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June 26, 2007
Dynamic price discrimination
So you want to be first on your block with an iPhone? It'll cost you.
NEW YORK (Reuters) - Apple Inc. said on Tuesday its hotly anticipated iPhone could cost as much as $3,000 with a required two-year service contract, and a handful of eager buyers started lining up to spend their money.
They don't go on sale until Friday. And to be clear, that is $3000 over the life of the two year contract, as the article later explains...
Apple and AT&T on Tuesday outlined three iPhone rate plans that will be available, from $60 per month for the most basic to just under $100 per month for more talk time. AT&T said iPhone customers could also choose other AT&T service plans listed on its Web site.
While that is consistent with other AT&T wireless plans, it adds $1,400 to $2,400 to the cost of what many say is already a steeply priced $500-to-$600 gadget.
Of course, many people already pay $60 for their wireless plan, so using the economist's favorite concept of opportunity cost, it's the $500-$600 for the iPhone itself that is of interest. Still, that is several times what I paid for our family's two phones combined. (Our monthly rate is comparable to theirs, but again, that's for two phones.)
The story wouldn't be complete without this...
Not only Apple and AT&T are hoping to profit on the iPhone phenomenon. Advertisements on the New York and San Francisco online message boards at Craigslist.org solicited payment for waiting on line to buy an iPhone.
One listing from a self-professed "professional waiter" offered to stand on line for a fee of $100 per eight hours wait. The person will throw in delivery for an extra $50.
One wonders just how high Apple could have pushed up the price for this initial release. There is one certainty however. In a few months, there will be a better model that will be released at about the same price and this one will be sold at a discount. For tech products like this, there is most certainly a dynamic form of price discrimination partly due to the nature of quality improvement and innovation over time and partly due to calculated profit maximizing behavior. The effect is to segment the market into the patient and the impatient.
UPDATE: Felix Salmon thinks they are cheap. Yes, I think they could have gone higher. But on the other hand, as they come out with better models, they may be intending to stick with the $500-$600 price for the top shelf model for some time which will capture a moderate amount of consumer's surplus at each stage of product evolution rather than try to squeeze out too much in the first round. Just a thought.
Oh, and via Wired, we read that the iPhone will be sold in a box just like the iPod and you'll set it all up through iTunes.
Customers will choose their AT&T voice and data plans through iTunes, while iTunes is transferring songs and video files to the iPhone (and iSync or Outlook is copying contacts and calendars). The phone will be activated remotely over the cell network.
"It will go much, much faster than the normal process of buying a cell phone," Allen said. "Apple has a reputation for streamlining the customer experience. I'm sure there's not going to be any box opening in the store. That's such an important part of the process of getting an Apple product."
Because Apple won't be opening boxes in the stores, Allen said buying an iPhone on Friday -- when big crowds are expected -- might be faster at Apple stores than at AT&T stores.
Posted by William Polley at June 26, 2007 02:56 PM
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