Author’s Arguments
In an online article on Forbes, author Tim Worstall contends that the major reason behind Apple’s legal battles with competitors such as Samsung, Motorola and others is to lessen the competitive pressure because the company has run out of ways to maintain competitive edge over the competition. Tim adds that industries tend to move to the perfect competition market structure in the long term though industry players attempt to prevent such as occurrence at all costs because it is not in their best interests. The industry players may use different strategies to prevent becoming part of perfect competition market structure one of which is innovation as Apple did around 2007 and in the following years .
Tim argues differentiation is important because the other scenario is commoditization of product which results in price-based competition and price-based competition lead to decline in attractive profit margins. Tim admits Apple still has quality brand perceptions and products to match with but as competition such as Android continues to close to competitive gap, it will increasingly become difficult for Apple to convince customers to pay premium prices. This is why Apple wants to aggressively protect its intellectual property so that it can legally prevent others from offering certain features that Apple’s products have which will enable Apple to maintain differentiation .
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Application of Economic Concepts
The article doesn’t explicitly mention the current market structure in which Apple and its competitors such as Samsung and Motorola etc. operate but it provides enough hints to confidently argue that the current market structure is monopolistic competition. First of all, there are a number of players in the market including but not limited to Apple, Samsung, and Motorola. Secondly, at least some players including Apple do attempt to seek differentiation through strategies such as innovation. Differentiation strategies do not exist in perfect competition and oligopoly, thus, these two market structures can be ruled out. Monopoly is simply out of the equation due to the simple fact that there are more than one players in the market. This leaves us with monopolistic competition and the market participants indeed exhibit characteristics that in line with the behavior of firms in monopolistic competition.
The author explicitly implies that the industry is heading towards perfect competition and offers several arguments in his defense. First of all, the author claims that due to Apple’s failure to continuously innovate, products sold by Apple such as smart phone are becoming commodities. Perfect competition is indeed characterized by commodities which are identical to each other , thus, it doesn’t make sense for buyers to pay different prices to different sellers. As a result, all sellers sell goods at the same price since being commodities, their products are identical. Author also claims that Apple’s attractive profit margins will disappear in a perfectly competitive market which is exactly what happens in perfect competition. In perfect competition, firms earn normal profits because abnormal profits attract more players into the market which puts downward pressure on profit margins . In this case, new players may not be entering but existing players such as Samsung may be causing downward pressure on Apple’s profit margins by increasing sales volume, supported by low prices. Perfect competition is also characterized by well-informed buyers and the author does claim it will make little sense to buyers to pay premium prices for Apple’s products when the competition offers competitive products with similar features at lower prices. This clearly implies that buyers in the markets in which Apple and its competition operate are well-informed about products and the prices being charged by different sellers.
The article doesn’t directly address the concept of elasticity but it provides us with enough information to determine Apple’s price elasticity of demand. From the article, it seems price elasticity of demand for Apple’s products has been declining because the competition has been catching up. As a result, Apple has become more aggressive in creating legal barriers for the competition so that it can achieve low price elasticity of demand for its products and enjoy high profit margins. The author claims the competition has caught up and it doesn’t make sense for the customers to pay high prices for Apple’s products. In other words, the author is implying Apple’s products now have higher price elasticity of demand due to greater number of substitutes.
Conclusion
I do agree with the author that Apple’s profit margins may continue to decline unless it restores the innovation edge it had over the competition around 2007 and few years after that. Otherwise it would not make sense for customers to pay premium prices for Apple’s products. I also agree with the author that Apple is trying to create legal barriers against the competition in order to protect its profit margins. But I disagree with the author over the claim that the industry is moving towards perfect competition if current trends are any indication. I think the industry may never become perfect competition because all market players are distinct brands whose products may become close substitutes but never perfect substitutes. Weaker players will simply be forced to exist or sell themselves as has been the case with Blackberry. In my opinion, the industry may continue to be monopolistic competition though the average level of profit margins may vary over time. Moreover, it is always possible to earn above normal profits over extended period as Apple has demonstrated in the past. The key is to maintain the innovation spirit alive and continuously introduce revolutionary products. Such is not the case in perfect competition where there is no place for innovation and differentiation.
- Economics Online. (n.d.). Perfect Competition. Retrieved July 25, 2014. Web.
- Krugman, P., & Wells, R. (2012). Microeconomics (3rd ed.). Worth Publishers. Print.
- Worstall, T. (2014, May 11). Why Apple Is Fighting The Patent Battle So Hard; What Other Protection From The Competition Does It Have? Retrieved July 25, 201
