ESSA

ESSA

How to eat an Apple


Thomas Wu

By

September 9th, 2012


On the recently patent dispute between Apple and Samsung.


The technology sector- what’s a firm to do?

Hot off the heels of the recent Apple vs. Samsung trial in the U.S. there has been heated discussion over what implications this ruling will have on the future of technology companies. While Apple walked away from the trial with a definitive victory and another $1.05 billion to add to its already overweight piggy-bank, could this triumph actually be a curse in disguise?

The current state of the mobile landscape is not what it used to be- gone are the days of the beloved ‘Nokia brick’. For the past few years Apple has dominated the consumer electronics sector, while the remaining manufacturers (Samsung, HTC, Motorola, etc.) have been left to fight among themselves for the remaining market share. From an economic perspective, it can be described as a somewhat monopolistic firm surrounded by an assortment of competitive firms. It begs the question, in the absence of an external regulator, can these smaller companies even begin to think of taking Apple down?

For Apple, their market dominance allows them to charge above market prices and makes everyday business a relatively simple recipe:

1. Spend existing profits to design and market a product

2. Roll it out

3. Charge higher than the efficient price to increase profits

4. Repeat until world’s largest company.

For other firms, their task is a little bit more complex. As electronic devices can be considered as close substitutes for each other, price setting becomes an instant no-no. If companies charge too much we, as consumers, will simply opt for one of the many, cheaper, alternatives. Due to this constraint, non-Apple companies are compelled to sell at lower prices, which reduces profits, and limits their capacity to fund improvements for their product. As a result of this limited spending, Apple (who faces no such constraints) will output an inevitably superior good and will retain its market power.

The logic here is that every single firm, including Apple, is trying to convince the consumer that what they’re selling cannot be substituted by another company’s offering. If firms are successful at differentiating their products, then this allows them to charge higher prices, increase profits, and gain market power.

Alternatively, this process could also be viewed as firms seeking to minimise the own-price elasticity of their products. That is, companies want to lose as few customers as possible if they decide to increase prices. A friend of mine once likened it to, ‘unleashing a swarm of tarantulas into a primary school and trying to minimise how many kids run out screaming’.

And herein lies the final solution. Whether or not it’s a substitution effect or a price elasticity concern, both of these effects can be decreased through increasing innovation- this phone has a retina display, this phone has a 3D camera, this phone can make waffles etc. Product differentiation sways us to believe that what we are buying is not only necessary for our everyday living, but also absolutely unique. Increased innovation allows any company to charge higher prices for their products which is, by definition, an increase in market power. Like a worm to an Apple, if all firms began to truly innovate, we could see the big fruit’s current supremacy inexorably eaten away. Ultimately, this would lead to a much more competitive landscape with better products and less market failure than the one currently faced today.

In relation to the recent Apple vs. Samsung case, a major reason for the outcry over the court’s ruling was because it was perceived by many to severely limit the avenues of innovation available to other firms. While the ruling is indeed a victory for Apple (the amount of substitutes for the iPhone has now been effectively reduced) it may very well be short-lived. The ruling only stops attempts of imitation, and has legally forced Samsung and other manufacturers into ‘product differentiation overdrive’, which is what I believe to be the clear winning strategy. Apple has poked the bear of innovation, and it better hope it’s not angry.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • D

    samsung has a greater market share than apple….thats not exactly a monopoly

    • Thomas Wu

      Ahh a very fair comment, I thought someone might bring that up!
      While this analysis may have been more relevant a few years ago, it’s still worth noting that Apple is still a much larger company than Samsung in respects to market capitalisation.
      Additionally from a theoretical perspective, Apple tend to have higher markups on their products than Samsung which can act as an indicator for larger market power.

  • Adam B

    Hey Tom, enjoyed the article, quality read. Although I must say it made me feel rather technologically behind for still owning a Nokia – though at least it isn’t really a brick! I was considering buying an iPhone at some point, but now I’m a bit worried about the tarantulas in the primary school!

    • Thomas Wu

      Haha I think you should be alright.
      And I wouldn’t worry at all about being behind the times in tech! I’ve still got my trusty Nokia 3330 lying around somewhere..

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