COMPETITION ON SMARTPHONES MARKET

Smartphones can be defined as mobile phones able to perform many of the functions of a computer,
typically having a relatively large screen and an operating system capable of running general-purpose
applications. (Oxford Dictionaries, 2013)

They are considered to be differentiated products. By differentiated products it can be understood products
with different characteristics but serving basically to the same purpose. (on smartphones market, the products
have basically the same purpose: calling, social networking, photographing, but different features). Product
differentiation can be made by marketing of generally similar products with minor variations which make
them imperfect substitutes for consumers. This may involve real differences in material, design,
workmanship, or other aspects of quality, or differences in advertising and the reputation of producers for
quality and reliability. Sometimes products may differ in both aspects, product differentiation being
associated with the use of trade-marks and brand names. (Black, 2003)

Smartphones are products with network externalities

Smartphones are products with network externalities. Network externality has been defined as a change in the
benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind
of good changes. (S. J. Liebowitz, 2008) Therefore, as smartphones increase in popularity, for example, a
smartphone becomes more valuable since his user will have greater use of it. This is because since the
convergence of physical features of smartphones occurred, the actual fights moved to ecosystems and platforms.
Smartphones market it can be classified either as an oligopoly one either as a monopolistic competition but this
paper aims to demonstrate the 2
nd
option.
Monopolistic competition on Smartphones Market
Firstly, Monopolistic competition is a market structure in which a large number of firms compete (12 main
companies): Apple, Samsung, Sony, LG, HTC, Nokia, Huawei, Acer, Asus, Google, Allview, Motorola. This
aspect has 3 implications for the companies in industry: small market share (each firm has only limited power
to influence the price of its product), lack of sensitivity to individual competitors due to the small market share
that each firm has and lack of cartels because of the large number of firms in industry. (Matthews, 2003)
Secondly, each firm produces a differentiated product (Matthews, 2003). Product differentiation consists of
products with different characteristics but serving basically to the same purpose, as it was exemplified at the
beginning.
Thirdly, firms compete on quality, price and marketing .The cross price elasticity of demand between two
different products is zero or close to zero. However, the cross price elasticity of demand between two
differentiated products is positive, and different than zero. (Salehnejad, note 2).
Basically, monopolistic competition model is based on products which are likely the same. Also, consumers
make their decisions of consumption based on their perception of difference. Thus, for company the profit it is
not realized by emphasizing the difference between their product and their competitors product.

Application on Smartphones Market
In terms of monopolistically competitive firms, they produce differentiated products. This means each firm
operates in a separate (unique) market. And since the firms product has no perfect substitute, the firm faces a
downward sloping demand curve. On the other hand, since a monopolistically competitive firms product has
close substitutes, the firms demand curve is not very steep. Recalling the higher the number of substitutes, the
falter the demand line will look like, product differentiation entails a downward sloping demand curve
(Salehnejad, note 2 ) Nevertheless, the evolution of those platforms is a positive one, and so the market is. In
2011, Apple App Store and Google Android Market had more than 500 000 apps on their platforms, keeping
also high prices for their products. Meanwhile their competitors, BlackBerry App World, Nokia Ovi Store,
Palm App Catalog and Windows Marketplace could sum of less over 90 000 apps together. (Rahul C. Basole,
2011). Also, it could be considered that the evolution of market went from physical appearances to ecosystems
and platforms. The integration of mobile applications and platforms resulted in a tremendous success for multi-
sided platforms.
The graph below shows the dominance of the market place of smartphones and how it evolves in time.
Meanwhile in 2009, Android had only 3.9%, in 2012 it reached 66.6%.










Source: http://www.theguardian.com/technology/2013/nov/07/android-market-share-smartphone-users-google-
apple

For a better perspective of smartphones evolution it could be considered the timeline. In 2006 Apple was about
to launch an innovative phone, meanwhile Nokia was selling phones in hundreds of millions, controlled supply
chains. While Apple was working at the first iPhone, and Nokia was selling half a billion of phones each year,
Google decided to buy the company Android. Nokia was invited to join in but refused it. 2 years later, in 2007,
Nokia had a market capitalization of 110 billion euros; by May 2012 this had fallen to 14.8 billion dollars.
Those figures illustrate the extent of the decline over 5 years in which Apple and Android came to dominate
smartphones. (Shaughnessy, 2013)

Another important feature of monopolistic competitive market is the lack of barriers to entering and exiting the
industry in long run. What differentiates monopolistic competition from the perfect one is that each firm faces
the downward-sloping demand curve. (Stanley Fischer, 1987)

Price Elasticity of Demand
When we talk of the evolution of a monopolistically competitive market, among other things, we refer to the
process whereby a firms demand curve continuously shifts leftwards as new firms enter the market to make
profits. A careful understanding of this process is vital for analyzing the essay topic and, more importantly,
designing optimal business strategies for monopolistically competitive industries. (Salehnejad, note2 )
















Source: http://ingrimayne.com/econ/International/MonoComp.html



Business Strategies
Business strategies (how firms make decision regarding output and input) . Taking into consideration that
people make their consumption decision based on the principle of paying less or equal for a product than the
value of product, and the network externalities effect , it can be considered that the actual competitively on
market being basically between Apple iOs and Google Android justifies the prices and output they have. Even if
they key point of a normal business strategy is to set up small prices, to enter on the market, in case of
smartphones market , because they are differentiated products with network externalities, the starting price is
high. Penetration or zero pricing at the start is very important.
Also, companies use continuous product differentiation through research and innovation, and marketing and
advertising. Samsung spent some $323 million between 2011 to 2012, while second-biggest spender Apple's
budget went from $253 million to $333 million over the same period. (www.appleinsider.com, 2013)

As a matter of evolution on monopolistic competition market, both companies which have the biggest market
share developed ecosystems. An ecosystem can be described as a networked system that contains a set of
objects that are tied to each other. In platform ecosystems, these objects are companies and ties are offer
buyer-supplier relationships, alliances and partnerships. The products became quite similar- smartphones, being
remarked the product convergence. The next step was an ecosystem of complementary software a strong
platform Apple iOs and one Google Android. As a result, the competition started by enhancing and developing
their platforms (Ecosystems). An important role is played by the size of the installed base of each platform and
the network externalities went into the spot light. The brands (platforms) that succeed to gain a larger installed
base earlier begin to dominate the market. And, as the installed base of platform increases, the platform
becomes more valuable to new potential customers, which incentivizes more customers to join the platform,
further enhancing network effects (Salehnejad, 9) 7 out of 40-50 different mobile platforms hold
approximately 97% of the entire market. (Rahul C. Basole, 2011)

In addition, it can be stated that as an installed base of a platform expands, the overall value of competing rival
platforms diminishes. Thus it is given rise the dominance of one or two platforms, eventually pushing
competitive platforms out of the market, leading to a winner-takes-it-all situation when it comes about
dynamics. Internetwork externalities and economies of scale, both using fast growth (an increase of all slides of
the market quickly, and pricing strategy), platform differentiation (multi-homing markets) , low switching costs
are just a few from the strategies that keep actual platforms iOs and Android dominants on the market.

In 2007 Apple started the first ecosystem in industry, when they released iPhone on market, integrating iTunes
software. In addition, they created the first application for download, management and payments - App Store.
Since then, all the rest of the companies have been trying to learn and practice the concept, developing more
and more multi-sided platforms. In this complex, it should be understood the effect of network externalities:
during 2009-2011 the number of developers at App Store grew up from 28.152 to 75.850. Same exponential
growth happened in Android Market: from 5.177 to 41.000 developers. The market share and number of
customers rose tremendous as well. (Rahul C. Basole, 2011)



Source: http://ben-evans.com/benedictevans/2013/5/23/on-market-share















For future, it is estimated that the estimated number of smartphones in use is about to pass the number of PCs in
use probably in the first half of 2014. (Blodget, 2013)











http://www.businessinsider.com/number-of-smartphones-tablets-pcs-2013-12
Also, given the rise of Google Android, their differential advantage , it can be assumed that Google Android
will grew up if Apple iOs does not invest in research and comes with an outstanding idea to innovate their
products and gain market share again.


In conclusion, generally economic theories, the past of the companies and the actual economic and social
environment suggest that smartphones market, a monopolistic competitive one, multi-sided platforms have a
greater success in ecosystems, generating larger network externalities which will likely develop in the same way
in the future. Yet, Google Android Market has a competitive advantage in front of Apple App Store, the
analysis showing that if they keep improving their differential advantages, their growth will be steadily.




References :
1. Oxford Dictionaries. (2013, 12 12). Retrieved 12 12, 2013, from Oxford Dictionaries:
http://www.oxforddictionaries.com
2. www.appleinsider.com. (2013, March 13). Retrieved December 12, 2013, from appleinsider.com:
http://appleinsider.com/articles/13/03/13/samsung-spent-68m-more-than-apple-on-2012-phone-ads-
increased-budget-fivefold
3. Black, J. (2003). Dictionary of Economics. Oxford University Press.
4. Blodget, H. (2013, December 11). www.businessinsider.com. Retrieved December 12, 2013, from Business Insider:
http://www.businessinsider.com/number-of-smartphones-tablets-pcs-2013-12
5. Matthews, P. P. (2003). Economics. Addison-Wesley.
6. Rahul C. Basole, D. J. (2011). Evolution of Mobile Platform Ecosystem. BISE STATE OF THE ART, 4.
7. S. J. Liebowitz, S. E. (2008). Network Externalities (Effects) . Network Externalities (Effects) , 1-8.
8. Shaughnessy, H. (2013). Apple's Rise and Nokia's Fall. Forbes, 1-3.
9. Stanley Fischer, R. D. (1987). Economics. William Clowes Limited, Beccles and London.
10. Salehnejad, R. (2013), Note 2: The Theory of Monopolistic Competition, Blackboard
11. http://www.theguardian.com/technology/2013/nov/07/android-market-share-smartphone-users-google-apple
12. http://ingrimayne.com/econ/International/MonoComp.html
13. Salehnejad, R. (2013), Note 9: Platform Competition, Blackboard
14. http://ben-evans.com/benedictevans/2013/5/23/on-market-share