Managerial Economics Assignment

Submitted by – Working Group A2

21B104 – Akansha Kumari

21B134 – Rachit Middha

21B139 – Rishikesh More

21B143 – Shriyans Varma

21B146 – Saransh Chhabra

What is Apple’s monopoly power in the global smartphone market? How has Apple’s
monopoly power changed between 2014 and 2016?

Answer- Apple operates in a monopolistic competition. Monopolistic competition is a market

system in which a large number of enterprises compete in the same industry, producing
comparable but different products. There is no monopoly among the companies, and each one
operates independently of the others. It is a type of imperfect competition. 
The following are some of the features of monopolistic competition:
 A Large Number Of Sellers - The Indian smartphone market has over 100 brands,
all of which are fiercely competitive. Samsung was the market leader with a 29
percent market share from January to March 2016, followed by Micromax Informatics
Limited (Micromax) with a 17 percent market share. Intex Technologies Ltd. (Intex),
Lava International Limited, and Lenovo Group Limited were the other major
companies, with market shares of 10%, 6.8%, and 5%, respectively. Apple with a
market share of 1.9 percent, was not even in the top five.
 Product Differentiation- Each firm has the same product i.e. smartphones but they
are differentiated by their features and qualities. Companies compete based on
product quality, price, and how the product is marketed
 Freedom of entry and exit- Each firm is free to enter or exit the industry whenever
they want to. The barriers to entry into the Indian smartphone market are low.
 Pricing Decision - Companies are the price makers, not takers. They set a price for
their smartphones taking into consideration various factors like brand value, features
offered, presence of competition in the same segment, etc. Small and new companies
have to keep prices low to compete and acquire the market share. Big companies like
Apple, keep their prices much higher than the cost due to their position in the market
and enjoy a good profit margin.

Monopoly power -
The ability of a corporation to charge a price higher than its marginal cost is referred to as
monopoly power (also known as market power). Monopoly power is more common in
industries where there is a low demand elasticity and high entry barriers.
Monopoly power is calculated by the Lerner Index of Monopoly Power. It is a measure of
monopoly power that is calculated by measuring markup price over marginal cost as a
fraction of price.

Bill of Total BOM +

Full Price Material Assembly Assembly Cost
(Price/Unit (BOM) Cost Cost Per Unit Monopoly Elasticity
Year Model in $) ($/Unit) ($/Unit) ($/Unit) power of demand
iPhone
2014 6 16 GB 649 196.1 4.5 200.6 0.69 -1.449
iPhone
6S 16
2015 GB 650 211.5 4.5 216 0.667 -1.499
iPhone
2016 7 32 GB 649 219.8 5 224.8 0.653 -1.531
 Lerner Index Formula

L= (P-MC)/P

Lerner’s index in 2014: = (649-200.6)/649 = 0.690

Lerner’s index in 2015: = (650-211.5)/650 = 0.667

Lerner’s index in 2016: = (649-219.8)/649 = 0.653

In 2014, Apple implemented a strategy to raise its prices based on the assumption that
consumers are price insensitive. And this strategy had a significant impact on Apple's
monopoly strength. As a result of this method, the cost-price disparity widened significantly.
In 2016, Apple unveiled the current iPhone 7, whose selling cost three times the cost of the
product. Between 2014 and 2016, the margin grew exponentially. The three-fold difference
has a significant impact on iPhone demand. Price elasticity of demand is a measure of the
impact of price on sales. If the price elasticity is larger than one, it indicates that the market is
elastic and that customers are sensitive to the price.
Consumers in Indian and Chinese smart phones market were inclined towards less expensive
android smart phones due to their price sensitivity. This resulted in a lower sales of Apple
products which were highly priced. Another major setback suffered by Apple was due to
Indian government policy. ‘The Make in India Campaign’ and high import excise duties
levied by Indian government boosted Indian manufacturing, which resulted in an increase in
the competition in India.
Apple’s iPhone 6 (16 GB), iPhone 6S (16 GB), and iPhone 7 (32 GB) had a monopoly power
of 0.690, 0.667 and 0.653 in the years 2014, 2015 and 2016 respectively. 
We can see that Apple's monopoly power is decreasing from the year 2014 to 2016, but the
rate of decrease is not significant enough.
The closer the monopoly power to 1, the higher is the markup done by the company. 
It is evident in the case of Apple that it is charging high prices for iPhone when compared to
smartphones of other brands. 
As we can see the elasticity of demand has been increasing in magnitude from the year 2014
to the year 2016, signifying that people are now more elastic in their decision to switch the
brand from Apple owing to its pricing.
Irrespective of this fact, Apple has a high monopoly power which should not be the case. It
has been trying to lower the monopoly power to acquire a share in the market.
It has been seen in the case, iPhone sales in India's price-sensitive sector were down 33%
year over year. This was despite a 28% annual increase in Android phone sales in India, from
23.2 million units in Q2 2015 to 29.8 million units in Q2 2016, with Android's market share
expanding from 90% to 97 percent during that time. Between Q2 of 2015 and Q2 of 2016,
Apple's smartphone market share in India nearly halved, from 4.5 percent to 2.4 percent.
Apple’s sales and revenue were falling as compared to competitors, yet they earned higher
operating profits. This implies that Apple’s pricing strategy didn’t work as expected.