Module Seven Short Paper: Oligopolies

Introduction

Apple Inc. is an American global technology company concentrated on developing consumer electronics products and electronic devices, a worldwide company headquartered in California, Cupertino. Founded in the year 1976, Apple was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in 1976. The fame of this company lies in re-creating the world-class, state-of-the-art devices. This includes the revolutionary class smartphone, the iPhone, the iPad, and Mac PCs. On top of that, Apple also creates intelligent smart gadget wristbands with health ‘n’ fitness features like the Apple Watch and also produces AirPods, which are wireless earbuds capable of seamless integration amongst all its devices. Beyond hardware, Apple designs software, including macOS and iOS, with a package of services: Apple Music, Apple TV+, iCloud, and the App Store that solve different user needs. With its philosophy of beautiful design, simplicity, and constant striving for perfection, Apple has maintained a competitive edge in the technology world (Heracleous, 2013). The company also has an organizational model and leadership that drive innovation, making it stand out globally.

Pricing Strategies

Oligopolistic firms are those involved in markets with considerable barriers to entry and where the firms are related in that their decisions have a bearing on each other. In this regard, such firms tend to engage in complex behaviors while setting product prices. Game theory offers a platform for assessing these behaviors by providing insight into managerial decision-making in firms operating under the oligopolistic market structure. The interaction of firms in an oligopolistic market tends to be closely tied together. A price decision by another firm is likely  to affect the prices of competing companies. Therefore, the moment when the time has come to set prices, the company should guess what its competitor’s next move will be to avoid a potential price war. 

One of the major concepts of game theory is the Nash Equilibrium. In the context of pricing in this type of market, Nash Equilibrium means that the optimal pricing strategy of a company is to set a price that will be suboptimal for the company. On the same note, given the strategy of competitors, this price will not be changed by the company (Muu & Van Quy, 2018). It is an equilibrium in which no firm’s strategy is the optimal response to the strategies of other firms. This can be seen in the Cournot model of the oligopoly in which firms act simultaneously and competitively to choose quantities rather than prices. In this case, an individual firm’s output tends to affect the market price. In this model, two firms are assumed to act independently in the market in order to choose the level of output that will maximize their profits. Muu and Van Quy (2018) state that the Nash Equilibrium for this model is when the level of output by each firm is the reaction to the level of outputs of other firms.

Another model is the Bertrand model, which assumes that firms compete through price decisions. In this model, the firms choose their prices simultaneously. On this note, the Nash equilibrium occurs when the price chosen by a particular firm is optimal given the prices chosen by other firms. If firms put the same price on their products, they will share the market. On the other hand, if one firm undercuts other firms, Dolányi et al. (2023) indicate that it gets the entire market, thereby leading to a price war. The kinked demand curve theory also indicates the rigidity of prices in oligopolistic markets. This theory postulates that firms perceive their competitors to balance prices by not lowering prices but also not raising them. In this case, the aggregate demand curve slopes downwards while the aggregate supply curve is vertical. This means that firms are reluctant to change their prices. On the contrary, the firms are keeping their prices constant even when costs change.

The interaction of these models explains how the firms in the oligopolistic systems end up being trapped in strategically unenviable positions. For instance, should one firm in the industry decide to lower its prices in the hope of capturing more of the market share, it should expect that the other players will follow suit. Therefore, this will lower the profits for all the market players involved. Raoufinia et al. (2019) have identified that this link often leads to the non-aggressive positioning of prices, unless it is a last resort. However, there are also other competitive methods, like advertising or product differentiation, that firms can use to improve their market standings without necessarily courting into explicit price adjustments. Mankiw (2024) also notes that brand loyalty or any other differentiation is a good way through which firms can set themselves a position whereby they can charge high prices given that consumers are willing to spend their money on such products due to perceived high value.

These dynamics can be further distorted with collusive arrangements among firms. However, despite being prohibited in most jurisdictions by competition laws that encourage competition, collusion can take the form of tacit collusion. This occurs whereby firms agree on price or output that serves their joint best interest. As Mankiw (2024) observes, such behavior provides an insight into how firms in oligopolistic markets cooperate and compete at the same time.

Market Share

Samsung was the largest player in the smartphone market in Q1 2024 with a market share of 20%, while Apple had a 17% market share. The graph also indicates that Oppo and Vivo control 8% each, while Honor has a 7% fraction of the market, and Xiaomi remains at 14% (Laricchia, 2024).

Determination of Apple Inc. as an Oligopolistic Company

Apple Inc. can be described as an example of an oligopolistic firm because it reflects all the major features that define oligopoly. These key features include a market structure dominated by a few large firms, large obstacles to entry, and interdependence of decisions taken by the firms.

Market Concentration

Some famous rivals in the technology industry exist where Apple will compete against Samsung, Google, Microsoft, and others. Because concentration in such markets is very high, it gives a lot of power to such firms in terms of having a significant say in the market prices and conditions (Zhou, 2024). There exists a high brand reputation and value product line. This includes, but is not limited to, the iPhone and Mac, which have driven Apple to hold extensive market shares, commanding high pricing power in product development.

Interdependence

The oligopolistic nature of the markets means that the action of one market player impacts the others. For example, should an innovation involve a new model of iPhone from Apple or its operating system, the traditional course of action for Samsung is to produce their own versions. This strategy would make the competing firms retain their market share (Zhou, 2024). This is because competition in the market requires firms operating in it to influence attention to their competitors every time they undertake strategic moves.

Barriers to Entry

Many oligopolies also display high barriers to entry as another tendency of this kind of market competition. Some of the important barriers to entry that Apple has are patents and brand image. This industry also needs a lot of capital for research and development. As postulated by Zhou (2024), such a factor will make it difficult for new entrants to easily challenge the firms within the various markets and therefore consolidate the firms’ positions.

Dominant Firm

At the same time, in an oligopolistic setting where many companies are operating in similar fields, Samsung holds more share in the market compared with its nearest competitor, Apple. It can be seen in 2024, by the end of Q1, that Samsung leads the marketplace that holds a 20 percent share, while Apple is leading after it with 17% (Laricchia, 2024). For the reasons stated above, even though there is powerful competition from Samsung, due to premium branding and the ecosystem lock-in effect, Apple can compete with Samsung.

Conclusion

Apple Inc. can be cited as a good example of the oligopolistic market, where high industry concentration is combined with interdependence among a few dominant competitors, such as Samsung and Xiaomi. In this competition, commanding shares by Apple in smartphones and other devices give it a strong say in price and product offerings. In oligopolies, where firms are interdependent due to the fact that they usually follow each other, there is a need to respond swiftly to innovations by competitors to remain relevant and competitive. Such interdependence on a market is partly suggestive of an oligopolistic feature of the market. Also, Apple has benefited from high barriers to entry. Strong brand reputation, a high level of patent portfolios, and huge financial muscles raise the barrier to entry and keep new entrants at bay in this industry. By means of product differentiation and strategic marketing, Apple has been able to engage in non-price competition with an emphasis on innovation, developing a unique ecosystem of products that create loyal customers for its products. This strategy enables Apple to maintain high price premiums amid high competition from rivals, thereby fortifying its position as one of the oligopolistic leaders.

References

Dolányi, M., Bruninx, K., & Delarue, E. (2023). Triggering a variety of Nash-equilibria in oligopolistic electricity markets. Optimization and Engineering, 1-37. DOI:10.1007/s11081-023-09866-0

Heracleous, L. (2013). Quantum strategy at apple inc. Organizational Dynamics, 42(2), 92-99. DOI:10.1016/j.orgdyn.2013.03.002

Laricchia, F. (2024). Global Mobile Phone Market Share by Vendor 2022. [online] Statista. Available at: https://www.statista.com/statistics/632168/global-mobile-phone-market-share-by-vendor/

Mankiw, N. G. (2022). Principles of Economics. United States: Cengage. 

Muu, L. D., & Van Quy, N. (2018). Algorithms for finding global and local equilibrium points of Nash-Cournot equilibrium models involving concave cost.arXiv preprint arXiv:1805.02171.

Raoufinia, M., Baradaran, V., &Shahrjerdi, R. (2019). A dynamic differential oligopoly game with sticky price and advertising: Open-loop and closed-loop solutions. Kybernetes, 48(3), 586-611. DOI:10.1108/K-02-2018-0067

Zhou, Z. (2024). Market Competition and Monopoly Power: Insights from Oligopoly Structure.

Highlights in Business, Economics and Management, 24, 188-195.