Part 1: Company Overview
Apple Inc. is a worldwide company that is focused on providing innovative products and solutions to consumers in the technology market. Apple has set the benchmark in numerous products they have developed throughout the years. The company designs, manufactures and markets high quality personal computers (desktops/laptops), portable music devices, video players, cellphones, and a variety of software services. Products are sold to a number of demographics, readily waiting for the ‘next big thing’:
Teenagers – This demographic heavily uses IPhones & IPods in order to stay connected to friends through various means of social media or pass time playing with various gaming apps.
Post-Secondary Students – Students at this level are making full use of MacBook’s and IPads. These products are easily portable and light making it much easier carrying devices to and from school.
Business People – Apple has helped improve businesses conveniently stay connected around the clock. It has also made it easier for business to design and create documents with their high end software.
Young Children – Able has been able to revolutionize how children begin learning. The use of IPads has allowed very young children to use apps to play various types of learning games.
Adults – Today you see the majority of the adult population utilizing an IPhone as part of their everyday needs to make calls, map directions, taking pictures, and accessing social media.
Apple has tapped into to a variety of consumers, continuously and uniquely meeting the needs of each market with their innovative technology.
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Apple faces competition with a number of companies in the technology industry, because of their diverse range of products they are able to take a large portion of the market share. In terms of their computers, their competitors include Dell, Acer, and Lenovo. For mobile devices, they compete against companies like Samsung, Google, Sony, and HTC. Regardless of the extremely high competition, Apple have been able to consistently stay on top of the newest and current technologies. Staying one-step ahead of the market has given Apple a successful competitive advantage over their competitors. Apple is constantly on top of the newest and current technologies which gives them that competitive advantage over their competitors. With a worldwide eye on a large company that Apple is, it’s been crucial that they are complaint with the regulatory environment. Apple has followed laws and practices of many jurisdictions with their products; federal, state, local, and foreign. As each country differentiates from each other, they have been complaint with all.
This includes recycling of products and material specifications. Being environmentally conscious have been important to the success of Apple today. Today the pressure on major business to “be green” has never been greater. Consumers now are having growing expectations to show eco-friendly practices, if Apple were to ignore their consumers expectations it would impact their reputation and future success.
Part 2: Market Structures
There are four different types of market structures; Perfect competition, monopoly, monopolistic competition, and oligopoly.
Perfect competition occurs when there is a large number of buys and sellers for a homogenous good or service. The market entry and exit is easy, and not one company can affect the market prices. All companies in a perfect competition are so small in relation to the industry. The productions decisions have no impact on the market, meaning prices has little control over this market structure. A company that is in a perfect competitions cannot influence the price because they use the prices that is given by the intersection of the market demand and market supply curves – this is called a price taker. Its influence on price is insignificant. An example of a perfect competition would be agricultural industries – the market for wheat.
A monopoly market structure is known as the “price maker”. This would be opposite of the perfect competition mentioned previously. A monopoly market exists when there is only one seller of a product or service. Substitution are not available for these products and there are usually significant and/or legal barriers to the entry of this market. An example of a monopoly is government regulated utilities; electricity, water, and natural gas.
The next market structure is monopolistic competition. This is a market structure what has many company’s selling differentiated products. This competition is seen as similar to the perfect competition. Entry and exit into this market is open, as a result of this there are many independent sellers. An example of monopolistic competition is retail clothing, furniture stores, health/personal care products, and restaurant meal options.
The last market structure is the oligopoly – known as the price setter. This market structures has very few sellers offering similar or identical products. Goods and services in an oligopoly are either homogenous or differentiated, regardless of this the barriers to enter this market is very difficult. An example of an oligopoly market structure is tobacco and beer.
Part 3: Apple’s Market Structure
I believe that Apple Inc. exists in an oligopoly market. It shares many similarities with monopolistic competition as well; however a few key details differentiate it. The tech industry market is one with a few major players such as Apple, Samsung, and Toshiba. The industry has its share of competition, yet overall shares of the market don’t fluctuate very much with Apple still maintaining a decisive lead in most product markets. The barriers to entry into the markets in which Apple operates are extremely high as discussed in question 5. The cost alone of producing a smartphone on a mass scale is astronomical and surely a barrier to any potential business from entering the market. I feel one of the key details that show Apple exists in an oligopoly is that it has been able to maintain long-tern economic profits. This is a condition of an oligopoly market as firms are price setters and therefore can maintain and even increase profits simply by increasing their products price slightly and at their discretion. The technological industry is extremely conscious of each other’s actions and an individual firms decisions affect the decisions of other companies. Such as if Samsung began to sell their phones at an extremely low price, Apple may have to counter with a price decrease as well to maintain a controlling share of the market. I feel it is important to note that in Apple Inc.’s particular industry, firm’s products are differentiated and that condition does not match oligopoly as firms generally have a very similar or identical product. Yet it can also be said that a smartphone is a smartphone and a tablet a tablet and in that definition, they are essentially the same product with a different appearance.
Part 4: Economic Profit Levels
In 2015, Apple ranked number 5 on the fortune 5002 generating a $39.5 billion in net income. Previously in 2006, Apple place number 159. In Figure 2, you will notice that Apple’s earnings have increased each year since 2011. Currently Apple holds a Gross Profit of $93.626 billion U.S. and an overall net income of $53.394 billion US Dollars. Forbes ranked Apple as number 3 in overall profit making companies in the world.
Accounting profits are different from economic profits since they decrease the total explicit costs from the revenue – whereas economic profits decrease the explicit and implicit costs form the revenue. Accounting profits are equal to the total revenue less the total explicit costs.
Explicit costs are the monetary costs of running the business such manufacturing costs, office space rental, transportation and shipping. The accounting profits can also be taken to represent the overall trend of how the company takes in the marketplace, whether the change be a positive or a negative value it generally signals the trend of the company’s future.
As mentioned above, economic profits are the total revenue less explicit costs and implicit costs. Implicit costs are all the other possible choices a company could have made and therefore had to part with in order to pursue a different business route. Implicit costs are what could have been gained had the company made a different decision using the resources at in it disposal. An example of this would if Apple theoretically chose to focus their funding on “Software Development” and as a result missed an opportunity to buy-out a competitor. The implicit cost of funding “Software Development” is the total profits of the competing company, as they could have been Apple’s had they made a different decision. Economic profits provide an analysis of the potential of the company giving its present resources as they are the alternate decisions available to the company.
Apple’s consumers are to thank for their ever increasing loyalty to the brand, regardless of thehigh price, this has helped Apple to maintain positive and massive economics profits throughout the last few years. Apple has shown is dominance in the technology industry. If Apple had ever decided to take a different business route the results of their success will be completely different. Apples has fought and remained ahead of their competitors with their products.
Pick a publically traded company that you would like to know more about and print out their annual reports. Become familiar with your company and understand the business and industry in which it operates. Once you become familiar with the company complete the following questions:
1. Provide an overview of your company discussing the industry it which it operates. Briefly discuss its sales and profit levels it reported in the most current year for which its annual reports are available (if you are in a 2012 class for example, you should have access to 2011 annual reports for instance). Briefly discuss the competitors you company faces within the industry and the regulatory environment it which it operates within.
2. Please outline the market structures discussed in class or your textbook. For each market structure, outline the facts that need to be present for such market structures to exist. Be as exhaustive as possible in your answer. This question should be general in nature and not related to your selected company.
3. Having outlined what the different market structures are in 2 above, where does the company you selected fit in the scheme of things? Does your company operate in a perfectly competitive environment or does it fit somewhere else (oligopoly, monopoly, other)? Why or why not. You should ensure that the characteristics that make up a particular market structure are discussed when determining where your company falls.
4. Looking at your companies financial statements discuss what there profit levels are like. What are the accounting profits and how does it differ from economic profits (in general and not related to your company). In your specific case, what is the accounting profits(give a value)? What can we say about economics profits (without being too specific: are they zero or non zero).
5. If the answer to the above suggest that accounting profits and or economic profits are greater than zero, will new entrants to the market result in profits falling over the longer term? If not, what factors present within the industry and marketplace acts as a barrier to entry? Be sure to look at factors specific to your selected company to answer this question.
6. Class, look at the good your company sells. Is the good elastic or inelastic and why? What does this suggest will happen to your company’s profit levels if they decided to increase price or decrease price? If you where a shareholder in the company what would you suggest where would you like to see prices go? Do governments impact the price that you are able to charge? If so, is this good for customers? Why or why not?
7. What is government regulation like in your company’s industry? Does the government employ any regulation designed ensure that competition is healthy or the rights and welfare of consumers is protected. Would you support governments breaking up companies if they become too powerful? Why or why not? Be sure to discuss how consumer and society’s welfare are impacted by firms that exhibit market power? Do you think that governments should always, as a rule, reduce market power of firms that exhibit market power (in order to protect consumer welfare) or should firms be able to grow to be large and power (such as Microsoft)? Would breaking up large companies as a rule eliminate incentives to work hard?