Here is some simple market power analysis of Apple’s use of the iPhone as a platform. Think of it as a device you have to buy in order to obtain services from sellers who use the iPhone platform.  The kinds of services you can buy are voice calls (currently from AT&T), music (currently from Apple via iTunes but also via third-parties like Pandora), and applications (from third-party developers via the app store.)

Apple controls the platform, so it can decide whether to provide a service itself (as with iTunes), and if not who provides each service, whether the provider will be exclusive (as with AT&T), and what price to exact from the transaction.  Of course, Apple also sells the handset to you and all of the above factors in to how much you are willing to pay for the iPhone.

Here is a basic principle of monopoly power that is central to these decisions. Whether Apple wants to exclusively provide a service or allow a competitive supply from third-parties depends on which of its customers will benefit from the service.  Suppose the service has similar benefits for all iPhone users.  Then Apple can allow the service to be competitively supplied (as with the App Store) and capture the benefit by raising the price of the iPhone.

On the other hand, if the service will most valuable to those iPhone users who already have a high willingness-to-pay for the phone (the so-called infra-marginal users,) then Apple wants to exclusively provide the service (or contract with an exclusive provider.)  The reason is that the price of the iPhone handset is determined by the marginal user.  In order to raise the price of the phone itself to capture the benefit to high-end users, too many marginal users would be price out of the iPhone and profits would go down.  Instead, Apple captures the value of high-end services (like 3G voice and data) by controlling the supply and pricing the service separately.

The cynical way to interpret this is to say that Apple’s exclusive contract with AT&T is simply a way to extract surplus from high-end users.  The more charitable interpretation is that without this exclusive contract, as a monopolist, Apple would have less incentive to make the phone compatible with high-end services.

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