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. 

 Diagram 2.2 People queue up in Newcastle for the new iPhone 5

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!

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References

Apple Inc (2013) iPhone 5 Pre-orders Top Two Million in First 24 Hours. Available at:
http://www.apple.com/pr/library/2012/09/17iPhone-5-Pre-Orders-Top-Two-Million-in-First-24-Hours.html [Accessed 21 May 2013]

Bloomberg and Reuters (2012) iPhone 5 pre-orders double previous record, top 2 million. Available at: http://www.thestar.com/business/2012/09/17/iphone_5_preorders_double_previous_record_top_2_million.html [Accessed 4 May 2013]

Gallagher, B. (2012) iPhone 5 Pre Order Sells Out 20X Faster Than 4s, Further Highlighting Apple’s Dominance. Available at: http://techcrunch.com/2012/09/14/iphone-5-pre-order-sells-out-20x-faster-than-4-and-4s-further-highlighting-apples-dominance/ [Accessed 7 May 2013]

Horowitz, J. (2012) iPhone 5 Release Date: September 21 Likely to Be Launch Day. Available at: http://www.policymic.com/articles/13287/iphone-5-release-date-september-21-likely-to-be-launch-day [Accessed 6 May 2013]

Iqbaljhr (2013) Apple Inc. Pro and Con. Available at: http://www.studymode.com/essays/Apple-Inc-Pros-And-Cons-1544054.html [Accessed 7 May 2013]

Louis, T. (2013) The Apple Monopoly. Available at: http://www.tnl.net/blog/2012/02/26/the-apple-monopoly/#sthash.bxHNmDPO.Uc5dZxgJ.dpbs [Accessed 4 May 2013]

Riley, G. (2012) Oligopoly –Non Collusive Behavior. Available at: http://www.tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html [Accessed 4 May 2013]