high, the most important factor that has an impact on the smartphone industry would be innovations of new smartphones. Apple iPhone may require constant innovation of new iPhone for the demand to be inelastic in order to increase profit. Furthermore, as the nature of the industry is highly interdependent on other firms, firms have to make strategic decisions for a mutual profit growth. In the long run, as firms continue to produce new innovations of smartphones, and with the high barriers of entry in the industry, there will be a positive economic profit. This is due to the lesser competitors in the industry and as oligopolistic firms, such as Apple and Samsung have the market power in the long run, this enables them to increase their joint profit.

References

Arnold R. A. (2011). Principles of Economics: 10th Edition. United States: Southwestern, Cengage Learning http://www.ida.gov.sg/Infocomm-Landscape/Facts-and-Figures/Telecommunications The Statistical Portal. Global smartphone shipments forecast from 2010 to 2018. Retrieved from
http://www.statista.com/statistics/263441/global-smartphone-shipments-forecast/ The Wall Street Journal. New iPhone: A Sapphire Screen and a Higher Cost. Retrieved from http://online.wsj.com/articles/new-iphone-a-sapphire-screen-and-a-higher-cost-1408042296 Brown, R. 2012. The Cost Of Making An iPhone. Retrieved from http://www.investopedia.com/financial-edge/0912/the-cost-of-making-an-iphone.aspx Cunningham, A. 2014. Apple breaks revenue, iPhone, and iPad records in Q1 of 2014 Retrieved from http://arstechnica.com/apple/2014/01/apple-breaks-revenue-iphone-and-ipad-records-in-q1-of-2014/ Welker, J. 2012.Understanding Oligopoly Behavior – a Game Theory overview. Retrieved from http://welkerswikinomics.com/blog/2012/03/23/understanding-oligopoly-behavior-a-game-theory-overview/ Blodget, H. 2012. In Case You Had Any Doubts About Where Apple’s Profit Comes. Retrieved from http://www.businessinsider.com/iphone-profit-2012-8#ixzz3CZ1Uc0cy Shermen, J. 2013. Spendy but indispensable: Breaking down the full $650 cost of the iPhone 5. Retrieved from http://www.digitaltrends.com/mobile/iphone-cost-what-apple-is-paying/#!bOunwD