Apple can be considered a monopoly primarily as a producer of the iPod. This is a product which has no close substitutes and inspite of being quite expensive has achieved a magnificent percentage of sales both in the USA market as well as globally. The iPod technology coupled with the digital downloading options from the iTunes site as a package is a unique product that has led to incredibly high profits for the company and when one considers the magnitude of the sales jump apple has succeeded in achieving by launching the iPod, it does seem to be presently a monopoly.
Consider the diagram below. Suppose prior to the launch of the iPod, apple was a firm participating in a semi-competitive market structure where the price it was earning per unit was Pc.
Now, after the launch of the iPod and its other digital download offers it became a monopoly and thereby its equilibrium price rose to a monopoly level, say Pm. The shaded rectangle represents the monopoly profits apple presently earns while the smaller rectangle below that represents the super normal profits apple was earning when it was a competitive firm. The change in status form a competitive firm to a monopoly thereby mounting the market power thus explains the enormous jump in the level of profits for apple. Think of the smaller rectangle as representing the profit level of 2003 and the larger shaded rectangle as representing the profit level of 2005. This interpretation explains the almost tenfold jump in apple’s profits in the afore-mentioned period.
The diagram above explains the case of price discrimination across geographically segmented markets. As is shown in the diagram the US and UK markets are different in terms of demand conditions prevalent in the markets. As a result the MR curves faced by a monopolist vary between the two markets thereby creating the scope of optimally charging different prices. Note that the monopolist’s optimal output is determined by equating its MC to the total MR and then determining the allocation of output and the different prices are decided in accordance with the demand conditions. The marginal revenue in both markets at the optimal output levels must be equal as otherwise the monopolist could increase profits by transferring output over to the market with higher marginal revenue.
(b) To have successfully charged discriminatory prices across the markets two main conditions must have been satisfied. First, the price elasticities of demand must have differed across the markets. Secondly, the apple must have been able to prevent market seeping or arbitrage in which a supplier bought in the cheaper market and sold it where the higher price is charged.
4. The policy of monopoly pricing may prove to have been costly if the high price of the iPod leads customers to seek for alternatives as that will be the opportunity rivals like Sony or Samsung may capitalize upon. To maintain its monopoly status the high differentiation that has been made with the incorporation of the iTunes mechanism to enable easy downloads and with the present attempts to integrate the entire apple PC-software-iPod range has to be sustained with effective and efficient marketing strategies as well as efficient R&D that allows the iPod and its associated service benefits to remain unique.