1. The meaning of disruptive technology
Disruptive technology alludes to an innovation whereby there is creation of a new market subsequent with a value network that unsettles the already existing market and value network. Consequently, there is displacement of the well-established firms along with their products and the alliances that they may have set up. This technology changes the status quo of goods and services in terms of production, distribution and marketing (Paul & William, 2015).
Mobile internet; there has been an increasing reliance of mobile internet in preference to the previously computer internet or rather cyber browsing. Such an increase in mobile internet has made cybercafé’s redundant. Today people only go opt to go there when they need services like scanning, printing among others which they do not have in their homes. This has been possible due to its reliability, easy access, inexpensive and readily available.
E-commerce; traditionally people had to cover huge distances in order to move goods and services from one location to another. As a result, there was a huge number of intermediaries who simplified business transactions in between. However, with proliferation of the internet services, intermediaries have lost their power to act on the transactions. I have bought goods directly from the producer who lives in a different country.
Electric trains; they have absolutely revolutionized transport sector and led to the demise of steam locomotives. Electric trains are fast, efficient and effective and above all, reliable. Their continued popularity dampened the efficiency of the locomotives which were eventually phased out.
From the graph, the fourth quarter in both the US and UK indicates a steady rise. It recorded the highest percentage of sales across all the four quarters. Furthermore, the time series reveals a slight negative fluctuation in the first three quarters with the third quarter recording most of the lower percentage sales. Percentage sales dwindle from the fourth quarter in every succeeding year deepening up to the third quarter and then picks up. The trend is repeated across all the years. Generally, both countries exhibit an increase in the e-commerce percentage sales across the years.
The growth of the e-commerce market in both countries reveals a contrasting influence of economic factors. More so, there is a similarity in some of them at influencing the rate at which they have acted on the market and boosting the market sales recorded. The steady growth in the e-commerce in both countries is down to a number of reasons. Firstly, the UK’s increase in the e-commerce may be due to; first, growth of smartphone and general mobile commerce.
The UK has witnessed an upsurge in the mobile use coupled with lot of incentives by mobile services providers that has made accessing the internet relatively cheap secondly, popularity of mobile shopping in the UK as made possible by the greater internet penetration. Lastly, the UK has had a growing involvement in the logistics and warehouses; this has been down to a boom in the aviation particularly in the small cities. This aviation boom led to an increase in the online retailers penetrating into the remote areas as well (Adner & Zemsky, 2009).
The USA on the other hand experiences nearly all the factors that have pushed the UK’s sales. However, the US strong foreign exchange; the dollar status in the market strengthened in prior financial crisis in 2008. This is reflected in the sharp increase in sales in 2007-2009 while the post crisis re-established its previously acclaimed status. Also, the increase in the demand and use of credit cards especially for the cashless transactions. This has broadened the market in the online market. For the boom in the stock markets skyrocketed the e-commerce company’s valuations. With an increase in the stock markets, most consumers resort to shop online which presents an easier approach.
Monopoly market structure. The electric trains are solely controlled by respective governments who make all decisions with regard to its operationalization. This implies that the firms that offer this service are monopolies. Electric trains therefore as one of the disruptive technologies that phased out locomotive trains. They exhibit characteristics of the monopoly competition. This include;
The existence of a few sellers in the market; they are exclusively controlled by the governments of the respective countries where they exist. More often it is rather a single seller operating in the whole market. Meaning that he enjoys all the profits and incurs the losses alone.
Second, the seller is the price maker; usually, it is the government who decide the amount of money that people pay as fare. The market forces of demand and supply have a limited impact in price determination. As a result, the price may not factor in the variables within the economy that influence the price.
Third, there are high barriers to entry and exit in the market. The complete control by the government makes it difficult for others to get into the market. Barriers exist in terms of startup capital, tax issues and more significantly, the terminus. It is difficult for private investors to get into the business since they will have to cater for all the costs including railway construction costs.
Fourthly, existence of monopoly power; monopolies have powers that put them in charge of the whole industry. In this case, the ownership of patent rights scares private investors from venturing into the business. Also, the huge financial outlay required for it presents a stumbling block.
Fifth, profit maximization; monopolies are able to achieve the highest profit by adjusting prices at will. They achieve this by charging the price at the point where marginal revenue equals marginal cost. Governments in charge of the railway sector will keep on adjusting price until they attain that level.
Disruptive technologies have had a huge impact in the monopoly market structure. This has particularly been evident in the characteristics that define it. An in-depth look into the inherent characteristics of monopolies reveals the following;
First, as it pertains to the many buyers and few sellers, disruptive technology created avenue that promoted efficiency, effectiveness, availability and above all reliability in the existing market. As a result, there was an increase in the number of buyers while the number of sellers continued to dwindle. Disruptive technologies meant that those who sought for better goods and services had to get them from the only producers (monopolies). The existing market riddled with obsolete goods with thinner scope in terms of their features appealed to fewer people hence its demise (Allen & Timothy, 2008).
Second, it has led to an increase in the restrictions to exit and entry of firms into the market. The existing market structure is not able to catch up with demands such as a large capital outlay. Hence, this does not bode well with dynamic consumer demands. Eventually, the existing market shrunk.
Thirdly, a rise in the price of commodities in the existing market. Disruption technology calls for a huge financial investment which has to be recouped starting from the immediate future spanning into long term. Due to this scenario, an increase in the prices contributes to the existing firms being pushed out of business as the costs increase proportionately as well. Monopoly firms are then able to adjust prices so that they get their investment soon enough since they are price makers.
4. Welfare implication of the disruptive technology.
Demand and supply before disruptive technology.
The disruption effect is highlighted by the forces of demand and supply interaction. Basically, firms in the monopoly market structure are able to maximize profits by adjusting prices. The firms determine the best price for the products in the market.
From the diagram, before the disruption technology is introduced in the market, profit maximization is determined at the point where demand equals to supply i.e. the equilibrium point (Pe). At this point, firms are able to make normal profits. The equilibrium price implies that firms are able to produce at the quantity demanded by the market (Q1).
Consumers spending is determined by the market price. They pay the price P1 and hence get quantity Q1 which accounts for (P1.Q1) as represented by the area (P1.Pe.Q1.M). This implies that there is an absolute net gain to the consumer because the area (D.Pe.Q1.M) is greater than (P1.Pe.Q1.M). The net gain is the consumer surplus indicating the total area which gives the total benefit (D.Pe.Q1.M) less the amount spent (P1.Pe.Q1.M).
Firms are able to make supernormal profits by adjusting the price to (P2) as a result of disruption. This is down to the monopoly power that firms wield in the market. With the introduction of the disruptive technology, there is creation of excess supply due to increased production as firms advance better production methods. This implies production surplus (PS) indicated by the region (P1-Pe-G).
An increase in the price to (P2) will therefore lead to a reduction in the quantity to (Q2). Such a move will mean that the firm will operate at equilibrium point (qe). As a result there will be a surplus in the market. An increased price effectively reduces the amount of goods that the consumer can buy. The market will as a result experience consumption surplus (CS) as indicated by the point (P1-Pe-D). In order to cut on the resulting market surplus, firms will be forced to reduce prices. This is possible due to the monopoly status that comes with monopoly power (Baran & Sweezy, 2012).
Adner, R & Zemsky, P. 2009. Information and communication technology innovations, New Media & Society vol. 11 no. 4 599-619
Allen W. J. & Timothy E, 2008, the evolution of human societies: disruptive technology, 2nd. edition. Stanford: Stanford University Press, pp. 257-258.
Baran, P.A & Sweezy, P.M (2012), some theoretical implications: Technological innovations University of Michigan Monthly review vol. 64 pp. 3
Paul, S & William. D, 2015, The Indian adoption by Sudip: Economics, McGraw Hill Education press Ltd.
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