Wednesday, January 3, 2007

Rumoured iPhone Pricing

Thinksecret reports that Apple wants all carriers to charge the same high price for the cellular phone the company is said to be preparing. Most if not all current cell phones are highly subsidized by providers of service contracts (this is thrown into sharp relief if you ever go to the Verizon store and try to buy a new phone without a new contract). The article suggests that Apple does not want its phone to become a mere "commodity."

Apple products like the iPod, while obviously superior in quality and design, are status goods. Everyone knows that Apple products are expensive and flashy, so they serve well as signals of wealth and "coolness" (of course, coolness is endogenous, but I won't go into that here). This can explain why Apple would want to contract away any free money from cell phone service providers. Cell phone service providers might not only sell the phone at a nominal loss, but might even give up expected profit on an individual cell phone service consumer if selling the iPhone cheap attracted lots of new consumers. In that case, the low price the consumer paid for the iPhone would weaken the iPhone's conspicuous signaling ability.

I suspect that Apple is concerned with its reputation. Consumers might hesitate to buy an iPod now if tomorrow Apple is going to drop the price in order to sell to lower quality customers (while simultaneously releasing an expensive and shockingly different-looking, easily distinguishable "iPod 2"). Once Apple has dropped the price, the signaling capacity of the good is diluted. What Apple might want is a reputation as a "crazy" firm - one that can, for unknown reasons, commit itself to perpetually charging high prices. Reputation games like the ones I learned in game theory require that there be some positive true probability that the firm is crazy - and indeed, this is exactly what Apple has cultivated in the image of the demanding, reclusive, and perfectionist Steve Jobs. The CEO's insistence on perfection keeps prices high, and, if he is "crazy," then more signal-conscious consumers, expecting prices to stay high forever, will buy Apple's status goods now.

One last note - perhaps the above is why the iPod rarely changes, and why the changes under the hood usually dwarf the changes in physical appearance. It's easier to sell someone something expensive if it's never going to go out of style.

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