Market Patterns One industry that has shifted in the past few years in terms of its structure is the smartphone operating system market. A few years ago, most of the early smartphones were based around proprietary operating systems. Palm and Blackberry dominated the market. Apple joined the industry with the introduction of the iPhone, but more recently other firms have entered the market as well, including Google (Android), Windows, Symbian and other systems. The market has moved from a stable oligopoly of four firms basically between two firms into a market that is much closer to monopolistic competition. However, there is the risk that as operating systems shake out, the market could return to an oligopoly of just three operating systems (West & Mace, 2007).

In the short-run, firms in this industry will seek to gain market share through differentiation. The products are slightly differentiated from each other -- they perform the same functions, more or less, but there are differences with respect to the usability, the look and the number of applications that are available for each. Another difference is that some market players, such as Apple and Blackberry, are vertically integrated with respect to their handsets and their operating systems, whereas other players like Microsoft and Android license their operating systems to multiple manufacturers. This behavior is consistent with firms in a state of monopolistic competition, as they seek to use this differentiation to gain advantage in the marketplace (Seppala, no date). As long as firms in the industry are making a profit, there remains incentive for new firms to enter the market. That is the case, with other firms set to enter the market in the next year or two.

In the long-run, however, the industry should enter into a state of equilibrium. Firms will be unable to make a profit, as the margin cost of production...

Thus, the industry will stabilize. In this industry, it is likely that the high fixed costs associated with participating in this industry will force some players to exit the market. This could bring the industry back to an oligopoly state, which is not predicted in the basic economic models. What is predicted, however, is that firms will continue to attempt to innovate and diversify in order to gain market share. If firms are unable to improve their market position by these means, then they might be compelled to engage in consolidation.
There are three types of transaction costs. Watkins (no date) outlines these transaction costs as search and information costs, bargaining and decision costs and policing and enforcement costs. In the mobile operating system industry, one of the most important means of differentiation is with innovation, and that forces firms to incur search and information costs. Bargaining and decision costs are incurred when the firm must either sell the product at a lower price that it would otherwise, given the market conditions. Policing and enforcement costs are often associated with the software industry, given that the industry is faced with significant piracy. There are high costs associated with maintaining a high level of protection for the products of the firms in this industry.

One expected behavior from these transaction costs is that firms will seek to maximize the effectiveness of their research and development costs. All firms will spend on R&D, but the firms that are the most successful are the ones that get the most bang for their buck with respect to their R&D spending. Another behavior that derives from these transaction costs is that firms are going to seek to leverage whatever bargaining power that they have in order to minimize their transaction costs. We can see, for example, that the big three…