Toppling a Giant
For most of the 1990’s, Apple was the second-place holder in the world of personal computing. Since then, Apple has risen to the top by re-positioning itself as an innovative, sleek, and modern company with products such as the iMac, iPod, and more recently the iPad. In addition, Apple was led on a large-scale marketing campaign by Steve Jobs and has since garnered a customer base so loyal it are sometimes compared to a cult. Many other tech giants have attempted to challenge the dominance of the iPad but all have failed to give the iPad any real competition. The most recent challenger is Amazon’s Kindle Fire, which for reasons relating to network structure and game theory, poses much more of a threat to the iPad than previous competitors.
In a perfect competition with consumer sovereignty, it doesn’t make sense to consider network exchanges or power positions but in this sort of duopoly, these become major factors in analyzing which product will be successful. The current situation in the tablet market is a monopoly in the iPad is priced higher than the market clearing price; while there is a large demands amongst buyers looking for tablets, the negative payoff from the iPad’s current price leaves many buyers stranded. Apple’s ability to do this comes from its power position as the only seller in what is essentially a tablet monopoly. Being at the center or this network, it is able to keep most of the value from its exchanges, thus its high profit margins. It can afford to sacrifice those deals where price exceeds value to the consumer since its strong market position gives it so many other offer s to choose from. These consumers are left without an option. Simply put, the iPad is currently above the market clearing price.
The addition of Amazon’s Kindle Fire into competition changes the tablet market in a way that changes the market structure by creating a duopoly. The Amazon Kindle Fire poses a threat to markets by adding payoff to buyers in two ways; it adds value by offering both a piece of hardware and access to the Amazon network and priced at $200 cheaper than the iPad, it has a much lower relative price. Other tech companies like HP and RIM have offered similar prices but none have been able to offer a network like Amazon’s. The Kindle Fire also comes with access to the “world’s largest bookstore” and to Amazon Prime, creating a strong tie between the user and Amazon. Thus, This combination of lower price and higher value puts the Kindle Fire closer to the market clearing price and makes the tablet market look more like a preferred seller graph. The buyers who now face a weak position in the Apple network, now have an outside option and no longer have to play an ultimatum game that leaves them nearly powerless. This by itself is nothing unusual; the concept of a perfect competition is that all markets are preferred seller graphs. However, this is often not the situation and the current tablet market more closely models a monopoly. What truly makes the Kindle Fire interesting is that it demonstrates a growing trend in technology where the value of products is not determined only by hardware but also by the network it gives users access to.