All summer long, the tech world has been abuzz as to when Apple
will launch its coveted new product, the iPhone 5(Horowitz, 2012). According
to Apple Press Info, iPhone 5 pre-orders doubled previous year record, topped 2
million units in first 24 hours worldwide, said the company, Apple Inc (Apple
Inc, 2013). Demand for iPhone 5 had far
more exceeds the expectation specially compared to the sales record set by
previous model, Iphone 4. This resulted part of the pre-orders request has to
be delay for delivery (Bloomberg and Reuters, 2012).
Even though it has not been a year after the
launch of Iphone 4, yet blockbuster Iphone 5 has become the focus of the
public. From the article, it highlighted that due to the better features with
Iphone 5, the excess demand had lead to a shortage of products in the market. According
to a record by Techcrunch, Apple sold out their preorder stock within 60
minutes, which are 20 times quicker than the iPhone 4s where took 22 hours to
reach this mark (Gallagher, 2012). The shortage of Iphone 5 can be discussed
using market equilibrium concept as following.
In
Diagram 2.1, it shows the graph of supply and demand of IPhone 5. The market is
in equilibrium when the supply curve and demand curve intersect while the
corresponding price is equilibrium price and the corresponding quantity is
equilibrium quantity. From diagram 2.1 above, E1 is the equilibrium point of
iPhone 5 where the quantity demanded and quantity supplies are equal. Economist
also refers equilibrium as market- clearing because of the quantity demanded
and quantity supplies are same there is no surplus nor shortage occurs. Neither
producers nor consumers tend to change the price or quantity, which is an important
situation for equilibrium.
Based
on the sales performance upon launching, it has definitely proved Apple Company
had successfully launched their marketing campaigns which lead to the phenomenon
as underproduction. Underproduction has lead to a market failure where lead to
a dead weight loss in total surplus (consumer surplus and supplier surplus),
which means Apple Company is regarded as inefficient Company. However, the
causes would need to further examine when it is a blockbuster product. Public
do have a very high expectation on their product due to their success of
getting innovation for traditional product. Furthermore, there has been word-of-mouth
marketing campaign had also helped to boost the performance of the new feature
within Iphone 5.
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Diagram 2.2 People queue up in Newcastle for the new iPhone 5
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As long as Apple underestimates the demand for a hot new product, Apple will have loyal customers clamouring for the new devices; in fact, they’re willing to lines up for hours before stores open to buy a new product as shown in diagram 2.2. Apple Firm successfully create marketing buzz as Apple are reported had price advantages in securing key components, manufacturing capacity, capital equipment, and airfreight capacity (Iqbaljhr, 2013).
In
Figure 2.3 below, it illustrate how does market responds to underproduction and
the likely effect of it.
In
theory, when the original demand curve shift to the new demand curve (D2)
intersects with the original supply curve at a new point (E2), the new equilibrium
price (market price) should have moved to a higher level at P2. However, due to
the fixed pricing policy by Apple to ensure the value-in-use for their
products, this had shifted the demand curve and leading a temporary shortage of
iPhone 5 between Q1 to Q3.
This
has indirectly locating a price cap as well as price cap on the Iphone 5. In
order to meet the demand of customers, there are black market in existence
where Iphone 5 are illegally sell at above market price by third party or
customers choose to switch their preference to another brand. It
is also likely that users will go for a forged Iphone 5 as it can be bought at
a much lower price and was available in the market anytime. Again, the market is inefficient and leads to
dead weight lose in total surplus.
The proportion of dead weight loss
shared between buyer and supplier is much depended on their elasticity. Elasticity
is the measures of relationship between how much the quantities demanded and
supplied of a product will responds to the change in price change for the
particular goods. When a percentage fall in price can lead to a higher raise in
percentage for quantity demanded, it can then be regarded as elastic curve as
shown in figure 2.4.
Apple
firm is operating in an Oligopoly structure, as there are only a few close competitor
in the Smartphone industry like Samsung, Nokia and HTC. To succeed in this industry,
brand loyalty is the key (Louis, 2013). The elasticity of demand curve wills
also dependent on the marketing mix strategy of its competitor which is also
kinked curve.
The
price elasticity of demand for iPhone 5 is simply inelastic when there is no
price war between the peer industry and are people are willing to purchases it
disregard of its price.This is an element of brand loyalty. Furthermore,
iPhone users appeared to be more rich and “high techs” in such a way that iPhone
comes with IOS 6; the world’s most advance operating system, which enhance
system’s performance (Apple Inc, 2013).In Figure 2.5, it shows a steep
inelastic demand curve where in quantity demanded for Iphone 5 is smaller than
the change in price.
From
another perspective, if there is price war between the Smartphone companies,
the offered price by Apple Company would likely to change more than the
quantity demanded. This is because each and every brand posses different type
of technology advancement in their products which makes users difficult to
compare all products on apple to apple basis. Thus, any reduction in price will
lead to the perception of value for money.
In
oligopoly markets, technology advancement is considered as an artificial
barrier to entry. Apple firm differentiate themselves with their competitors
through model changes, advertising, proliferation of brands and so forth where
all are legal business practices that to be used in the oligopoly industries.
Apple firm do have to consider the actions of other firms and their behaviour is
interdependent as shown as Diagram 2.6.
As
a model of oligopoly, Apple firm pricing sought to explain “stickiness” of
oligopolistic prices as a natural result of non-collusive behaviour (Riley, 2012).
In equilibrium, the marginal social benefit (price) of their products exceeds
the marginal social cost. Output of Apple firm will tend to be lower as I
mention earlier and at higher prices to consumers. The kinked demand curve
model assumes that Apple firms reach a stable profit-maximizing at price, P1
and output, Q1and have little incentive to alter prices. Not to forget that Apple
firm maintain their current price if any one firm raises its price or any price
reduction by any single firm.
In
conclusion, Apple Firm frequently maintains their position of dominance in an
oligopoly market because it is too costly or difficult for potential rivals to
enter the markets. Somehow, Apple firm has an ownership of scarce resources of
their output and successfully creates a market buzz. Furthermore, as a strong
brand, Apple firm successfully creates brand loyalty, “locks in” existing customers
and deters the entry lead the firm to gain a higher market share. Back to the
main article, a shortage of supplied for iPhone 5 might lead to existing of
black market. Normally, the prices in black market are lower than market price because
black market does not pay any taxes. In some country, the black market exist
even iPhone 5 had not launched out yet. They most probably will sell at a
higher price because the product is limited in that particular country. It is
an illegal trading and you will be penalized of get caught for buying product
from black market and might be sue by the Apple Company too.Think
twice before your action!
(1439 words)
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