MBA & Ph.D.

– First Year 2020 Name: Sourabh Thakur

Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

Section A (Assignment Questions based on the Case: Apple’s iPhone in India) (1×6 = 6 marks)

Note: Substantiate your arguments/answers with valid data/results. Draw Exhibits based on the data given in
the Case.

Q1. How can one assess the degree of monopoly power enjoyed by a firm in an industry? Is Apple a monopoly?
Does Apple have monopoly power in (i) the global smartphone market? (ii) the India?

Q2. How has Apple’s monopoly power changed over the years 2005-2016?

Q3. What determines monopoly power? What are the likely constraints on Apple’s monopoly power in the
Indian smartphone market?

Q4. How has Apple’s elasticity of demand changed over the years 2005-2016? What about changes in its mark-
up prices (mark-up over marginal cost) over these years?

Q5. Does greater pricing power for the iPhone guarantee greater profits for Apple? Estimate the level of profits
enjoyed by Apple from 2005 to 2016. What explains Apple’s high profitability in the global smartphone
market?

Q6. What should Apple’s pricing strategy be for its iPhone in India? Give valid reasons based on the data.

Section B (2×2 = 4 marks)

Q7. Is there any one-to-one correspondence between price and quantity supplied under monopoly? Hence, draw
the supply curve of a firm operating under monopoly. Discuss in detail

1
C  Q   2  Q2
Q8. Given the total cost function for the monopolist as 2 . Also, the monopolist faces a market
with two distinct consumer groups, say Group A and Group B. Group A has a demand function
of  Q1 ( P )  60  3P1 , and Group B is having a demand function as  Q2 ( P)  40  2 P2 .

a) Is this monopolist operating in the short run or the long run? Also, given the monopolist engages in uniform
pricing, calculate the monopolist's profit-maximizing price and quantity sold. What is the level of profits in this
scenario?

b) The monopolist can now engage in third-degree price discrimination, setting a different price for each
market segment. Calculate the monopolist's optimal prices charged to each market segment, the quantities
consumed by each market segment, the price elasticity in each market segment, and the monopolist's profits.
Would the monopolist rather engage in this price discrimination or would they rather set a uniform price?
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

Answer1-

Monopoly- It means that there is only one seller of the product in the market is known as “Monopoly”.

Degree of Monopoly- We can assess the degree of monopoly with the help of elasticity of demand of the
product in the market. It can be measured by the inverse{opposite} of the elasticity of demand.

Suppose, in a market where elasticity of demand is infinite, its inverse will be zero and there will be no
Monopoly power. But if in a market where elasticity of demand is zero, the Monopoly power will be infinite.

There are various methods given by economists to calculate the “Degree of Monopoly” such as-

a) Lerner Index
b) With the help of Price Discrimination
c) Concentration Ratio
d) The Herfindahl Index

According to me Apple does not have monopoly power in Global and Indian market because there are several
other players also functioning in the industries such as Samsung, OPPO, VIVO etc. So, the Apple does not have
monopoly power in the market.

Answer3-

Following factors determine the Monopoly power in the market-

a) The price elasticity of demand- It is one of the most important factor of market power, due to the
pricing rule that is L=(P-MC)/P=-1/Ed
In price elasticity of demand when the price elasticity is large (Ed>1) the demand is relatively elastic, so
the firm has less market power. When the price elasticity is small (Ed<1) the demand is relatively
inelastic, so the firm has more market power.
b) The number of firms in a market- It means that if there is single firm in the market so, it is act as price
maker of the product and does not have any fear in the market of loosing the customers from the market.
On the other hand, if there are more than one company in the market so, it is act as a both price maker or
taker of the product in the market and also having fear of loosing the customers from the market.
c) Interaction among firms- It means that when firm rigorously(continuously) comptite with each other,
less market power results and if they are co-operated or act together, so the firm can have more market
power.

Some of the following constraints on Apple’s monopoly power in the Indian Smartphone market are-

a) Challenging and Growing Competition

b) Languages and smartphones adoptions
c) Preference for android phones
d) Low per capita income and high price sensitivity of Indians
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

e) Languages and Smartphones adoptions

Answer2-

Due to following reasons Apple Monopoly power changed over the years are-

a) Slowdown of Global Smartphone Market- It means that the demand of the smartphones is decreases
in the year 2016 due to which the selling of smartphones also decreased and it also affects monopoly
power of the companies in the market.
b) Increase in the Number of Competitions- It means that competition is also increasing in smartphone
industry new companies such as OPPO, MI and VIVO is also entered into the market due to which the
prices of smartphones are affecting in the market and it also affects the monopoly power of Apple in the
market.
c) High Product Price (Price Sensitive)- It means that the price of Apple products is very high as
compare to other companies’ product it results in losing customers from the market especially in
countries with low level of income like India where people prefer cheap smartphones and it also affects
the monopoly power of the Apple in the market.
d) Policies affecting Smartphone- Policies such as ‘Make in India’ which influence to produce the
products with in the country as well as influencing people to purchase the home-made products from the
market which affects the monopoly power of outsider’s companies in the Indian market.
e) Preference for Android Phone- It means that in the market people are preferring android phones over
other operating system platform in the market such as android, windows etc. so, it is also the reason for
the change in monopoly of Apple in the market.
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

From the above table we can say that Learner Index is not too close to 1 which shows that Apple don’t have
monopoly in the smartphone segment. But the elasticity greater than -1.5 shows that Apple is an inferior
product and it can change its product price without any competition.

Answer4-

This is how Apples price elasticity of demand changed over the years 2005-2016:

a. Increase in the number of companies in smartphone in the market which leads to higher competition in
the market due to that which came up with value-priced smart -phones for the customers in the market.
b. In Indian market the income level of the customers is also low as compare to other nations such as
China, USA etc. which also impacts on the price elasticity of demand of Apple in the market.
c. Indian people are more price sensitive due to that they did not spend more on expensive phones as well
Indian people are desires to switch phones regularly and also wear and tear of phones on the regular
interval basis.
d. In India, Apples sales is dipped by 33% against a 28% annual growth in Android phones sales in India.
Similarly, Apples smart phone market share in the Indian almost halved from 4.5% to 2.4% between Q2
of 2015 and Q2 of 2016.

Answer 5-

In simple word Pricing Power means that the how much the change in the price of the product influence the
demand of the product in the market.

In case of Apple, Apple is always come in the market with expensive or costly smartphones and mainly
targeting the rich people in the market. Apple is always able to make economic profit from the market year on
year. As the new companies enter into the market with lower price segment did not vanish the Apple from the
market and Apple is also starting manufacturing smartphones for middle income group in the market. In below
given table I calculated the profit of Apple year by year-

Margin
Year Price % Cost Profit

2007 499 14% 428.142 70.858

2007 599 14% 513.942 85.058

2008 599 16% 501.363 97.637

2009 599 19% 483.992 115.008

2010 599 22% 470.215 128.785

2011 649 24% 493.889 155.111

2011 749 24% 569.989 179.011

2011 849 24% 646.089 202.911

 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

Answer6-

According to my opinion Apple should adapt one of the following pricing strategies-

a. Average Cost Pricing- It refers to the pricing method in which goods are sold at the lowest price
consistent with covering average costs, ensures there are no losses to be financed, so can be second best
optimum.
b. Market based Pricing- In market-based pricing companies can evaluate the pricing of competitors in
the market and according to that decide the price of own product in the market.

India is a Price Sensitive country so Apple should keep this factor in mind and make their pricing strategy
evolving around that particular factor in the market.

So, Apple may try to manufacture cheaper cellphone in the market to attract middle or lower level income
group in the country as well as to increase their market share in the country.

Otherwise, Keep focusing only on the higher income group people in the Indian market and manufacture
only premium smartphone in the country.

Part B

Solution 8-

Group A- Q1(P)= 60-3P1

Group B- Q2(P)= 40-2P2

C(Q)= 2+ 1/2Q^2 we can see that there is a fixed cost elements in the given cost function. Fixed cost
elements=2 units.

So, the monopoly is definitely operating in the short run because in long run there is no fixed cost elements.

For Price Discrimination condition i.e. uniform pricing.

 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

Hence, P1=P2=P

Now, we can add both the demand functions horizontally to obtain the total demand.

Q=Q1+Q2

Q=(60-3P)+(40-2P)

Q=100-5P – demand curve equation (1)

C(Q) = 2+1/2Q^2

So, we get after differentiating

MR= 20-0.4Q

Putting value MC=Q in C(Q) we get C=104.04

Putting value MC=Q in TR we get TR=285.72-40.82=244.90

For Profit Maximisation (MR=MC)

20-0.4Q=Q

Q=100/7

P= 120/7

So, the profit=140.86(244.9-104.04)

B) In general, Third Degree price discrimination means we have to treat both groups of market separately.

So, we will maximise profit in each market one by one with the help of MR and MC to each of them.

Group A

Q1(p)=60-3P1

 P1 = 20-Q1/3

TR = P1Q1= 20Q1- (Q1)2 /3

 MR=20-2/3Q1

1
C  Q  2  Q2
2
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

C(Q1) = 2+(Q1)2/2, which means MC (Q1) = Q1

Profit(max) at MR=MC

20-2/3Q1=Q1

 Q1=12, P1=16

(Profit)A = TR-TC= (16*12) - (2+(12^2)/2) =118

Ep = (dQ/dP)*(P/Q) = (-3)(16/12) = -4

Group B

Q2(P)= 40 - 2P2

 P2 = 2 - 0.5Q2

TR=P2*Q2=20Q2 - 0.5Q2^2

MR=20 – Q2

1
C  Q  2  Q2
2

MC=Q2
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

Profit(max) when MR=MC

 20-Q2=Q2
 Q2=10, P2=15

(Profit)B = TR-TC = (15*10_-(2+10^2/2) = 98

EP = (dQ/dP)(P/Q) = (-2)(15/10) = -3

Therefore, Profit (uniform pricing) < Profit (Price Discrimination)

 3rd degree price discrimination will be preferred.

Answer7-

A monopoly firm has no well-defined supply curve because there is no specific supply curve for the monopolist
derived from his MC curve. And in Perfect competition, short run MC curve above the shut-down point is the
supply curve which shows a specific relationship between price and quantity. So, at a particular price, a
particular amount of the commodity will be supplied.

Under monopoly, there is no such one-to-one correspondence(similarity) between price and quantity supplied.
This is because of the fact that output decision of a monopolist not only depends on MC but also on the shape of
the demand curve. So, it means that change in demand of the product do not detect out a series of prices and
quantities as happens with a competitive supply curve.
 MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..

It might be happened that a monopolist, can supply some quantity at different prices in the market depending
upon the elasticity of demand of the product in the market. So, the construction of supply curve from MC curve
is impossible under monopoly or any other market of imperfect competition.

Taking the example of Gillette a near monopoly in the market.

Monopolist Supply Curve when two different quantities are sold at same price.

Note- I made this graph with the help of paint 3D software in my laptop.

Monopolist Supply Curve when output is sold at two different price.

MBA & Ph.D. – First Year 2020 Name: Sourabh Thakur
Course: Managerial Economics Roll No.: …MBA06151
Assignment 3 & 4 (Maximum Marks = 10) Section: C……………………………………..