10 July 2017

Daring Fireball: “Speculation Regarding the Pricing of and Strategy Behind This Year’s New iPhones”

It sounds to me like the OLED iPhone is a phone which Apple can’t make 40 million of per quarter, at least not today. And if that’s true, that means it should be more expensive. Not should in any moral sense, but simply because that’s how the principle of supply and demand works. When supply is constrained and demand is high, prices go higher. The higher prices alleviate demand.

John Gruber

That’s some pretty twisted logic, but I wouldn’t expect anything less in defense of Apple. By the same logic, prices should go down to iPhone 7 levels as Apple ramps up production capacity. Does anyone honestly think this will happen? iPhone price are regularly reduced each year along with the introduction of upgraded models, but the new models are priced mostly the same as last year; if an OLED iPhone is introduced at $1,200, it will stay at $1,200 for the foreseeable future.

By invoking the law of supply and demand, Gruber is trying to imply a ‘perfect market’ condition, but the iPhone market is far from perfect:

  • As we are constantly reminded by Apple analysts, the iPhone is positioned as an exclusive product, and as such it’s not homogeneous with other smartphones on the market
  • There is a single seller of this product (Apple)
  • It’s basically impossible for other sellers to enter the market, as Apple would not license iOS or its design to third-party manufacturers
  • There are significant economies of scale and network effects and buyers are far from rational

Essentially, Apple has complete control over the pricing of its products and is operating like a monopolist, setting prices to achieve its desired profit margin. Moreover, in a monopoly, the elasticity of demand decreases, so as prices go up, demand goes down slower than in a perfect market; the market dynamic is not so simplistic as Gruber describes and demand may remain high even with higher prices.

Nevertheless I find the entire article very revealing for Apple’s real motives, especially this line: let’s further assume that maintaining company-wide margins in the high 30s is non-negotiable for the company – that’s right, there’s no customer benefit at the heart of Apple, just profits. Customers would enjoy ‘the Apple experience’ just as much if the company would have a 5% or a 50% margin, but Apple still chooses to charge more rather than less, because it can.

iPhone 8 rumor

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