1.What is Market failure?

Market failure occurs when the allocation of goods and services by a free market is inefficient,
leading to an outcome that is not socially optimal. This can happen due to various reasons such
as externalities, where the actions of one party impose costs or benefits on others not involved in
the transaction; public goods, which are non-excludable and non-rivalrous, leading to under-
provision by the market; asymmetric information, where one party has more or better
information than the other, leading to adverse selection or moral hazard; and monopolies or
oligopolies, where market power allows firms to restrict output and raise prices. Market failures
can result in underproduction, overproduction, or misallocation of resources, highlighting the
need for government intervention through regulation, taxation, subsidies, or provision of public
goods to correct these inefficiencies and promote societal welfare.Formal institutions play a
crucial role in correcting market failures by establishing and enforcing rules, regulations, and
property rights. They provide the framework within which markets operate, ensuring fair
competition, protecting consumers, and mitigating the adverse effects of market failures through
effective governance and oversight.

2.Monopoly Market Player: Apple

Apple's iOS platform holds significant market dominance due to its large share of revenue and its
tightly integrated ecosystem. Apple has leveraged this dominance by linking the distribution of
digital products on iOS to its own payment system, imposing a 30% fee and generating excessive
profits. Additionally, Apple has utilized its control over the App Store to hinder competitors and
promote its own applications, distorting competition within the iOS ecosystem and across
different smartphone platforms. Presently, courts are increasingly resistant to antitrust lawsuits
targeting the behavior of dominant firms, creating legal barriers that hinder enforcement against
tech giants like Apple.

A.Monopoly power and Market Structure

Apple's control over 71% of the revenue in the U.S. mobile app platform market, along with its
consistent global market share ranging from 62% to 86% over the last ten years, underscores its
enduring dominance. Legal precedents suggest that market shares exceeding 50% can signify
significant market power, with percentages over 70% typically indicating a strong monopoly
position. Courts have recognized that market shares between 50% and 70%, coupled with
notable barriers to entry, can also establish monopoly power. Therefore, Apple's substantial
market share alone suggests it wields considerable power in both tying arrangements and
monopolistic practices.

B.Barriers to Entry
Lock-ins for both users and developers, reinforced by robust network effects and economies of
scale and scope, serve as formidable barriers to entry that safeguard Apple's position. High
switching costs enable Apple to maintain supracompetitive prices, especially given iPhone users'
retention rates exceeding 90%. Estimates suggest switching costs of at least $250 for users,
comprising various expenses like app and accessory purchases. Even a modest 5% app price
increase, significantly lower than typical thresholds for antitrust scrutiny, would pale in
comparison to the hefty switching costs, allowing Apple to sustain profits. These barriers
effectively shield Apple from competitive incursions, amplifying its influence beyond its
apparent market share dominance.

3.Anti-competitive Behaviour & Rent Extraction

Apple's favoritism towards its own apps within the App Store search results and placement can
be viewed as anti-competitive behavior. This behavior stifles competition from third-party
developers, limiting consumer choice and potentially reducing allocative efficiency. The 30%
commission on in-app purchases can be seen as rent extraction, where Apple extracts surplus
from both developers and consumers.Apple engages in this anticompetitive action in an effort to
preserve its monopoly status and maximize profits.

4.Consumer Welfare and Market Distortion

The imposition of a 30% commission on in-app purchases and the requirement for all third-party
apps to go through the App Store contribute to market distortion. This leads to higher prices for
consumers and reduced consumer surplus, a measure of consumer welfare.Users of Apple
devices are restricted to using the App Store as the primary source for applications, leading to
limited options compared to platforms that allow for more open competition. This lack of choice
can result in higher prices for consumers and a diminished incentive for developers to innovate.

3.Existing Institutions and Solutions

Department of Justice & Sherman Act

The Department of Justice (DOJ) is an executive branch branch of government tasked with
upholding federal laws, defending the country in court, and making sure justice is administered
fairly and impartially.
Recently, Apple faced a legal action from the US Department of Justice for allegedly breaking
antitrust regulations. The complaint focused more on how Apple created a monopoly by using its
restricted iPhone environment. In a civil antitrust action brought under Section 2 of the Sherman
Act, the Justice Department and sixteen other state and district attorneys general accused Apple
of monopolizing or attempting to monopolize the smartphone industry.
The Department has been using the Sherman Act to free markets and bring back competition for
more than a century as it enforces antitrust laws against illegitimate monopolies.When it comes
to handling monopolistic issues with Apple, the Department of Justice is an essential player. The
Department might handle this scenario as follows:
A. To find out if Apple has exploited its market dominance or participated in anti-
competitive behavior, the department will look into the company's business practices.
B. Antitrust Enforcement: The DOJ may sue Apple under antitrust statutes like the Clayton
Antitrust Act or the Sherman Antitrust Act if the investigation reveals evidence of
monopolistic activity.
C. Legal Action: To confront Apple's anti-competitive behavior and bring back competition
in the market, the DOJ may pursue fines, injunctions, and other structural remedies in
court.
D. Monitoring Compliance: To make sure Apple doesn't carry out its anti-competitive
practices, the DOJ keeps an eye on the company's adherence to any court orders or
settlement procedures.
E. Policy Advocacy: In order to more effectively handle monopolistic issues in the IT
sector and avert similar issues in the future, the DOJ may also push for modifications to
antitrust laws or regulation.
Through enforcement actions and antitrust legislation, the Department of Justice can help
counter monopolistic behavior by firms such as Apple. The Department may file a lawsuit to
resolve the matter if it were discovered that Apple had participated in monopolistic tactics, such
as abusing its market dominance or engaging in anti-competitive behavior. Nonetheless,
combating monopolies as a result of market failures usually entails a mix of legislative action,
regulatory involvement, and various strategies to increase competition in the marketplace.
Consequently, even if the Department can play a role in combating monopolistic activity, doing
so frequently calls for a more comprehensive strategy including other parties and regulatory
organizations.

Antitrust Laws(competition laws)

The goal of antitrust law is to safeguard competition for the advantage of consumers by
guaranteeing effective corporate practices, affordable prices, and high-quality goods. Through
the preservation of a fair marketplace and an emphasis on preserving competition rather than
favouring particular companies, it promotes innovation and customer happiness. The heart of
antitrust law is to spot practices that stifle healthy competition.

Gatekeeping tech giants like Apple hold immense power as intermediaries, influencing markets
by controlling consumer access and platforms. Antitrust laws are pivotal in preventing
monopolistic behavior, ensuring fair competition, and protecting consumers and innovation.
They curb dominant firms' ability to exploit others through coercion, high fees, or unfair
treatment, particularly concerning self-preferencing and abrupt rule changes. Regulators use
antitrust laws to maintain market fairness, integrity, and prevent monopolistic abuses, especially
in the digital realm where major companies like Apple act as both competitors and gatekeepers,
necessitating scrutiny to prevent exploitative practices and ensure a level playing field. Antitrust
laws curb Apple's monopoly power by prohibiting anti-competitive practices like exclusive deals
and price-fixing, promoting fair competition and consumer choice while imposing fines for
violations, fostering a competitive and consumer-friendly market environment.

The EU's Digital Markets Act (DMA) was created to address concerns about anti-competitive
behavior among tech giants, including Apple. It targets gatekeepers, like Apple, who have
significant market influence, requiring them to follow specific rules such as data protection,
avoiding anti-steering clauses, and allowing third-party app installations. Failure to comply can
result in substantial fines or structural changes, reflecting a proactive stance by the EU to
promote fair competition, particularly within closed digital ecosystems such as Apple's.

The European Commission and national antitrust agencies have investigated Apple for unfair
App Store rules and alleged abuse of dominance in Apple Pay, raising concerns about market
dominance and harming competition and innovation. These antitrust probes align with
competition policy objectives to ensure fair markets and prevent anti-competitive practices.

4.Suggestions to improve market conditions

A comprehensive strategy to tackle monopolistic practices in the tech sector includes
strengthening regulatory oversight for app stores, setting clear legal standards for antitrust laws,
promoting global cooperation among regulators, encouraging competition through alternative
channels, enhancing transparency in policies, and implementing continuous monitoring for
consumer protection. Proposed federal agencies seek to create a new digital supervisory body
focused on mobile app oversight, advocating for fair competition and consumer choice while
addressing regulatory gaps and banning anti-steering practices.

5.Conclusion
Thus,Apple's actions run afoul of antitrust laws, undermining competition and consumer welfare,
which are central tenets of the Sherman Act. Apple's strategic construction of a closed ecosystem
has enabled it to wield considerable power as a gatekeeper between millions of consumers and
small businesses, exploiting their limited resources to maintain its dominance. This case serves
as a cautionary tale for regulating all tech platforms, highlighting the challenges posed by their
extensive reach and potential for abuse in a complex, interconnected networked environment.
However, existing judicial interpretations often fail to adequately address the abusive practices
of dominant tech firms. These doctrines underestimate the risks of leveraging dominance in
adjacent markets and impeding competitors' access to essential services, hindering effective
enforcement against monopolistic behaviors that stifle competition and innovation.1

1 https://retailwire.com/discussion/is-apple-a-monopoly/
https://www.researchgate.net/publication/371753367_Apple's_Antitrust_Paradox
https://ivypanda.com/essays/a-monopoly-market-player-apple-case-study/
https://www.justice.gov/opa/pr/justice-department-sues-apple-monopolizing-smartphone-markets
https://www.theverge.com/2024/3/21/24105363/apple-doj-monopoly-lawsuit