The Apple iWatch is centered in the smartwatch market. The market structure in which the product lies is oligopoly. Oligopoly refers to a market structure that is dominated by a few sellers. This is because the smartwatches are products which are produced by a few large companies, and every contribution of every company is considered substantial enough to be significant in the market. In addition, the companies in the market are cautiously aware of how rival companies react to change and particularly in association to price. This particular market structure is distinctive in the sense that the company’s pricing as well as output decisions will also integrate the perceived or anticipated reactions of the competitors. For instance, in this case, the pricing and output decisions of iWatch will consider the anticipated reactions of other company products such as the Sony Smartwatch (Salvatore, 2015).
Elasticity of the product (iWatch)
The elasticity of the demand offers a measure of the amount of quantity that is demanded in response to changes in the price. A good or a product is said to be elastic if the quantity of the product that is demanded changes in a substantial manner in response to the changes in price. With regards to the iWatch, to start with, it is a luxurious product. The elasticity of the product is inelastic, which basically implies that an increase in the price of the iWatch product would barely have any impact on the quantity that is demanded for the product itself (Salvatore, 2015).
How will pricing relate to elasticity of your product?
According to the Apple Store website, the price of the iWatch starts at $349. For the purpose of calculation, let as assume a price of $350. As stated above, the elasticity of the product is inelastic and therefore will barely have any effect on the product demand if there is any change in price. The following graph will illustrate how pricing will relate to elasticity of the iWatch. For instance, let’s say Apple makes the decision to increase the price of the iWatch from $350 to $450.
Q2 Q1 Quantity
As can be seen, the pricing changes made for the iWatch have very minimal impact on the quantity demanded for the product (Salvatore, 2015).
How will changes in the quantity supplied as a result of your pricing decisions affect marginal cost and marginal revenue?
The major costs that come about with the manufacture and production of the iWatch include labor costs, manufacturing costs, raw material costs, research and development costs, and also advertising and marketing costs. The pricing decisions undertaken by the company will without doubt have an impact on the marginal cost as well as marginal revenue as it affects the total cost and also the total revenue. In accordance with Mudida (2003), marginal revenue refers to the change in total revenue arising from the sale of an additional unit of output. The same case applies with marginal cost where it is the change in total cost with regards to the change in the output produced. The graph above indicates that a change in price has minimal to no impact on the output produced. For instance, assume that the quantity change decreased from 110 products to 100 products due to the change in price. The total revenue will be assumed to be the price retailed for every product which means the total revenue changes from $350 to $450.
The marginal revenue can be determined as follows:
Marginal revenue =
= (450-350) / (110 -100)
As can be seen the price changes will have very minimal impact on the marginal revenues as well as the marginal costs. This is because as for the costs, the company would not be largely affected with the production of 10 less watches or the production of 10 more watches.
Besides your pricing decisions, what are your suggested non-pricing strategies? What non-pricing strategies will you use to increase barriers to entry?
Non-price competitive strategies are marketing strategies that are employed by companies with the purpose of differentiating their products or services from the other rival products on the basis of features such as design. The companies can also differentiate their products being offered in different ways such as consumer focus and quality of services and other aspects other than price. Aside from pricing decisions, there are a number of non-pricing strategies suggested for this business proposal. The main non-pricing strategy to be used for this product is advertising. Mass media advertising and marketing in an extensive manner is a strategy that can steer the product into success. Being in an oligopolistic market structure, this strategy will prove to be most effective as the business will concentrate more on how the iWatch as a product is superior to the other products and also why spending on the product itself will become a better investment to the consumers. Because the market has very few competitors selling the same product, the company will be able to distinguish itself from other products simply by showing off its superior quality through advertising (Nielson, 2014).
The main non-pricing strategy to be used to increase barriers to entry is the use of the Apple brand name. Apple has already distinguished itself in the market by offering superior products to the consumers such as iPhone, iPad and the rest; this gives the products a higher scale in terms of being retailed in the market (Scott, 2011). Another strategy is product differentiation. Apple, the selling company of the iWatch, endeavors to increase and intensify market demand for its products by using the strategy of product differentiation. The products of the company have at all times been created and designed to be futuristic and advanced in comparison with the products of its peers. In spite of high levels of competition, Apple has prospered and thrived in generating demand for its products, handling the business power over prices through product differentiation and guaranteed brand loyalty around the unveiling and promotion of fresh products. By concentrating on consumers enthusiastic to pay more and sustaining a premium charge at the cost of unit capacity, the company also established a simulated entry barrier to company rivals (Nielson, 2014).
How could changes in your business operations alter the mix of fixed and variable costs in line with your strategy?
The changes in the business operations could alter the mix of fixed and variable costs which are in line with the strategy. Increased mass media advertising and marketing increases the amount of variable costs in a huge way. At the same time, loyalty cards being offered to the consumer, that in the end provides discounts to them, increase the variable costs. Every business being proposed or already in operation needs to cover both its variable costs as well as fixed costs to generate a profit, the ultimate goal of every business. The variable costs are the costs that increase as the sales made by the company increase; for instance, by having additional labor and also raw materials. This implies that the price set by the company ought to be higher than the variable costs incurred in the manufacture and production of the iWatch (Salvatore, 2012). For instance, if for every product manufactured by the company, $100 is for fixed costs and $120 is for variable costs, then the total costs incurred by the company for the manufacture of every product is a total of $220. This implies that as more and more watches are manufactured, the variable costs incurred by the company increase while the fixed costs remain the same. This is due to additional raw materials, labor and time for manufacturing the products. The same case would apply for the manufacture of fewer products than anticipated. The company would incur more costs in the long run as the fixed costs would remain the same.
Current global economic conditions and their effect on local macroeconomic indicators for your good or service
The past number of months have been increasingly challenging for the international economy; this has brought about difficult global economic conditions. The fluctuations are to a great magnitude due to bigger volatility and improbability, and they bring about a higher risk for the current global economy. The fast deterioration includes the prices of oil, rapid adjustments in exchange rates, having the United States dollar appreciate and weaken against other currencies such as the Euro, the uncertainty of the economies such as Greece and also the conflicts between nations such as Russia and Ukraine, and also the Middle East (The Conference Board, 2015). These economic conditions have had an impact on local macroeconomic indicators for goods as well as services. One good example is the retail sales indicator which is imperative and significant to foreign exchange traders for the reason that it indicates the overall strength of spending of the consumers and also the level of success of the retail stores. In particular, this is a beneficial aspect for the reason that it is an opportune and apt indicator of comprehensive consumer patterns for spending that are altered for seasonal variables. It can be employed to offer prediction for the performance of other significant lagging indicators and also to evaluate the instantaneous course of an economy (The Conference Board, 2015). Another indicator is the Consumer Price Index (CPI) which is the most significant indicator with regards to the level of inflation of a nation. The change in the economy of the nation has had an impact on the purchasing power of the U.S. dollar not only within the nation but also in the global markets as well. This can have an impact on the purchase of the iWatch as it is a luxurious good.
The Economy’s Stage in the Business Cycle
The economy of every nation experiences different business cycles in its life. The business cycles take into consideration the high level phases and the low level phases of the economic activities within the nation. There are four phases or periods which a business cycle goes through and these are economic expansion, recession, recovery and lastly trough. The time frame of these different economic stages might vary from one case to another (The Economic Times, 2013). Taking a look at the current statistics, the United States economy is presently undergoing a recovery or expansion. The Gross Domestic Product (GDP) of the nation has been increasing for the past few years as indicated by the Bureau of Economic Analysis (2015). The statistical information shows that the economy of the United States is at the economic expansion phase of the business cycle.
How current credit market conditions affect your planning or operating decision for the iWatch
The current credit market conditions do in fact have an impact in terms of the decisions for planning or operating for this good. As a result of the recession, there was tightening of the credit markets and issues concerning the accessibility of credit in the United States. This implies that a number of consumers might find it hard or face several delays in attaining the required financing and money that is necessary for purchasing the Apple products. It is imperative to note that the iWatch is operational with the current iPhones such as iPhone 5s, 6 and 6 plus. The tightening of the credit market will make it much harder for the consumers to attain funds for both the watch and the phone as they are complementary goods. In a number of instances, these delays are expected to cause consumers to postpone their orders with the company. A continuous increase in these cancellations might negatively impact the business of the company (FedGazette, 2009). The recession of 2008 which brought the fall of companies in the United States caused consumer confidence to decline and therefore makes it much harder for consumers to spend, especially with luxurious goods such as the iWatch.
Apple Website. (2015). Watch. Retrieved 12 June 2015 from: http://store.apple.com/us/watch
Bureau of Economic Analysis. (2015). Gross Domestic Product (GDP) Graph. United States Department of Commerce. Retrieved 26 June from: http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm
Fedgazette. (2009). How have current credit conditions affected your business, community or industry? Federal Reserve Bank of Minneapolis. Retrieved 26 June from: https://www.minneapolisfed.org/publications/fedgazette/how-have-current-credit-conditions-affected-your-business-community-or-industry
Mudida, R. (2003). Modern Economics. Nairobi: Focus Books Publishers.
Nielson, S. (2014). Why innovation could be the key to Apple’s growth. Market Realist. Retrieved 12 June 2015 from: http://marketrealist.com/2014/01/apple/
Salvatore, D. (2012). Managerial economics in a global economy. New York: Oxford University press.
Scott, G. (2011). Is Brand Loyalty the Core to Apple’s Success? Forbes. Retrieved 12 June 2015 from: http://www.forbes.com/sites/marketshare/2011/11/27/isbrandloyaltythecoretoapplessuccess2/
The Conference Board. (2015). Global Economic Outlook 2015 – Key Findings. Retrieved 26 June from: https://www.conference-board.org/data/globaloutlook/
The Economic Times. (2013). Real Business Cycle Theory. Retrieved 26 June from: http://articles.economictimes.indiatimes.com/2013-04-11/news/39065904_1_business-cycle-shocks-phases
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