Question

smartphone industry market do the supply and demand analysis. no less than 3000 words

Answer 1

Answer-

Demand and supply principles are the most basic part of economics that stands as a crucial component defining the markets for various products in the economy. Mobile phones in today’s world is a commodity or product that is highly demanded by consumers considering the increasing use of the product because of the formation of new mobile companies, numerous suppliers providing phones at affordable prices which attracts consumers from all kinds of income classes who can easily afford a mobile phone of the price range they can want to buy. We shall analyze the mobile phone market here, to see the demand supply trends of mobile phones and the factors that affect the demand supply of mobile phones.

As was noted by the ‘The Guardian’ as of the year 2009, more than half of the world population had mobile phone accounts which must have increased further after the growth of suppliers and units of the product in the market. The sale of mobile phones in the nations which are poorer rose considerably in the years from 2006 to 2010. As per the GSM association the mobile phones industry revenues were expected to go up to $1.9 trillion in 2015 as the number of mobile connections pitch to 9.1 billion.

Australia is said to have 9^th highest number of smart phone subscriptions in the world. It is found that 89% of Australians own a smart phone, 34% do not have a landline connection, 61% would prefer a mobile phone than a TV (Rogers, 2015). Further technological developments with the Apple i-Phone launch in 2007 and i-Pad in 2010, as well as the Samsung android phones have boosted the demand for smart phones and tablets. The industry revenue is predicted to grow at a compound annual rate of 9.3% in the coming five years along with the industry’s contribution towards the economy is predicted to go up at the annual rate of 5.1% over a period of 10 years. The push given by Australian carriers to wireless data services and mobile hardware is also considered as a reason for the industry boom, with wide coverage the rising demand for data services is increasing demand for smart phones. Surveys and statistics also claim that Australia is considered as the top smart phone market, as per the data saying that the smart phone penetration has risen up to 84% in 2013 from just 19% in 2007. On the other side social media has driven more people towards mobiles through fast networking via applications as the Yellow Pages Report says 59% of the Australian social media users are accessing Facebook on mobile devices.

If we consider the pricing strategies of mobile phones, then prices are fixed on differentiation of devices and the price point segments giving rise to different equilibrium prices based on demand and supply of different types of mobile phones. Pricing is also dependent on the competitor’s prices. Demand of the mobile phones differs as per geographical regions, distribution chain, local taxes, etc. If we consider the differentiation between the devices and revenue obtained from those then we see that marginal revenue from a smart-phone which is considered of the higher segment is greater than a phone from the lower end. The market structure of mobile phones is unusual, as in there is no perfect completion but there is no oligopoly either even though the market is driven mostly by a fewer number of big players in the industry. If we consider demand for mobile phones then it also depends on the preference pattern of consumers based on brands.

As we know there are several factors that affect the demand and supply of a product. Similarly, here there are many other such factors that affect the demand supply of mobile phones. The factors cause a shift in the demand curve of mobile phones, shifting upward or downwards and simultaneously increasing or decreasing prices. Some of the factors that affect the demand for mobile phones are:

The price point of each particular type of phone

Prices of substitute goods like tablets, laptops, PDAs, etc.

Prices of complementary goods which are often bought along with the mobile phones, like accessories, phone covers, USB cables, headphones etc.

Expenditure on advertising and marketing is very crucial in determining demand, the more advertising the greater will be the demand.

Disposable income of the customer, the higher the income the greater would be the purchasing power of the customer to buy a mobile phone and of higher price point

Macroeconomic factors like inflation, economic growth, IT booms, recession also affects the demand for mobile phones

Tastes and preferences of consumers. This can affect in multiple ways, consumers who do not prefer the use of mobile phones or are restricted till a certain age shall have lower demand whereas it also affects the individual demands for types of mobile phones based on phones of higher segments like smart phones or of the lower end.

Availability and cost of credit for customers also affect their demand or purchase of mobile phones. Higher costs may not make consumers be more attracted to buying phones.

Expectations of consumers, of fall in prices of phones in future or better models to enter the market in future also affects the demand for the devices

Population changes also affect the demand. Rise in population shall increase the demand depending the growth in population is in which income level and vice versa.

Relationship with telecom partners, distribution channels or operators also affects the demand for mobile phones.

Production Costs affect the number of mobile phones supplied in the market. If the prices of related inputs in producing the mobile phone increases then the supply of mobile phones in the market decreases and vice versa.

Technology also plays a significant part in determining production costs and hence the supply of the phones in the market. If the technological knowledge of how to combine different inputs like labor, raw materials or machinery goes up, then the production becomes much more efficient and hence increases the supply of mobile phones in the market.

Prices of the other goods that the mobile company can produce or sell also affects the supply of the mobile phones by the company and is also included in the cost of production as some sort of opportunity cost.

The mobile company also takes into consideration the consumer expectations or the changes in consumer behavior which can result in changes of demand and hence supply of the phones.

There is huge competition in the mobile phones market between various sellers coming up with new innovations and differentiations in products which also affect the individual company supply in the market.

Market size also affects the market supply as the growth of the market in future also affects the quantity to be supplied in future.

Over the next following years the mobile phone price is expected to fall because of the growing competition and the increased supply of mobile phones by many producers, which will soon lead the market to reach a point of saturation such that the demand would grown at a slower rate. The prices would fall essentially because of the growing markets in developing economies like China and India.

Thus, we saw how the sale of mobile phones is increasing globally and soon would reach its saturation point where billions of users would own mobile phones and hence demand would be growing slowly. The growing demand and supply is also benefitting industries related to the mobile phone industry like the telecommunications industry or the ones which sell accessories that act as complementary goods for mobile phone. Growth in sale of mobile phones is also in a way boosting economic growth with its considerable contribution to the GDP of economies and helping citizens be more connected to the world through internet or mobile applications.

Example of Apple is given below

We have analyzed Apple company smartphone-

Apple is one of the biggest technology companies out there. Apple is widely known for a variety of products including the iPhone, iPad, and Macintosh software and computers. Apple was founded in April of 1976 in Cupertino, California. The company’s founders are Steve Jobs, Ronald Wayne, and Steve Wozniak. Apple’s “secret” for success is their skill in creating exactly what consumers want and how they want it. Through their differentiated business strategy, Apple has penetrated and dominated every market it’s entered. Over the past few years Apple has begun to slip in the smartphone market, slowly losing more and more market share and eventually giving up the lead to their biggest competitor, Samsung. The purpose of this paper is to analyze the smartphone market and the supply and demand conditions, price elasticity, cost of production and the different actions Apple can take to maximize the profit of the iPhone.

History of the Company

Steve Wozniak, the company’s cofounder, initially built the Macintosh computers by hand. Wozniak wanted to sell his hand-built computers for a low cost, but Steve Jobs wanted a higher price. It further developed the Macintosh and later the apple computer over time. However, in 2007 apple brought out the first iPhone. (Ritchie 2016) It was definitely not the first of its kind in the smartphone market, but it had very advanced technology that Apple came out with. After the original iPhone was produced, apple began adapting the phone with better technology and further producing iPhone 3g and 3gs. (Ritchie 2016) With this production, price decreased. This is because when considering the elasticity of the iPhone and the market at the time the price of the phone decreased to make it more desirable. As Apple further developed the iPhone, the price and quality increased. iPhone is one of the top leaders, next to Samsung, in the phone community.

Supply and Demand Conditions

Apple has always been in high demand when it came to the iPhone. They consistently had issues with keeping up with supply and demand though. December 26, 2015, Apple posted its largest quarterly earnings. (The Data Team 2016) Their earnings were $18.4 billion which exceeded to what the company was anticipating and probably the largest quarterly earnings for any company ever. (The Data Team 2016) Additionally, in 2012 the iPhone 5 exceeded the company’s goals so much to where the people who preordered the phone were put a waiting list. However, these last couple of years is a different story. In fact, the company is expected to cut its production by 30% this year.

As you can see in the above graph, iPhone sales skyrocketed in late 2012 to early 2013 and continued to grow. However, the company had a really hard time with forecasting it’s supply and demand. Apple took steps to improve its supply and demand problems for the iPhone 6 but 2 months after it launched for more than 42% of its product was still unavailable. The graphs above represent the supply and demand problems that Apple has faced over the years. To have a better understanding of the supply and demand issues at Apple and what steps can be taken to improve the process, we have to understand how they got there. Because the iPhone is in high demand, Apple’s inability to meet consumer demand has not affected its revenue. We know this because, as stated above Apple hit an all-time high in deposit in December of 2015. So the question is, is apple’s inability to meet demands affecting the business at all? The answer is no. In fact, by limiting the availability of the product could indeed control the rate at which the product sales and could raise anticipation for it next iPhone generation. By supplying only, a set amount sales growth can be maintained continually.

Price Elasticity of Demand

When analyzing the price elasticity of demand for the iPhone it is important to determine if the iPhone is an elastic or inelastic product. Considering that there are not very many substitutes to the iPhone, the demand tends to be inelastic. It is also important to determine if the iPhone is a luxury or a necessity. It would seem like smartphones are a luxury rather than a necessity, but as society becomes more technologically advanced smartphones are becoming more of a necessity rather than a luxury. After analyzing the smartphone industry the Apple iPhone is inelastic product and consumers will not be overly price sensitive because of their need for a smartphone and the oligopolistic smartphone market that offers limited substitutes.

When assessing how the price elasticity of demand impacts Apple’s pricing decisions it seems that Apple stays focused on maximizing profit over the short-run. Since the iPhone is in oligopolistic competition, Apple makes a short-run output and price decisions. Considering the iPhone is an inelastic product Apple can raise the price of new products without seeing a drop in demand. Apple can also prepare and make pricing decisions when other firms are getting ready to release a new product to the market. Apple can predict the effect of an increase in the price of the firm’s new product on the quantity of iPhones demanded by holding other factors constant and determining the cross-price elasticity of demand.

Costs of Production

There are normally four main categories of costs for a phone. The first category is the bill of materials, also known as BOM. The Bill of Materials represents the cost of the components that go directly into the device. The second category is transportation and warehousing. This is simply the cost to transport and store the product before the sale in any store. The third is manufacturing costs which does include labor. Finally, the last category is the warranty expense which is paid back to customers for any returned product that can no longer be sold due to issues. Since the original iPhone release in 2009, the COGS have been rising since. For the iPhone 4, the COGS were $112, following $132 the next year for the iPhone 4s, and shot up to $167 for the iPhone 5 the next.

While we can also analyze the manufacturing costs, it is very important to analyze the operating costs, including the administrative costs and R&D (research and development). Apple spent roughly around $1.18 Billion on the research and development, and that includes IOS and most of the software that comes with it. Since Apple built its’ entire operating system ‘in-house’ and iPhones cost half of all sales being made, we can assume that Apple puts in half of their research and development into iPhones alone. Just based on that information, we can assume Apple made around $589 million to 31 million iPhones sold within three months. After calculations, per device being sold it comes out to roughly $18.85 per iPhone. View our services

Another cost Apple has to deal with are the “selling, general, and administrative”, which can include anything from paying electric bills of factories, offices, and stores to salaries. Shipping and storage costs for the iPhone alone come out to $2.65 Billion. When you cut that amount in half, you get roughly $1.32 billion for iPhones to account for, only leaving $42.33 to tack onto the cost of each. Most increases to the COGS are caused by the variable cost. The fixed costs have stayed consistent over the years and Apple continues and will continue to focus on the R&D.

The main factor to the increasing COGS and the variable costs are the changes Apple continues to make to the design of the iPhone. From the manufacturing aspect, the biggest variances in cost are in the larger touchscreens and the improvements to the battery. While the changes may add to the COGS Apple has made clever pricing decisions to maximize profit. Apple released the iPhone 6 and the iPhone 6 Plus, which is slightly bigger than the iPhone 6. Since the screen is larger on the iPhone 6s, it’ll add an extra $15.50 to the production cost. Apple still charges an additional $100 though. The larger screen on iPhone 6 Plus costs $9.50 more, bringing the total screen cost to $51, and the larger battery is $2.50 more, bringing that cost to $6 (Edwards, 2014).

Overall Market

The smartphone industry is an extremely competitive one. Most phone companies are always looking to get the “best” and the “latest” phones out there. Some of the phones that have been recently announced that are similar to the iPhone today are the LG K30, Google Pixel 2, Samsung Galaxy and so many more options that are actually cheaper compared to the iPhone. The biggest competitor for Apple with the iPhone is the Samsung Galaxy. It has been competing against the iPhone for years now!

One reason Apple continues to be a technology giant is the high barriers of entry for other businesses to even begin to compete. The greatest barrier of entry is the versatility and compatibility of their products. For example, you can receive text messages and phone calls from your iPhone on your MacBook or iPad. Every Apple user has an iTunes account which can be synced to all of your Apple products. Another barrier is the overall success and money, Apple has billions of dollars to spend, it can use predatory pricing to keep other competitors from succeeding in the marketplace. The most significant barrier of entry for Apple is their operating system. Apple is the only company that has their own exclusive operating system, companies like Samsung run on the Google operating system, which is the Android operating system.

The smartphone market is oligopoly. The companies that dominated oligopoly and monopolistic competition are usually maintain the position in the market because it’s too costly or difficult to any potential rivals to enter the company which mean there are entry barriers. Apple Inc. is oligopoly in the smartphone’s operating systems’ firm. There are 3 mainly operating systems which is very competitive in the market are iOS, owned by Apple Inc., Android, which is owned by Google, Windows phone, owned by Microsoft.

Recommendation

The one thing I would personally suggest to Apple is a couple of things. The first one would be for them to not change their products so much! It seems like almost every 6 months to one year they are coming out with a new phone, and yes, it’s great and all, but the people who spend $500+ on the latest phone now regret buying that one because it is not the newest phone out there.

Apple needs to focus on the cost-benefit principle and opportunity costs. An important question to keep in mind is; what is the opportunity cost of constantly investing large amounts of resources in the development of the iPhone from year to year? I think Apple should invest more resources in a new smartphone product in addition to the iPhone, and to maybe make it more affordable for more people. When considering the cost-benefit principle Apple would earn more money by investing more money in the development in a new smartphone product, the benefit would outweigh the cost.