Apple's Monopoly Power to Control its Products' Prices

We have studied monopoly(price competition&price discrimination), oligarchy and bundling this semester.

Analyze one of the following three short cases by using a formal model (from those that we have studied in the course). You may refer to the following points when analyzing each case:

• The demand function/s
• The cost function/s (fix and variable costs)
• Market structure and different market structures comparison
• Surpluses – consumer and producer surplus
• Firm's profit
• Mark-up price
• Marginal revenue and Marginal cost
• Total welfare and dead weight loss
• Elasticity
• Different pricing strategies
• Any other relevant definition or tool that you may use to analyze the case

ü  It is recommended to use graphs or equations to emphasize your analysis.

ü  You may add additional data to the case if relevant.

ü  Each case analysis should not be more then 2-3 pages.

ü  You may submit each case in groups, up to 3 students in a group.

Case 1

Are platform-based tech giants such as Amazon, Apple, Facebook, or Google should be broken up?  “TD in FL” put it succinctly with one of the age-old defenses of capitalism: “No breakups! Why punish a company for doing the best job they can and succeed?” Others argued that market definition is changing in ways that render United States anti-trust policy outdated in an increasingly global economy. David de Weese added, “It is not at all clear that they do not face competitors in Asia, India and other countries who will effectively threaten their apparent dominance, including in the US.” Alternatives to a market wide breakup were suggested. Guy Higgins pointed out distinctions between practices used to gain market power in the past and present. “Standard Oil … was an abusive monopoly, defined as one that used its market position to opaquely strong-arm suppliers and competitors. If Amazon, Facebook, Google and Apple operate transparently and legally, I don’t think we need to worry. The speed with which innovation occurs and expands will almost certainly see competitors explode from nowhere.” BLR said, “Eric Schmidt was once asked if Google was a monopoly and if so, should it be regulated or broken up. His answer: ‘Our product is free to the consumer. We welcome any competitors.’” Questions were raised about how a platform-based high-tech company could be broken up. Nick C commented, “If you did (break it up), would the residual entity be able to thrive if denuded to some extent from the parent platform economies and technologies?” Locked on Leaders asked how Google or FB could be broken up. “They own the virtual real estate, and I don’t see how you take that away from them,” he wrote. “Your only choice would be to shut them down, and that is fascism, not capitalism.” Can a platform-based tech giant be broken up? What do you think?

Case 2

In 2005, even with more than one player in its market segment, Apple was able to sell a more expensive product and achieve 63% control of digital music players and 83% control of legal digital music download market. Such an achievement was made through leveraging on its ITunes store and stylish status of iPods. In charging high products, Apple built a premium and exclusives status for its products. Over the long term, this will create a cult like following for its products if the firm can keep on developing digital music players with the better technology than that of its competitors. This will require massive investment in idea and technology generation and development. Low sales numbers can easily lead to the company being bankrupt. Charging high prices is a risky move but it may be a highly rewarding option.

Case 3

Comcast and Time warner Cable are two competitors in the provision of cables in the market. The two companies are selling the same product in the market on very competitive market forces. The two companies, therefore, merges in order to reduce the competition and working together to achieve the same goals and objective since they provide the same products. When these two companies merge, the levels of competition in the market will reduce effectively enabling them to have almost full control of the market through monopoly. The mergers will be able to determine prices and provide products to the customers without any competitive pressures. The need for a higher bargaining power in the market may also be the other reason for the merger of the two companies. This will enable the two companies to penetrate the global markets at the same time. The two companies also merged in order to reduce the costs relating to marketing and promotional activities in the market. The cost of marketing or advertising will reduce effectively by combining the costs of advertisements and marketing in general. This will also enable the two companies to share jointly the costs of technological advancements that are not of great value to the company individually. The merger will also create a monopoly of power leading to negative effects on the society due to lack of competition.