Economics Of Computers Essay Research Paper Advertisingcom

Economics Of Computers Essay, Research Paper

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COSHE.COM : Science / Technology : The Economics of the Computer Industry

Computer Industry Supply

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Introduction and Background The computer service industry can be broken down into several categories ranging from reseller to consultant. Entr. Computers / Executive Business Machines Inc. (EBM) was a sales and service organization for typewriters at its inception in 1972. However, as the corporate market shifted its needs from typewriters to word processors to personal computers, so did EBM change its product line to meet that demand. Now they are trying to compete in a very competitive low margin industry. They are a small single location company with annual gross revenues of twenty million (USD). However, as the profit margin and price of their product continually drop at a rate of forty percent annually, it becomes more difficult to show increasing gross revenues. They will need to find a place in the market, a niche, to survive and effectively compete with larger internationally known corporations as well as small local companies that are very much like their own. Industry Structure, Competitors The market is extremely competitive price-searchers market; product is often sold below manufacture’s cost just to maintain market share and brand loyalty. It is a competitive price-searcher market because of the low barriers to entry and no regulations in price. Firms in this market are faced with a downward-sloping demand curve. The sellers range from international organizations, which retain over twenty thousand employees, to very small local shops with as few as two workers. The low-end of the market could be considered a Natural Monopoly because the average costs of production are continually decreasing as a result of higher production, improved technology and increased competition. However, there is a high end of market that would be deemed an Oligopoly, because it consists of a small number of sellers due to a very high barrier to entry. Typically the differentiated products are custom-built solutions that can only be provided by companies of the size and stature of a big six consulting firm or an internationally know organization such as Oracle or SAS. There are very high barriers to entry to compete in this market since the clients to this product are looking for large-scale international support. In order to implement a sophisticated differentiated product like Oracle financials or SAP, a company needs to retain an enormous overpaid staff of software engineers to develop, support, and implement such solutions. Very few companies are capable of retaining and / or attracting the staff necessary to provide such solutions. However, every large company is dependent on this information technology to maintain their financial, budget, inventory, production, and customer information. Just as most Americans are dependent on our automobiles for transportation. I make the comparison to the automobiles because the automobile industry is an excellent example of an oligopoly. The computer industry is an example of a competitive price-searchers market because firms can freely enter and exit the market and profits and losses play an important role in determining the size of the industry. Economic profits are attracting new competitors to the market. The increased availability of the computers and software are driving the price down until the profits are almost completely eliminated. These economic loses are beginning to force competitors to exit from the market. Eventually the decline in available computer related service would allow Information Technology (IT) firms to increase their price until they are able to cover their total costs. Change in Demand The demand curve of the IT industry is a downward slope due to the change in revenue caused by a price-searcher market. A firm faces this curve because of the price reduction that causes increased sales will exert two conflicting influences on total revenue. First, total revenue will rise because of an increase in the number of units sold. However, revenue losses from the lower price on units that could have been sold at a higher price will at least partially offset the additional revenue form increased sales. Therefore, the marginal revenue curve will lie inside the firm’s demand curve. Although there are continuous price cuts on computers, the demand for PCs in the workplace will remain fairly consistent however, the demand for PCs in the home will increase as the unit price decreases. Since the home market account for less then twenty percent of total computer sales world wide, it shows very little affect on the demand curve. The market appears to be only slightly elastic because the price is decreasing and the demand curve is barely affected. Virtually every corporate employee has a PC. Most companies will hold to that policy despite drastic price drops. However, as the total cost of owner ship decreases with the purchase price and the rapidly changing technology, the expected life of a PC is shortened. This will show an increase in unit sales over a three-year period but that curve would only be a forecast. The Year 2000 Bug (Y2K) has caused a lot of activity in the IT market. I use the word activity because the increase in corporate IT budgets and IT sales and service is short term and should not be