The article, Battling for the palm of your hand, as published in The Economist (Apr 2004), discusses the changing nature of the mobile handset manufacturing market. It suggests that the market structure is changing from a pure oligopolistic environment to an oligopoly with many monopolistically-competitive features. This analysis will explore the concepts discussed in the article and its relevance to the structural aspects of oligopoly and monopolistic competition.
As noted by the article, the mobile handset industry was previously an oligopoly until recent years. The structural aspects of oligopoly can be clearly seen in the low number of mobile phone manufacturers and the concentration of their aggregate market share, as shown in Figure 1. Further, many of the barriers to entry are addressed in the article, such as the high cost of design of the many handset components, the cost of efficient mass-production techniques and the cost of distribution and promotion. As a result, emerging firms were not able to survive against the low-cost production provided by larger established companies such as Nokia and Motorola, which enjoyed oligopolistic economies of scale.
However, with continued global growth in recent years, profits have enticed other suppliers to enter this once oligopolistic market. These emerging suppliers have survived and flourished due the changing nature of handset manufacture: oligopolies have to consistently make technological advances in order to remain competitive; by outsourcing various aspects of handset manufacture, they have nurtured niche markets which provide standardised components and design; in turn, profitable niche markets encourage entry, creating many new suppliers similar to the monopolistically competitive market structure.
The emergence of many smaller suppliers such as original design manufacturers (ODMs) is evidence of a monopolistically competitive market structure. The emerging suppliers prosper due to now lower barriers of entry with the use of low cost off-the-shelf components and gains from component specialisation. They have increased their technological and financial capacity due to widespread outsourcing in the industry. Further, they are willing to cooperate with network operators directly to produce operator-specific handsets in order to capture more market share. These reasons have given ODMs a significant increase in global market share, estimated to be 35 percent by next year.
Northstreams prediction that in the long-run ODMs would produce up to 50 percent of handsets indicates that market can continue to support both large and small suppliers. Under the relationship between minimum efficient scale and industry structure, this also suggests that the long-run average cost curve of handset manufacture has prolonged constant returns to scale.
It can be seen that there has been significant change in the nature of mobile handset manufacturing in recent years, from a pure oligopolistic structure to one with monopolistically competitive features. As the many smaller firms continue to grow in market share, the market structure will resemble monopolistic competition ever more closely.