Apple’s Dominance and Networks Effects
Sources:
1. R.Price, Apple is taking 94% of profits in the entire smartphone industry, Business Insider
2. Smartphone Shipments Reach Second Highest Level for a Single Quarter as Worldwide Volumes Reach 355.2 Million in the Third Quarter, According to IDC
http://www.idc.com/getdoc.jsp?containerId=prUS25988815
Apple, according to an article on Business Insider, has a dominating 94% profit in the entire smartphone industry. However, it is only responsible for 13.5% of phones shipped globally, according to an IDC research. However, an argument was made that the 94% profit was an overstatement since the research failed to address the profits made by some growing Chinese smartphone OEMs, which took a large share in Q2/2015, with their aggressive pricing strategies.
In our class we learned the networks effects for pricing and market share. This is a good example of how to maximize profit and how to launch a new product. Apple, with the impressive features, quality and service of their product, has successfully won a significant market share and a huge group of loyal fans. Their pricing strategy is to maximize profit: which is to establish an equilibrium where the market share remains as they desire and at the same time maximize the price of the product. The profit is the margin per item times the number of purchases, which was maximized with this strategy: if they lower the price, there might be more users, however the total profit might decrease due to the lower margin; on the other hand, they will not be able to make as much profit as they are since the number of users will likely turn to their competitors’ products due to their higher price. Therefore, Apple retains the right amount of users at the right amount of price in order to receive the maximum profit.
Apple’s Chinese counterparts, on the other hand, use aggressive pricing strategy so that they can grow their user bases. As we learned in the class, if the price is lower than the higher equilibrium price, the number of users will increase. To gain a higher profit in the future and practice a profit maximization strategy like Apple does, an aggressive pricing strategy is in order. Once they have gain the desired market share, they will then be able to charge a higher price for a higher margin to maximize their profit. Though it is a rather simplified model, it is essentially guiding the pricing strategy of multi-billion-dollar corporations.