Market Behavior One Industry That Has Seen

Market Behavior

One industry that has seen a shift in the market model is the smartphone industry. During the mid-2000s, this industry was an oligopoly, populated basically by two firms that emerged from the old PDA market. Palm and RIM (Blackberry) operated as a duopoly, catering primarily to business customers with early smartphones. Apple joined the industry with the iPhone, and was quickly followed by a number of other players. The organization of the industry is somewhat unique, as some firms are vertically integrated providers with operating systems and hardware integrated (Blackberry, Apple) and other firms have a number of hardware manufacturers working in conjunction with operating systems makers. Thus in operating systems there remains almost an oligopoly with two or three major firms and a couple of other minor ones, whereas on the hardware side the industry is fully in a state of monopolistic competition.

Short Run and Long Run Behaviors

During the oligopoly years, the expected behavior was that the firms would compete against one another. They would not have a high level of innovation, and would charge premium prices. While some oligopolies sees firms enter a race for the bottom, these are differentiated products so both major producers felt compelled to keep prices high. Apple's entry to the market did not change that, as it was also a differentiated producer, but once the OEMs and Android became involved, the nature of the industry moved away from the type of oligopoly that supported high prices.

Even Apple's entry into the industry disrupted the nature of the competition. Blackberry was winning the battle against Palm, but Apple's entry into the market all but eliminated Palm. While Blackberry had a niche in the business market and Apple courted consumers, Blackberry has proven unable to innovate at the same pace of Apple and newer entrant Google, and has seen its market share dramatically reduced as a result (Thierer, 2012). Other players such as Microsoft and Nokia (Symbian) have failed to make a significant dent in the market, which is rapidly moving back to oligopoly status with Google and Apple as the only players.

Kokovin (2011) studied this type of industry, dominated by big players with oligopoly positions and a set of monopolistic competitors underneath on the margins of the industry. In that study, the monopolistic competitors had low barriers to entry and exit, so probably describes the hardware side of the business more than the operating system of the business, but there is no shortage of companies still operating on the margins of the industry trying to break in. The short run prediction was that the big firms within the industry alter the strategic interactions between the big firms. Over the long-run, all companies within the industry would adopt practices characteristic of monopolistic competition.

The short-run prediction does not appear to have played itself out, as at this point Apple and Google appear very much locked in an oligopolistic battle with each other. There are two points to make here. The first is that the conditions are not exactly as described by Kokovin, since there are significant barriers to entry for smaller firms. These barriers include not only the cost of developing an operating system and signing deals with OEMs and telecoms, but also in building an application store. One of the major reasons that Apple and Google are destroying Blackberry is due to the number of apps available for Android and Apple -- this is a key selling point and no firm can succeed in the industry without apps. Thus in the short-run, these firms are behaving much more as oligopoly firms than predicted.

Interestingly, the long-run prediction is closer to having come true. This prediction held that firms were likely to behave as in a state of monopolistic competition. Both Google and Apple are doing just that, and for a couple of reasons. One is that Apple envisioned that as the state of competition all along, and Google entered the industry under those conditions. More importantly, both of these firms are incredibly successful, and understand that this is a long game. They knew that the early leaders in the industry are all but wiped out, and that is precisely because of the threat posed by new entrants. With Samsung leading the industry in unit sales -- thereby giving it bargaining power over Google -- and with well-financed companies like Microsoft still seeking to make a play in this market, combined with the rapid pace of change, it is entirely conceivable that either Google or Apple could be knocked out in the industry in a matter of a few years (Thierer, 2012).

Transaction costs can be incurred as the result of information asymmetry, as noted by Halaburda and Yehezkel (2011). Specifically customers and app developers do not know what the impacts of changing competition will be. This leads to the inability to optimize the decision between platforms. For many app developers this leads to multi-homing, but consumers will often switch between platforms as well (e.g. Blackberry to iOS; iOs to Android). For the firms developing apps, multi-homing is a natural response. For the platform developers, lowering the barriers to app development is essential to bringing out more apps.

Apple in particular has set up transaction costs associated with gaining access to its closed platform. This strategy is a response to the desire to earn as much profit as possible from the captive audience. The strategy is risky, however, because as the industry moves towards oligopolistic competition the app makers are going to seek out the company with the greatest market share, and right now that is Google. Google also has lower transaction costs, related to the openness of its technology and the ability of app makers to retain certain rights to their product and customer bases in exchange for having access to the different platforms. As apps are a major point of competition in the industry, Google leaving its platform open and access to it low-cost is effectively competing against the threat of new entrants. Apple is not; rather it is taking the Blackberry approach that has already failed once, operating on the idea that its customer base is unassailable.