Apple as a monopolistic industry
Yixi, Gabriela, Jessica, and Tahlia
A monopoly is a market structure involving only one firm that sets both price and quantity and has a downward sloping demand curve. The graph below shows that the quantity in a monopoly is at MC=MR. It would be maximizing for Y. The price is the demand curve. The consumer surplus is located below the demand curve above the price. The producer surplus, is found between the price and marginal cost.
The first Apple ipad was released in 2010 and, at the time, dominated the hand held tablet industry. According to an ABI Research report, the ipad held 85 percent market share. For the purposes of this example, we will assume Apple is still a monopoly. What does this exactly mean? Apple has no other competitors, they created a product without substitutes and therefore face no competition. Because of this they set the price and quantity of their product regardless of the market equilibrium (as mentioned in class they now are the market). Quantity is lower than that of a perfect competition scenario and profits are much greater as well. More details on the price effects are explained below. Monopoly power is regulated in the United States by antitrust laws which promote fair competition. On the other hand, patents give a firm the right to produce an exclusive design of the product, for example. This means that, at least for some time, the firm is the only one who is able to produce and sell the exact product for which it was given a patent. This is done as an incentive for innovation and change.
By creating the new category of device, iPad dominated the tablet industry. Apple as a monopolist had the power over setting the market price of iPad. Recall the quantity effect and price effect in influencing Apple’s decision in setting the price. Aiming at attracting more potential consumers to its first generation iPad, which was innovative and advancing, Apple set the price of base model at $499, which was much lower than the pre-release estimates by Wall Street analysts. Therefore, Apple sold more than 15 million first-generation iPads before its release of the iPad 2. As price decreases on all iPad that Apple sell, the marginal revenue of iPad 1 is less than the slope of consumers’ demand curve. However, since Apple was acting as a monopoly in selling iPad, the market price is still much higher than the one in a perfectly competitive market.
**How apple uses price discrimination to increase their revenue.
During the fall of 2011, Apple introduced and sold their MacBook Pro laptop computers with 13-inch screen on its website and in its retail stores for $1, 499. Yet, college students and faculty members could buy the same computer from Apple for $1,399. Why would Apple charge different prices for the same computer, depending on whether the buyer is an customer that studies in an educational institution? It makes sense for Apple to charge different prices because students that are customers have a different price elasticity of demand than other customers. So, Apple will charge the market segment with the less elastic demand a higher price and the market segment with the higher elastic demand a lower price. This suggests that Apple charges customers a lower price because they have a more elastic demand than some customers.
Here, the graph shows that in the education customers segment of the market, the marginal revenue equals marginal cost at 20,000 computers sold. This shows, Apple should charge a price of $1,399 to maximize their profits. Yet, if Apple charges $1,399 to the general public segment of the market, shown in (b) then it will sell 32,500 computers which is more than the profit-maximizing quantity. By charging $1,499 to the general public, Apple will sell 30,500 computers, which is the profit-maximizing quantity. We have shown that Apple will maximize their profits by charging students in educational institutions with a lower price than it charges the general public. You would notice the demand curve in graph (a) that is more elastic and steeper.
Math example :)
Apple wants to maximize its profits. An output and price must be found that allows the company to make as much as it can. The profit maximization function is given for a monopoly:
Max y, P(y)*y - C(y)
As an example (not using actual data) let us say that Apple has a demand curve of P=400-3yand a total cost function of C(y)=y2+ 4
In order to find optimal output we must use the profit maximization equation.
Max y, (400-3y)*y - y^2- 4
Here we use First Order Conditions and solve for y
400-8y=0
y=50
Now that we have found y, we plug it into the demand curve to find the price
p=400-3(50)
p=250
Lastly, we want to know the profits that this monopoly will receive. Here we plug our newly found quantity and price into the profit equation
profit =(50)(250) - (50)2-4
profit = 10,004
This is how one would calculate the profit of a monopoly.
Resources:
http://www.law.cornell.edu/wex/patent
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