In 2007 Apple Inc made a move that changed the whole High-Tech world when it launched the first iPhone. The iPhone easily dethroned Nokia, and became the first smartphone that appealed to technophiles, businessmen, and everyday consumers.
Apple generated exceedingly high profits from the iPhone’s success. According to iSuppli, Apple made a $326 profit for every unit of the 2nd generation iPhone sold (excluding development and capital costs). Attracted by these profits, many companies had tried to find the formula for a mobile phone that will cut into Apple’s market share. Palm and Nokia failed miserably, while RIM’s Blackberry managed to find success only with businessmen.
This is a classical example of a corporation which has an almost absolute monopoly on a specific product. Over time, this product could become essential for many, allowing the corporation to sell it at a very high profit.
The conventional solution for this problem, suggested by many economists and politicians, is to impose price controls. After all, the free market failed in preventing a market failure from occurring so the power of government is required to save the day.
Professor Israel Kirzner, Austrian school economist and 2014 Nobel prize candidate, offers a different perspective. According to Kirzner’s important publication, the book Competition and Entrepreneurship, temporary monopolies do indeed exist. But using the powers of the antitrust authority is not the correct response. The high price itself is be the instrument that stimulates entrepreneurs to find ways to overcome, repair those failures, and invent a whole new competing product. Conversely, artificially regulated prices will instead send false signals which suggest there is no need in a competing product, and so in the long run we will stay with the monopoly. Of course, competition is dependent on market freedom; The freer the market, the easier the entrepreneurial efforts are. In a heavily regulated market, entrepreneurs must overcome artificial governmental barriers in order to compete with the monopoly, and in many cases, the barriers are too high for a new entrepreneur to surpass.
Kirzner’s theory turned out to be true — after many attempts Samsung’s Galaxy 2 was announced in 2011, and finally managed to bring Android based smartphones into the mainstream. Today, there is a wide range of smartphones ranging from affordable to luxurious, with new technologies and upgrades appearing frequently. Apple’s monopoly is shattered.
What would have happened had we listened to those who demanded price controls? To be sure, if the antitrust authority had used its power to restrict the price of an iPhone, the price would not have been as high as it was during the first years following the introduction of the 1st generation iPhone. But what about the long-run consequences?
The artificially low price of Apple’s smartphone would have reduced the incentive of competing companies to invest heavily in an attempt to take market shares away from Apple. Forget about Galaxy, LG Nexus, HTC One, etc. We, the consumers, would have still been using Apple 2nd generation today. After all, what incentive would Apple have had to invest in launching new generations if there’s little competition and it is forbidden by law to charge higher prices from consumers?
The lesson from Kirzner’s theory goes beyond the dynamics of the free market. The bigger picture is that government coercion is not only immoral, its unexpected implications are mostly destructive. Even if it seems that “just a bit” of coercion can improve everyone’s life, the real long-term consequences usually makes us all poorer.
