The most recent popular cell phone to be introduced is the iPhone. Aside from the multiple grammatical errors in the article, I found it interesting that there was a situation where there is an extremely high demand for a product but no supply. Due to the lack of sellers in the market, it has created an illegal black market monopoly for the iPhone. The legal way to supply cell phones in China involves a monopoly of two state-owned companies that act as cellular operators who demand a profit-share on the iPhone.
This is one of the few times where there may be an excessively large demand for a product but it isn’t profitable for the company to supply it to the market. China is the world’s largest cellular market with a consumer base that is always looking to stay up to date with new technology. Due to this large market, it in turn can create an exponentially large demand on a new technologically sophisticated phone. The consumers have the demand but there is no supply, which results in consumers buying the product wherever they can. Rogue dealers have a monopoly over consumers in the market.
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The dealers are refusing to follow any rules and there are no antitrust laws that they have to follow when they supply the iPhone. With the demand so high they can charge excessively high amounts for the phone and have no price ceiling to worry about. Apple already made their money off of the phone by selling it to a legal dealer who then, without Apple’s knowledge, sent the product to China. The cost to send the phone to China is out of the equation for Apple and now must be evaluated by the dealer. He must include the original cost of buying the phone and the additional cost to ship the phone which will increase his marginal costs.
The other, legal, monopoly mentioned in the article is the state-owned cellular operators. Apple wants to setup an agreement with one of the two operators to be the sole provider of the iPhone. The best option would be the provider who has 70% (China Mobile) of the market and is expected to take over the smaller company in the future. Apple would want China Mobile to be the provider since Apple’s supply of iPhone’s in China would be more profitable with the larger consumer base. They could still make money with the company that has a 30% market share but would earn more revenue with the company that has a 70% share.
There hasn’t been a deal between the companies because of an issue of profit-sharing. Apple doesn’t want to increase their fixed costs to a level that their total costs for the iPhone is going to be more than their revenue. China Mobile acknowledges there is a large demand for the iPhone and wants to maximize their revenue the same way Apple does. China Mobile is about 60% larger than Apple and will continue to create revenue without Apple since there are substitutes to the iPhone and there is demand to have any cell phone.
There will be a demand for cellular phones without the introduction of the iPhone, but they will be missing out on the consumers on the demand curve who are willing to pay a large amount for the iPhone, or another phone. Currently the black market iPhone’s are stealing those consumers from China Mobile and are leaving a large deadweight loss area that can’t be met. If the iPhone is legally introduced and supplied to the market then there will be a large decrease in demand for substitute cell phones and a decrease in price. The price of the iPhone would be very elastic due to the demand.
Apple should not setup an agreement with China Mobile just to meet the demand for the iPhone. If the profit-sharing agreement raises costs over the total revenue then it isn’t financially responsible for them to enter the market. The black market sellers will continue to have no price ceiling if there is no competition and the large demand for the iPhone can only be met through them. If China were a competitive market then there would have been a deal in place with a cellular operator, but the monopoly is holding back the supply to meet the demand for the iPhone.