EC103-Topic #1: Incentives and Cost Benefit Analysis

On the Aplia Economics Blog, Ryan Knapp poses an interesting set of questions regarding the iPhone released by Apple this summer. Please read Knapp’s blog, and pay special attention to the comments at the end of the blog. Your comments should be similar in that they should be brief and well-thought out.

I would also like you to read stories by ABCnews and theStreet.com regarding the recent price cut on the iPhone. Another blog by Steven Levitt (author of Freakonomics) also discusses the iPhone price cut. Other questions to consider are the following:

  • Are you more likely to purchase an iPhone now that the price has fallen? Why? Had you been considering purchasing an iPhone before the price fell?
  • Imagine you had already purchased an iPhone (some of you may have) before the announced price decrease. Would you be upset about the price drop before the rebate was announced? Do you think the rebate would appease you?
  • Relate the iPhone to another product you have purchased in the past where the price fell soon after you purchased the good. When you bought the product, were you happy with the transaction at your moment of purchase?

Please try to limit your comments to 100 words with a maximum of 200 words. Additionally, I would like you to state something more than the obvious economic prediction in this posting. You can also try to discuss the different positive and normative statements that are related to this topic?

NOTE: Read other students comments before posting, and please leave your name with your posting.
AN

22 thoughts on “EC103-Topic #1: Incentives and Cost Benefit Analysis”

  1. If you’re an electronics consumer, it’s should be no surprise that Apple dropped the iphone price. What is surprising though, is the relatively short time in which they did it. I knew that a price drop was imminent and had/have no problem waiting. I also had another consideration; my current cell phone contract will not expire until November.If I had purchased the iphone, I would have known that $600 was the price of being one of the first to own an iphone. You’re paying for the exclusivity.Again, half of what drives products these days is exclusivity. One example is the sneaker industry, which has been revolutionized by the introduction of limited collaboration releases. If the price were to fall, or the quantity to increase, these shoes would be worth less.The main drive is the products ability to satisfy consumers’ need to differentiate themselves from each other and attain some sort superiority.Of course, hindsight is always 20/20.

  2. Many, including myself, were unwilling to pay the astonishing $600 for the iPhone, making the price cut beneficial to the company. Apple can anticipate an increase in sales with the more practical price of $399. Although I have been considering purchasing an iPhone my cell phone contract will not expire for another two years. Hopefully by that time there will be technological improvements along with an even lower price. The significant decrease in customer demand for the iPhone is driving Apple to increase the appeal of their product similar to other companies, such as Sony. With the release of Playstation 2 came a rush for this innovative gaming machine. I remember mere months after I purchased it there was a considerable drop in price and just a year later they introduced a new, smaller system. Companies need to keep up with the continually changing market in order to please the public.

  3. Kristen said…I agree with what Andrew has said about by paying the high price to get a product is what you are paying the company to get exclusive ownership of that particular product. The reason im sure that Apple reduced the price of this product is that they were expecting more people to buy the iphone at that high price, it was a good business decision to drop the price but i agree with consumers that the amount, and the time in which the price dropped was a little obscene. However, i feel that the consumers are being a little ridiculous in demanding that they get some money back because they were “ripped off”. The price drops on everything from when computers were first introduced to now. When computers were first inrtroduced they cost.. what was it.. like $2000. But now you can find computers that are $500. If these consumers are demanding money back from Apple, then shouldnt they be fighting with every company that they have bought products from and demanding that they get the difference between what they paid and what the price of that product is now?

  4. The iPhone is $599.99 at first and just 2 months later become $399.99. That’s ridiculous. Of course the consumers who bought at first would be mad. The apple company is losing its consumers’ trust. No one gonna buy Apple Company’s new product anymore when it first come out because they can buy it later at a cheaper price. Apple Company is doing this because they think if the price of iPhone decrease, people will buy more iPhones, they can make more profits. But they didn’t think about the consumers. If the consumers who want to buy an iPhone at the price of $599.99, but for some reason the consumers didn’t buy. Now the price drop to $399.99, the consumers would rethink their decision. They would think is the iPhone worthy? $200 is a lot and they would think will the price of iPhone be lower at next time? I understand it is a business method, sell something expensive first, and then lower the price, so the consumers think it’s cheaper and will buy it. But in this case, the difference of the price cut too many and too fast.

  5. After all the hype and the very enticing commercials, I was certainly curious to find exactly what the iPhone could do. But after playing with it for a few minutes and worrying more about getting the screen dirty than its features I found myself amazed that anyone would pay $600 for a glamorized version of a cell phone. As mentioned in the ABCNews article, I did slightly mock my friend in my head for paying so much for it right before the price went down. I’m sure the egos of a lot of Apple’s consumers are hurting.The idea of the iWaiter fits well into our study of opportunity cost, and for those who can afford it, I’m not surprised they spent their own time making back the money to pay it off. Those who chose to sit it out themselves reminded me of kids arriving hours early to a standing room only concert to be able to stand by the stage, only to be pushed out of the way by the massive crowd from behind once the music starts to play. But for those few moments when you’re right under the nose of your favorite musician, the wait could easily be worth it.On a much smaller scale, the iPhone’s price drop linked me to the aggravating feeling of returning to a clothing store a week after buying an item at full price and finding it on the sale rack. My purchased item often now holds less value in my mind. In other words, there is no way I would have bought the iPhone when it first came out. I would much rather let my friends be the ones waiting around at the help desk at the Apple store while I let the kinks get worked out and the price go down. Regarding electronics, the benefit of having something first just isn’t worth it to me.

  6. Like most of the previous posters, I had not considered purchasing an iPhone, largely because I had no incentives. My current cell phone gives me no problems, and I have no desire to be on the cutting edge of technology. I was also suspicious of the new “dream product,” since like most new technologies, developers were probably still in the process of correcting minor malfunctions. The ultimate goal of a company is to create a product that appeals to a targeted demographic of customers. Likewise, the price of a product is based upon the value those customers place in it. In trying to maximize the customer base—charging a higher price to customers willing to pay it and then reducing the price to entice a less “novelty-driven” demographic—Apple may have alienated previously loyal customers, especially those who do not see the rebate as due compensation. This is not a smart economic pattern to establish. Will people expect Apple to dramatically reduce prices on the next big-ticket product introduced? If so, few will buy the newest model, especially if they were previously burned when they were the firsts to buy the iPhone.

  7. With the iPhone’s price cut, I am still not considering purchasing the product. I am satisfied with my current cell phone and the benefits that the iPhone would provide do not outweigh the monetary and transaction costs. I do understand why early buyers of the phone would be upset with the price slashing, as they now see the extra $200 they paid as a waste of their resources. The rebate may satisfy some of the early birds, but likely not those who purchased the phone as a status symbol. Those who purchased the phone when it was first released likely saw utility in being one of the few people who owned the newest phone. The price cut will make the phone more accessible to the public, and a rebate won’t change the fact that the phone will have become more in the mainstream.Also, Steven D. Levitt gives a good explanation to why people are upset, as he states that it is because the public sees the sole purpose of the price cut as a means to maximize profits. Apple’s decision may boost the iPhone’s sales, yet it may have sacrificed the company’s reputation in the process.

  8. The recent price decrease of the iPhone exhibits a new pattern in price of technology products. These fashionable and trendy products, at initial purchase, seem to be more of a status symbol than a sensible decision. Personally, this price decrease would not make me more likely to buy an iPhone but would rather cause me to wonder if price was the only reason why this product was not reaching expectations. Could there be mechanical defects or other problems that caused this lack of sales? One area that makes economics so interesting and which is apparent in this story about the iPhone is that despite ideal behavior and models based on these ideas, we are unable to completely understand individual preferences. It is analogous to a science, yet any one individual or group can deviate away from the well researched theories. The idea of an iWaiter and how some individuals felt the need to wait in line themselves despite having a higher opportunity cost displays that some individuals do not behave logically. What is often overlooked is that individual preferences of the “right choice” may dramatically differ from the rational choice. Some may cherish the time away from the responsibilities of daily jobs to wait in line for the hot new item, while others may not want to be a part of this atmosphere. In the end, all will have their iPhone, but will some be wondering if their choice was truly the most rational?

  9. I think that Steven Levitt’s comments on his blog were right on. When companies’ business practices seem to be just for the sake of maximizing profits consumers feel as if they’re being used. Consumers were willing to pay $600 for the iPhone when it first came out because they thought that the new technology and interesting design were far enough ahead of their time to warrant spending that kind of money. However, by decreasing the price so soon, consumers may be inclined to feel that there was really nothing spectacular about the phone to begin with as shown by the recent price cut. Of course I understand Apple trying to increase profits, but it does look like they purposely used their loyal customers to maximize profits for a product that may have not deserved the price it was initially set at. I do believe that these kinds of price cuts are necessary, however I think that by slashing the price so soon Apple sent out the message that the iPhone may not be worthy of its extravagant price. So while trying to increase profits, Apple may have actually hurt themselves even more.

  10. Apple’s decision making on this subject was flawed at best. Judging from the other responses, the price drop is not going to attract many more customers. After all, if college students (who are probably more likely to purchase a new technology at a reduced price) don’t want the iPhone at the cheaper price, then who will?But even if I am wrong and the price drop does stimulate a lot of increased sales, I still think it was a bad move. Apple most likely alienated their devoted customer base by limiting the period during which the phone was exclusive, and then turned around and gave them the expectation that they will be reimbursed for any price drops on Apple products in the future.

  11. Like others, I have no intentions of purchasing an iphone, regardless of the price decrease. If I did purchase an iphone before the price reduction, I probably would be a little upset, but not to the point where I would demand a rebate from Apple. Those who purchased the iphone at its initial price probably already had an ipod, cell phone, and PDA. Therefore, their only incentive for purchasing a $600 piece of equipment that basically just combines these three other products was looking cool. If the consumer really had considered the opportunity costs, he might not have purchased his iphone. Apple has done noting wrong and should not be criticized for reducing the price on their product. They, as a business, are simply trying to increase sales, and I believe that the decrease in price is a large enough incentive to do just that.

  12. I had no intentions of purchasing the iPhone from Apple, simply due to the fact that it is just a flashier version of a standard cell phone. As long as I can make phone calls from my standard cell phone why would I spend $600 on a phone when my cheaper phone works just as well. Now that the price has fallen the phone did get more appealing to me but I am still not in the market to purchase one of these phones. I believe that at the rate technology is currently changing the iPhone will be pushed out of the market sooner than later, and a better cheaper phone will emerge. If I had purchased the iPhone, it would be due to the exclusivity as stated before I would view it as more of a status symbol. If the price dropped the exclusivity would also decrease which I believe would make the people who purchased the phone at its original price a little aggravated. Personally I would be very happy to get a rebate I think spending $600 on a phone is pointless, however some people who bought it as a status symbol may not view it that way and would be angry with Apple. A product that I purchased where the price soon dropped would be an Xbox, I was very happy with this purchase. The only thing that doesn’t come close to the iPhone, is that the price decrease of the Xbox came more gradually. I think that if Apple took more time to decrease the price of the phone and did not do it so abruptly, people would not have been that angry about the price cut. I also do realize that the phone was not reaching its expected sales, and this was done to improve them quickly. I believe it was the right call, but no matter what some people will still be angry about the cut due to the loss of exclusivity.

  13. It was a slimy move on Apple’s part to cut the price by $200 so shortly after releasing the iphone, although Steve Jobs did give $100 store credit to all previous buyers of the phone, so Apple did make a comeback.While the iphone is quite an amazing piece of technology, I would not consider buying it even after the price drop. Besides not wanting to pay $400 for a phone (plus the expensive monthly plan), the iphone is full of bugs. It is possibly that a later, less buggy model will be released at a lower price; at which point I may very well consider buying one. Had I bought the iphone before the price drop, I would have been quite upset before the rebate was given. After the rebate however, one can not really complain because a $100 price drop on a product that has been out for a few months is not too unreasonable.

  14. I, along with everyone else, was not going to purchase the iPhone and I am not about to now that the price has dropped $200. First of all, Apple should have planned that to get the greatest amount of sales, then everyone in the country should be able to use the phone on any cell phone service. With the iPhone only being carried on Cingular it limits millions of people who either do not get service with this carrier or dislike the company. In Vermont, where I am from, there is almost no one with Cingular because the cell phone coverage is terrible in the state. I am not about to buy a $399 phone that I can not even use at my house.I feel like the iWaiters were very beneficial to the rich businessmen. Their opportunity cost was the best by hiring people to stand in line while they made much more money then needed to buy an iPhone. So it was very cost efficient for the businessmen. The people who bought it early cannot be mad because it is business and Apple has gotten the most money out of their consumers. Prices, eventually, will always drop and if they wanted an iPhone that badly then they probably figure that for them it was cost efficient to pay the extra money to have the phone for 10 weeks before everyone else.

  15. Ken Dulaney, a mobile computing analyst for Gartner Research “hit the nail on the head” by stating, “Technology is moving at the pace of fashion.” We live in a period where new technology comes and goes with each season. Companies introduce new items in order to maximize their profits and appeal to a wider consumer base. Personally, I would not purchase the Iphone because I am content with the features on my phone, and I already own an Ipod. Therefore, I do not see any benefit to purchase this product. However, I would be extremely displeased if I had purchased the Iphone before the price cut, but you cannot be dissatisfied with Apple for lowering their prices on the phone. The price reduction was rather sudden to consumers, but most companies use similar concepts in order to attract more consumers. The Razr phone was marked at $500 dollars when it was first introduced in the market, but now it is only $50 dollars with a contract included. I faced a similar situation with apple when I first purchased my Ipod. I was thrilled, but month after I purchased the item, the Ipod nano came out for $150 dollars less. I was disappointed, but it’s the nature of the new business world. Although the consumer feels “used” in these situations, these situations cannot be avoided in today’s market.

  16. With the fall of the Iphone’s price, I’m more likely to purchase one, but still not eager. It’s a difficult purchase to justify at either price for a college student with no need to have up-to-date technology for the sake of a professional reputation or self-satisfaction. Price drops aren’t uncommon on similar products, but the short time certainly was. Quality technology can usually be expected to hold its price for more than ten weeks. I would certainly be upset at the price drop if I had purchased one, because it not only came much earlier than it should have, it also seems to show a lack of confidence in the iPhone’s merits. The rebate would appease me to a certain degree, but I would certainly become a less loyal customer once the $100 was spent. In the past, I was drawn to Fable, a highly advertised game. I purchased it when it was first released, and soon discovered it was much less than promised, as many features had been removed without warning. I was unhappy with the game from first purchase, and the price quickly dropped as a reflection of its poor quality, without compensation to the first purchasers. The apology devised by the company was similar to Apple’s. A sequel was eventually released, consisting of some of the features removed from Fable. A discount was offered to anyone who provided proof of purchase of the original Fable, but I didn’t purchase it, as it felt insulting. They admitted their mistake, but only offered credit towards another of their products, and I haven’t confidence in the developer since.

  17. What consumers should know about the cell phone market (or just about every technology based product market) is that it moves as quickly as the months change. Apple has recently been the leading proponent of this trend and has never hitherto encountered the issue of not realizing the overconfident expectations that CEO Steve Jobs constantly purveys. In response to this, Apple has reduced the iPhone to a mere $399, in an effort to increase the demand of their newest but underperforming product, coinciding with a new line of iPod MP3 players.Let’s not forget, however, that Apple had already sold about a million iPhones before the price cut. Common sense asserts that there is a limited pool of persons willing to pay $600 plus contract fees; and the million plus current owners of iPhones have probably exhausted that reserve. The cell phone industry is tangled with contract technicalities, breaching fees, and all sorts of reasons why it is never logical to buy a new phone until yours happens to fall out the window (usually right after you store all your contact information elsewhere). So those that were willing to go through the hassle are probably already enjoying the fruits of their labor, even if it is with a tinge of spite every time that catchy commercial is aired.The iPhone is an awesome item for about five hundred and ninety nine reasons…no, make that 399. The hype of being the first to own one of these hotcakes quickly evanesced and degenerated into being one of about a million fools who counted their chickens too soon. The new iPhone-look-alike iPod and the shame of spending all that unnecessary money has turned the tables on those who waited for days outside like overzealous bums. I’d say the smartest and coolest consumers out there now are those that walked into to buy an iPhone, the day after Apple’s controversial announcement, to find it drastically cheaper.

  18. The whole idea of the iphone is one that bugs me out for the simple fact that people are going crazy for it. At first I thoguht I wanted it, but at the same time I looked around and saw what it really was. It was a replica of things that many of us already have in our possesion all mixed into one. It also does not come as a surprise to me that the price of the phone was cut for the simple fact that today that is how thinkgs are sold. Think about it if you produce a product that is extremely expensive, there is going to be a rucsh ofthose that are viewed as the creme da la creme obviously going to purchase it. Now that they payed full price, once the price is cut there is going to be another gigantic rush of those who are not as wealthy, but now the phone is like any other affordable motorola on the shelf.As to those who stood online waiting to purchase the phone I feel as though they did this to in some way validate what they were doing. If you think about it, when you sit and look at this phone that you paid $600.00 for a thought that comes to mind is “Well I deserve this phone, I waited for days”, which in a way soothes the pain of spending so much money. At the same time if you have the money why not have someone else stand on line a buy the phone for you. By going to work instead of waiting on the line, you probably make enough money to buy two more of the phones.

  19. Personally I never considered purchasing an iphone. Like many other people I had a phone that is fully functional and a contract that still has a lot of time on it. The price decrease does not give me any incentive to buy the iphone because I still have a phone that works, and I think that $399 is still too much money to spend on a cell phone.If I had bought the iphone at higher price I would be annoyed, but I know that this is the way technology market works, prices are always being lowered. As for the rebate, it is a nice gesture, but, as Steven D. Levitt said, many of the rebates will go unused. I already have all of the Apple products that I want, so the rebate would be worthless to me.The only time I can remember that the price dropped after I bought something was another cell phone. I had paid a hundred dollars for it and then a few months later it was free with a contract. I was kind of annoyed, but I had needed a new phone and it was the one I wanted. In general, if you always wait for these things to come down in price you’ll never end up getting anything because it will always cost less later or some new model will come out and then you will wait for that one’s price to come down.

  20. As a profit-seeking company, Apple has every right to adjust prices to increase demand. Consumers seem to have forgotten about the countless past examples of this happening in the electronics market, and in all likelihood they will leave this behind as well. This move will almost certainly increase Apple’s short term profits, and will probably not affect consumption patterns in the future. As has been mentioned numerous times already, for some consumers exclusivity has no price, and clearly the opportunity costs of taking the time to do some product research is just too much for consumers to bear.Personally, I have chosen not to purchase an iPhone simply because of the transaction costs involved. The time and money that would be involved in canceling my current cell phone plan and starting a new one with AT&T far outweighs the cost of the phone itself, however outrageous it might be. If Apple wanted my business (and I’m guessing I’m not alone here) they wouldn’t cut the phone’s price so dramatically, but instead offer to cover all of the fees involved with switching phone services.

  21. A person’s opportunity cost for waiting in line to get an iPhone is the income or wages that would be earned had the person not left their occupation to stand in line. One might also be doing something that has a greater personal value, such as attending a concert or a baseball game. The assigned monetary value of attending a baseball game may be greater than the $250 that would be paid to the iWaiter. If this is the case, the subject would choose the option with the lowest opportunity cost and attend the baseball game. There are no economic benefits from standing in line for the iPhone; there is only the feeling of pride for having been one of the first to obtain an item that is evidence of extraordinary technological advancement.

  22. Kristen said…I disagree with jiang fang, because our generation revolves around the latest technology… even though Apple made a little bit of a mistake by lowering the cost of the iphone, i think that this whole dilemma will resolve itself when the next piece of technology emerges. I dont think that Apple will be hurt. Yes it was a big mistake on their part.. but in a business sense they are addressing the problem, which consumers will be pleased about, (money back).The consumers are getting what they want, which keep the complains to a minimum; and people seem to be fairly pleased with how Apple has handled the situation.

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