Report On Advanced Economics – Mobile Phone Market Structures And Models

Microeconomic Models

Discuss about the Report on Advanced Economics (A Case On Mobile Phones)?

Mobile phones are a potent brain child of engineers. It has made the world a single place. To communicate via mobile was a conspicuous economic behavior at the advent of mobile phone technology. Before 1995, the telecommunication sector was dominated by landline phones. But slowly and steady, the mobile communication system carved a niche for itself in the telecommunication sector. So, initially the mobile firms gained a financial leverage for their products. It may be noted that the landline started out as a monopoly. But the mobile phone industry has an oligopolistic market structures with a few market players. The firms of the mobile industry have a slightly differentiated service. There are barriers to entry the mobile market. Irrespective of age, almost every one possesses a mobile phone. Each firm in the oligopolistic mobile market has a tacit relationship. This is in order to maintain a profit margin.

Ever since its inception, the market for mobile phone was very concentrated. The first ever mobile handset was made by Motorola. On 1^st July, 1991, Nokia devised mobile phones using the GSM system. The market leader in the mobile phone industry was Nokia (Finland) in around 90s. Nokia had a monopoly for a significant time period. This was because the market demand was much higher than the target market. But normal mobile phones were transformed into smartphones that started around 2007. As Apple introduced the ‘iPhone’, smartphones were popularized. Apple’s forte was its application section. The output was higher and the usage of personal resources was lower. Apple was thus, allocatively efficient.

Later in October, 2008, T-Mobile G1 devised the ‘first ever android. So, Nokia’s monopoly broke down to duopoly. So, the main players that emerged in the market were Nokia, Motorola, Samsung and Apple. Nokia still maintained its position as the market leader. Nokia targeted the middle income group with its affordable mobile phones. Thus, Nokia enjoyed “economies of scale.” The marginal costs of mobiles were highly condensed. Thus, this allowed Nokia to sell its mobile handsets at an acceptable cost price. Thus, the price elasticity of demand for Nokia phones was relatively elastic. Nokia also promoted its phone as a “normal good” which was “income elastic:” thus, this normal good attracted consumers from various income groups including the lower income group. But until the early 90s, mobile phones were a ‘luxury commodity.’

Mobile Phones and the Evolution of Market Structures

Supply and demand:

The case with mobile handsets was that, the demand was greater than its supply over a time period (Hubbard, O’Brien and Sharma, 2013). This means:

The demand curve gets shifted towards the right.

The supply remains unchanged.

Shortage sets in (Hubbard, O’Brien and Sharma, 2013).

This induces higher equilibrium price.

Demand schedule for cell phones:

Price ($)	Cell phones (million)
270	20
240	40
210	60
180	80
150	100
120	120
90	140
60	160
30	180

Supply schedule for cell phones:

Price ($)	Cell phones (million)
20	30
40	60
60	90
80	120
100	150
120	180
140	210
160	240
180	270

The market state where demand in a market equals the supply in a market is the market equilibrium. The corresponding quantity is the “equilibrium quantity”. The corresponding price pertains to the ‘equilibrium price.” It is also called the ‘market-clearing’ price. Here, the quantities supplied and quantities demanded are equal (King, 2012).

Thus, market equilibrium is a state where the tendency to change prices is not there.

The equilibrium price is A. The equilibrium quantity is Q.  Thus, at A, quantity demanded=quantity supplied. At price B; suppliers would supply larger amounts of cellphones than the consumers’ demand. At C, suppliers would supply fewer amounts of cellphones than the consumers’ demand (Miller, 2012).

Thus, at B, there is surplus. The surplus creates forces among the competitive suppliers. They will cut their prices. These forces shall push down the price to A which is the equilibrium level.

Point C exhibits shortage. Thus, the competitors will hike the price of their products. This hike is due to shortages and competition among the buyers (Miller, 2012).

Apple monopolized both the product for smart phone & operating system using iPhone & iOS. Nokia monopolized in the second generation mobile handset (Miller, 2013). But these monopolies broke down to oligopoly when some other players like Samsung, Ericsson & LG entered the market. All of them are not always price takers. But the rivals prices effects their revenue.

The initial mobile market had players like Nokia or Apple for various time periods. And they monopolized the markets in their own lights (Miller, 2013). They charge higher prices due to increased demand and shortage. They practice first degree price discrimination. Thus, they gained super normal profits.

The UK mobile industry has six players viz. Vodafone, Orange etc (uSwitch, 2015). Consumer heterogeneity induces price discrimination in the market for mobile phones. These mobile operators charge various prices in the EU countries. This is first degree discrimination (Parkin, 2012). Different roaming charges are also a type of price discrimination. Also each operators charge different prices when consumers call to other networks. Tariff proliferation is done to retain the consumers.

Price Discrimination and the Mobile Phone Industry

The differences between the firms’ revenues and its opportunity cost are the economic profits. Firms do not need to earn any profits at all to be eager to stay in the market (Sloman, Wride and Garratt, 2012). A firm can cover its opportunity cost if resources are used in a best alternative use.

The mobile industry is oligopolistic in nature. Thus, consumers can make choices for the products they need. Decisions involving a choice between some options has the opportunity cost (Wessels, 2012).

Unemployment:

Data of mobile phones can present insights to the levels of employment (Onita, 2015). This is because the communication pattern of consumers changes when they are unemployed. Data scientists choose a European plant which subjected to redundancy.  The redundant employees’ number of calls fell by 51%. Their incoming calls are fewer. They also make fewer calls (Onita, 2015).

Mobile operators have substantially increased their rates in UK as per RPI (Ken’s Tech Tips, 2014). As people have more demand, firms take the opportunity to hike prices and attain maximum revenue. (Appendix 1)

 Mobile industry is 2% of the world GDP (Sharma, 2015). In both developed & developing economies, mobile industry is continuously offering unprecedented growth. The mobile communication services have become a pivotal part of how an economy functions and works. The economies having higher level of data usage (3G) have experienced increase in their GDP at 1.4%. In developing economies a 10% expansion in the mobile penetration hikes productivity by 4.2% in the long run. GDP increase by 0.15% if a 10% increase in 3G penetrations rises (Williams, 2015).

Mobile phones have become a necessity. It connects the world to a single place. But mobile companies have exploited consumers when initially there were monopolies. They extracted all the consumers’ surplus. Now, they have evolved to oligopolies. But still practice price discriminations. The firms are targeting the middle income group. They are slashing their prices and including new features. Thus, large portion of a population have access to mobiles. Usages of mobile all pose threats to the human body and the environment. Anti-social activities are also planned and worked out via mobile technology. The recent falls in prices of mobile is due to competition among the oligopolists. All want to earn revenues and create a larger customer base. Initially the demand was high, so firms set higher prices and created shortages. But now consumers can choose from varieties of mobile with new features and designs. No matter what the prices are, for consumers mobile has become a necessity. Even if inflation sets in, people will consume.

Reference:

Hubbard, R., O’Brien, A. and Sharma, A. (2013). Economics. Harlow: Pearson Education.

Ken’s Tech Tips, (2014). Mobile Contracts & ‘Retail Price Index’ (RPI) Price Changes. [online] Available at: https://kenstechtips.com/index.php/mobile-contract-rpi-increases#What_is_RPI_Inflation [Accessed 25 Aug. 2015].

King, D. (2012). Economics. Oxford: Oxford University Press.

Miller, R. (2012). Economics today. Toronto: Pearson Canada.

Miller, R. (2013). Economics today. [S.l.]: Prentice Hall.

Onita, L. (2015). Mobile phone usage shows when people are unemployed – E & T Magazine. [online] Eandt.theiet.org. Available at: https://eandt.theiet.org/news/2015/jun/phone-usage-unemployment.cfm [Accessed 25 Aug. 2015].

Parkin, M. (2012). Economics. Boston: Addison-Wesley.

Sharma, C. (2015). Mobile Industry is Now 2% of the World’s GDP, Analyst Reports. [online] Readwrite.com. Available at: https://readwrite.com/2011/07/07/mobile_industry_is_now_2_of_the_worlds_gdp_analyst [Accessed 25 Aug. 2015].

Sloman, J., Wride, A. and Garratt, D. (2012). Economics. Harlow, England: Pearson.

uSwitch, (2015). Mobile Phone Networks – UK Mobile Networks and Mobile Phone Companies. [online] Available at: https://www.uswitch.com/mobiles/networks/ [Accessed 25 Aug. 2015].

Wessels, W. (2012). Economics. Hauppauge, N.Y.: Barron’s Educational Series.

Williams, C. (2015). The impact of mobile telephony on economic growth | Deloitte UK. [online] Deloitte United Kingdom. Available at: https://www2.deloitte.com/uk/en/pages/technology-media-and-telecommunications/articles/impact-of-mobile-telephony-on-economic-growth.html [Accessed 25 Aug. 2015].