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Market Structure for Tablets and its Pricing Decision

Need help with revision question. Worth 5 credits:

Imagine the market for tablets (e.g. iPads), with downward sloping demand curve and upward sloping supply curve.
a. Describe the market structure when iPad was introduced. In theory, how did Apple decide how much to produce and what price to charge? Describe in a simple framework, either graphically or in equations.
b. Compare the market for iPads with the market for shirts. How does a producer of simple shirts (NOT luxury shirts) set her price? Describe difference between this market structure and the one under item a.
c. How did the demand elasticity of Apple and thus its pricing power change as more providers of tables entered the market? Use graphs to illustrate.
d. How does the introduction of the iPad and tablets in general affect the market for laptops? Use again standard supply-demand graph to illustrate. What would you expect in the long- term to happen to production/producers of laptops?
e. Use the examples above on tablets and laptops to discuss the product life cycle. Use graph if necessary.

Solution Preview

Please also refer to the attachment.

a) When iPads was just introduced, Apple was enjoying the monopoly power. It set quantity to produce by equating its marginal revenue and its marginal cost. That is Q1 in the graph (attachment). The price is set subject to demand, ie. at the price on the demand curve when quantity produced is Q1. The price is set at P1.

b) Assume the market for shirt is a perfect competition. Producers are price takers. They cannot set their own price but to take the market price as given. Price is determined whenever demand curve crosses supply curve. If we use the same ...

Solution Summary

Tablet market used to be monopolized by Apple with its iPads. It set price as a monopoly. The entrance of new players into the tablets market has made the demand for iPads became more elastic due to the availability of substitution. The tablets products are in the growth stage of product life cycle. Tablets also have push down the demand for laptops as they are substitute products. The laptop is in the maturity or declining stage.