Networks and Market Leadership
According to Gartner Inc., an information technology research company, Apple is expected to remain the leader of the tablet market until 2014. Android tablets, which constitute the second largest market share, currently make up only 17.3 percent of the tablet market. Their market share will presumably go up to 36 percent by the end of 2015, but Apple will still dominate the market. The analysts said Apple’s success is grounded on the “superior and unified user experience” that the iPad provides to the customers. Moreover, Apple offers the iPad “for a very competitive price,” which is hard to beat for rivaling tablet manufacturers. As there are surely more factors that contribute to Apple’s success, I want to deliver two approaches from a networks-based perspective to explain Apple’s domination in the tablet market.
The first simple model I want to present is the information cascade model. When reasoning about a buying decision, people have trouble in rating a new product themselves; hence they often consider the feedback their friends offered about the product as well as other external sources such as reviews on the internet. To put this in terms of my simplified sequential cascade model, current purchasing decisions correspond to decisions people made earlier in the sequence. As we know from class, as soon as two subsequent people made an “accept” decision, an information cascade starts, meaning that everyone after those two people will make the same decision thereafter.
Applied to the process of buying a tablet computer, this means that after having observed a few satisfied iPad customers, potential tablet buyers will be more likely to purchase an iPad as well (as opposed to a different tablet). Even if there are better competing products available, the buying cascade involving the iPad will prevent people from purchasing these competing products. Apple also had the advantage of conquering a new market where there were no legitimate competitors at the time. This head start makes it hard for other companies to catch up. In order to do so, they need to break the buying cascade that was started long ago.
Using a model for network effects, one can explain why Apple’s dominating market share seems to be remarkably stable. The model we introduced in class represented customers as real numbers between 0 and 1. Each customer had a reservation price r(x), which was the maximum amount that he was willing to pay for a product. We modeled network effects by saying that a customer will purchase a product if r(x)*f(z)>=p*, with p* being the price of the product and f(z) being a function measuring the benefit to each consumer when a fraction of z people purchase the product. There are special situations called self-fulfilling expectation equilibria which is when the fraction of people that are expected to buy a product will actually purchase it (e.g. z = x). As our analysis eventually revealed, outside these equilibria there will be a downward or upward pressure towards stable equilibria.
Apple did two things right: First, by raising everyone’s expectations, their product was more likely to be successful because more people initially bought it, which yielded a greater benefit, f(z), to all customers, pushing the demand upwards towards a stable equilibrium. Secondly, by offering the iPad at a reasonable price, they are more likely to end up in a “high” stable equilibrium, meaning that there are more purchases being made than at lower equilibria. Also, a low price will cause more people to buy it initially which results in the same benefit as above.
See the original article on http://www.gartner.com/it/page.jsp?id=1800514