Phone City Franchise: Your Gateway to Mobile Phone Sales and Accessories

Phone City is a franchise, which deals primarily with a sale of mobile phones, and accessorises. As franchise, it allows anyone to buy a shop to sell products under it's name. It is the responsibility of the owner of the shop to pay for renting out the shop, products and staff. Each franchise agreement works under different terms and conditions, therefore this work will only identify the terms and conditions of the Phone City franchise in Golders Green (North London). The Phone City franchise allowed the shop to work using its name on a condition that any contracts that are sold would go under the name "Phone City" to the network provider.

Therefore, once the commission for the sale is paid, it goes to Phone City, which then in turn passes parts of it to the shop. One of the main benefits that the shop owner gets from joining a franchise is a market recognised name.

The firm faces different costs.

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Fixed costs include: fixture and fitting, electronic systems and cost of ownership. Current costs include: rent, wages, stock, admin costs and advertisement. A large proportion of the costs will be current costs. The sunk costs are very low for this business as most of the assets, both fixed and current, can be sold on to the next owner. Due to those low barriers to entry there is a lot of competition. On the same road, Golders Green Rd, there are another three mobile phone shops. All of the shops sell the same mobile phones, at the same tariff rates and similar accessories; therefore, it can be argued that the products are homogeneous.

The demand for the products is stable throughout the year, as customers buy new contracts every 12 months (minimum length of the contract). The same applies to accessories and PayAsYouGo contracts. The supply varies. The shops order mobile phone from their supplier, therefore the supply is stable for available phones. However, the mobile phone market changes rapidly, and new models come out on the market every few months. Popular models take a few months to be delivered to the dealer shops, therefore there is a lack of supply.

Fig 1.

As can be seen from Fig 1, as there is a shortage of supply, the supply curve moves upwards (SS) and the equilibrium point moves from E to E2. In order to reach this equilibrium, the price shifts upwards from P1 to P2. However, in the long run, it can be argued, that the company will be faced with horizontal demand curve, as due to low barriers of entry the firm is faced with perfect competition, where is can not effect the market price.

As the products are homogeneous, the price is very elastic. However, the supply curve becomes very inelastic when there is a shortage. Those who wait for a new model will be prepared to pay higher price in order to get the product quicker.

Each mobile provider (T-mobile, Vodafone, O2, Orange and 3) pay commission to the shops for selling 12-month contracts on their network. The commission varies depending of the value of the contract, for example higher commission will be paid if the customer agrees to pay �30 a month contract, then �12 a month. The aim of Phone City is to sell as many high valued contracts as possible in order to maximise the commission rate. Moreover, the shop can also maximise it's returns by selling accessories and PayAsYouGo sim cards and phones.

In the long run, since the firm does not bid down the market price with an increase in output, the marginal revenue from an additional unit sold will be equal to price received (MR=P). In the sort run, if the price at which the goods are sold does not cover average costs, the firm will shut down. In the long run the firm will be faced with a flatter marginal cost curve as it will be able to adjust all production factors. (Fig 2).

Fig 2

As can be seen from Fig 2, the firm will only stay in business if the price exceeds P2, as otherwise it will be making a loss. Therefore, as long as the commission paid for each contract is higher then P2, Phone City will stay in business. However, the firm can also be forced out of business if it's average costs will increased. Although the market is close to being perfect, the costs faced by each firm is different (due to location). Those costs are not reflected in commission paid, but rather it is assumed that those firms that pay higher rent will also have higher demand for the products (e.g. a shop in Oxford Circus will sell more phones then a shop on Golders Green).

The only way that Phone City can differentiate itself from other firms in its area is by providing better service, supplying greater number of accessories and getting the new models in stock quicker then other shops. In the next five years, as the technology improves, the asymmetric information that persists in the market is likely to decrease even further, allowing customers to buy everything online, therefore not requiring better service, or be faced with a shortage of supply of accessories or new models. Therefore, with time, as the factors the differentiates the shop now from it's competitors decrease, the shop will be faced with perfect competition. As the barriers to entry remain low it may no longer be profitable to stay in business.

The firm may solve this problem by cutting its fixed costs and starting to conduct its business via internet. This strategy will allow the firm to save costs such as: rent, labour, bank repayments and wages. The costs that will be faced will be different such as: storage costs, online subscription charges, operational risk costs etc.

Alternatively, Phone City can start providing other services that are either related to mobile phones (repairs) or non related (exchange, photo development). The firm will be able to attract customers that require different products and can potentially increase its customer base for mobile phones. For example, CarphoneWarehouse historically has provided free repair services not only to their customers but "outsiders" as well. Although this service was not profitable, the firm found that by providing it, it was able to attract new clients.

Another way to attract more customers would be to spend more on advertisement. However, the effect of that will need to be evaluated, as this will increase average costs and may not bring sufficient amount of customer to increase revenue. Another way of attracting more customers is to give loyalty cards, that will allow the customers to use all of the services in the shop with a certain discount.

In the long run, Phone City operated within a perfect market. Although it can be argued that there is asymmetric information within the market, that will allow the firm to charge higher prices and therefore increase its profits, the availability of information has improved significantly over the last few years, as more and more people use internet. Shopping for a mobile phone is extremely easy today, as price comparisons are available at very little cost to each individual. The commission that is paid to the mobile phone dealers is fixed for each contract, and varies only according to different contracts sold. All of those factors make it difficult for dealer to effect market price or gain abnormal profits. The only way that Phone City can differentiate itself from its competitors is via better service. However, it has been highlighted that as the technology improves with time, the service may no longer be required. Therefore the shop can only distinguish itself from other shops, in the long run, by providing other services such as internet, repairs, photocopying etc. Provision of those services will allow the shop to attract potential customers that will buy mobile phones.

Phone City can make abnormal profits only when the supply curve is inelastic in the short run i.e. a new model of mobile phone comes out. Therefore by agreeing on certain terms and conditions with the provider, the shop may get the new models quicker then other shops and make abnormal profits. Moreover, promotion of certain networks may allow the dealer to charge higher commission for contracts sold.