iPhone pricing

by Russ Roberts on October 31, 2007

in Cafe Conversation

Apple has decided to keep restrict sales of iPhones. The AP reports (HT: Camilo Montenegro and Isaac Crawford):

Apple Inc. no longer accepts cash for iPhone purchases and now limits
sales of the cell phone to two per person in a move to stop people from
reselling them.

Why would Apple implement this policy? Why don’t they just raise the price to prevent reselling and make more money?

Use the comments to discuss and I’ll weigh in with an opinion tomorrow.

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{ 25 comments }

Unit October 31, 2007 at 3:38 pm

Because otherwise they get accused of gouging….

Rob Dawg October 31, 2007 at 3:49 pm

Apple needs to restrict sales for several reasons. Sorry to spoil your "big reveal" but they are neither obscure nor nefarious.

Apple is concerned with reputation and public relations while scaling from zero to millions while also teamed with AT&T who they rightfully do not trust.

The iPhone OS has been hacked sooner than expected meaning a gray market developed before the in-house infrastructure to support different wireless providers is ready.

Raising the price does not address those problems.

Interestingly lowering the price may help. Competitors got screwed trying to quickly meet Apple's price point of $499 only to have Apple cause them to spend millions and negotiate to get other carriers to get ready to support similar products. Some folded, some are trying to squeak by on smaller margins. Another price cut and Apple is the only game in town.

CRC October 31, 2007 at 4:14 pm

Cost is not just about the monetary price involved.

In effect they have "raised the price" (just not in monetary terms) but only for the people engaged in the activity that they wish to limit.

True, they don't make any additional profit from this "price/cost increase", but they probably make a greater overall profit by keeping the phone more affordable for the vast majority of people that are not buying the phone to unlock it.

Michael Fisk October 31, 2007 at 4:30 pm

Well, Apple is also getting a cut from AT&T's cell phone contracts with iPhone customers… to make up what they'd be missing out from those deals, they'd have to raise the price by a rather staggering amount (in fact, beyond the original $499/$599 prices of the iPhone), which would engender them a lot of negative PR. For a company that places its image at the forefront, that's a very negative signal to the market.

Since AT&T won't exactly let you walk out of their store, iPhone in hand, without activating it first, the Apple Stores are the main venue for a reseller. At the very least, Apple's goal to maximize their own revenue is to make it too difficult for resellers to get their product to make it worth their while. One way to do this is through product limits. After all, with no per-order limit, there's nothing stopping an entrepreneurial type from buying out the local Apple Store's stock. Then, from there, the next step would be to tie personal data to the purchase to further clamp down on a reseller's ability to acquire multiple phones. As a result, untrackable (cash) or disposable (in-store gift card) means of payment are therefore verboten, and the reseller is limited to the credit-destroying practice of having many credit cards in order to continue acting as a speculator. That or pay other people to buy for them, which is itself imposing additional costs…

Jason October 31, 2007 at 5:41 pm

I assume Apple knows better, but is not accepting cash even legal?

Mikhail Dubov October 31, 2007 at 7:23 pm

Apple obviously cares about reputation. It wants not just to sell the iPhone but to get a customer for life so they keep prices for these legitimate customers low.

At the same time they want to prevent resale to outside the US which would not lead to as much profit (since they dont pay for network, music and so on).

Ross Williams October 31, 2007 at 8:06 pm

Easy, Apple makes $18/month from ATT for every iPhone activated. Over 24 months, this is $432 per activation, assuming the minimum of 2 years of service.

If people hack them and sell them to others using a different network then Apple loses a lot of money.

And yes, these hacks exist and are relatively easy to use, which is why 250,000 iPhones have not yet been activated through ATT.

Chris October 31, 2007 at 10:25 pm

How are they getting around the cash-as-legal-tender laws?

t freak October 31, 2007 at 10:41 pm

Apple cares about the branding effect more than the revenue iPhone can bring.

It wants to create a scene: Long queue in front of a restaurant. Alternatively, the restaurant may choose to add more tables (let every buyer buy more than 2 units of iPhone) or raise price. In either case, the long queue would disappear. But that's the last thing they want.

David October 31, 2007 at 10:51 pm

Maybe Apple doesn't like the idea of raising their prices after already lowering them? I really don't know what to tell you.

ben October 31, 2007 at 11:14 pm

It is because the iPhone reaches two audiences. One is Mac users and longtime supporters of Apple. The second is the mass market. The profit maximising price in each market is different (mass market price higher), and Apple is unable to distinguish which market any customer is from and charge accordingly.

Because Apple cannot distinguish which group each customer comes from, Apple is forced to set a one-size-fits-all price. It has selected a price that is below the equilibrium price for the mass market.

Because Apple can only make so many iPhones per month, Mac users may find it hard to get an iPhone, because while they might buy 1 at a time, resellers will buy low and sell high (i.e. arbitrage) without limit.

Apple's 2 per customer policy raises the cost for resellers, dampening their activity, and thus improving access for users in the Mac market. This helps protect Apple's reputation among its long time supporters.

Billy October 31, 2007 at 11:35 pm

Chris,

They're "getting around" those laws because in the U.S., the legal tender laws only apply to existing debts. There is no general requirement that a merchant accept cash in the sale of a good or service. Some states may have such statutory requirements, but the Uniform Commercial Code, which many states base their commercial statutes on, does not. Consider the ubiquitous signs in convenience store windows cautioning that they will not accept any bill over $20 or $50.

Joe White October 31, 2007 at 11:40 pm

To address a tangential item, there is no federal law requiring individual or businesses to accept currency or coins in payment, according to

http://www.treas.gov/education/faq/currency/legal-tender.shtml#q1

Flash Gordon November 1, 2007 at 11:43 am

Most or the resellers are unlockers who are re-selling the iPhones overseas at substantial markups. The current low value of the dollar to other currencies helps push the overseas price up, plus the fact that the iPhone has not yet been introduced in those markets and there is pent-up demand, which Apple wants to save for itself when it is ready to introduce the iPhone into those markets.

It could stop or reduce the re-selling by raising the price but then they would also be raising the price for their U.S. customers and thereby reducing demand in this country, which they don't want to do.

Shaun November 1, 2007 at 4:23 pm

A few posters seem to think that its all about trying to limit the spread of the phone to the US market by making widespread export and resale difficult. Regardless of what Apple might think, the rest of the world has seen the way early purchasers were gouged and knows exactly what iphones are selling for in the US .
There is enough information in the market to prevent Apple from trying to arbitrage a ridiculous profit markets in other countries in the same way it did to its loyal US consumers, who all appear quite happy to have been fleeced.

shawn November 2, 2007 at 8:39 am

…copy/paste from my blog the other day…

66–Why would people be reselling them? Perhaps there's a market where people are willing to pay more? So, why not just raise the price? If I owned apple stock, I'd be a bit pissed that they'd dropped the price if people were obviously willing to pay more. That, and the fact of imposing "limits" on iphone sales…strange business model, oh Cupertino…very strange.

Or, perhaps, this is an arbitrage opportunity that smart people are jumping on. Hmm…a little economics learnin' being put to use.

IF they're reselling them, as Apple alleges and is apparently trying to quell, I have to assume that they're selling them for a profit.

…and, a quick visit to ebay gave me the answer. They're selling them *unlocked*…so, they've done the work of unlocking them (just as a scalper does the work of waiting in line or calling around to obtain a ticket to a hard to see show/game/concert), and they're selling them to tech luddites who are scared or unable to unlock them themselves, or simply don't want to go through the trouble of doing so. Another likely possibility is that they're selling them overseas (or possibly in Canada or Mexico). Regardless, there obviously is a profit opportunity, and apple's trying to guard against it….but that leads to the question: why wouldn't they sell as many as possible??

The only reason that apple would be hesitant to sell as many iphones as they could is because AT&T is pissed off that they're losing revenue to unlocked and unregulated phones, and they're leaning on apple to keep that from happening. There's a pissed off memo sitting on someone's computer at AAPL.

Maybe AT&T should pass an "anti-dog-eat-dog" rule to protect them from competition of other providers.–99

shawn November 4, 2007 at 8:50 am

…what, no weighing in by Russ? I think Flash Gordon had a great point…combine that with my at&t not wanting to lose revenue, and that's a deal.

Flash Gordon November 4, 2007 at 3:49 pm

Right, Shawn. Where's Russ?

ben November 4, 2007 at 6:37 pm

The current low value of the dollar to other currencies helps push the overseas price up

Actually it will push it down relative to the US.

This talk of fleecing and gouging is silly. Since when did the price of consumer electronics not fall over time? In any case, consumers have plenty of alternatives in front of them and Apple must compete.

Flash Gordon November 5, 2007 at 9:34 am

Ben, isn't it true that when the dollar is high imports appear cheaper to us and when it is low, as now, imports appear more expensive? To a European imports from the U.S. must seem cheap right now because the euro is high relative to the dollar. But the high euro/low dollar equates to more dollars paid to the U.S. re-seller exporting to Europe, right? The U.S. exporter should be able to raise the dollar price without that resulting in an increase in the Euro price thus avoiding any reduction in demand in the European market and reaping more dollars from the transaction.

I can easily get confused by this, but that seems right. If you can correct me please do, I don't claim to be an expert.

ben November 5, 2007 at 4:43 pm

Flash, I'm no expert either, but here is my thinking: a weak US dollar translates to, say, a strong Singapore dollar. A US reseller of iPhones will demand to be paid in US dollars (or at least an amount that is indexed to a US price, since that is where iPhones are presently being sold). When the US dollar is weak, you need fewer Singapore dollars to purchase the number of US dollars the reseller requires. Hence the foreign price goes down when the US dollar is weak.

The fly in the ointment, as it were, is that if Apple has to pay foreign suppliers in making the iPhone, then a weak US dollar increases cost of production, and possibly raises the US price: but this is second order.

shawn November 6, 2007 at 7:34 am

…but wouldn't increased demand due to higher singapore dollar vs. us dollar push that price back up to at least the level it was before?

Flash Gordon November 6, 2007 at 8:39 am

I think you are both right, Shawn and ben. It will take fewer Singapore dollars to give the U.S. exporter the U.S. dollars he wants, and he could also increase the U.S. dollar price but to a level a little below the former Singapore dollar price thereby getting more U.S. dollars for himself while also costing the Singapore buyer fewer Singapore dollars.

We may have figured this out. I guess Russ Roberts has lost all interest in the topic he started.

ben November 6, 2007 at 10:21 pm

…but wouldn't increased demand due to higher singapore dollar vs. us dollar push that price back up to at least the level it was before?

No I don't think so. If the US price stays unchanged that implies the reseller makes a windfall profit – but he can be easily bypassed by any Singapore buyer who knows someone in the US or even via eBay.

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