Introduction
It can be stated that the pricing strategy of a firm can be seen as a distinctive factor when evaluating the performance of a product. In that regard, there are numerous examples in history when a product superior in all aspects failed in the market, due to unsuitable pricing strategies. There many principles, both short and long term, being guided by which a firm can set the price on its products. Such products might be developed according to the company’s strategic goals as well as the niche chosen by the company. The latter can be specifically true, when a product provides certain innovations in such a niche. In that regard, the present article will attempt to explain pricing strategies, using them to analyse the pricing decisions of Apple inc, outlined in an article by Ben Kunz, “How Apple Plays the Pricing Game”, published in Bloomberg Businessweek on 6 September, 2010 (Kunz 2010).
Summary of the Article
The author in this article provides his personal analysis of the pricing strategy of Apple’s products. The article specifically covers products such as Apple’s iPhone, iPod, and iPad. The analysis can be seen relevant, especially that it was made after Apple announced new products from the iPod touch model line. In that regard, the author uses the term “price decoys” to describe Apple’s strategy in setting the price for the product. Accordingly, it can be understood from the tone of the article that the provided analysis is a critique of such strategy, rather than an appraisal of a successful decision. The main feature of such price decoys is what he author calls the reference price, i.e. “products, services, or price points that a business doesn’t really want you to take, but rather use as a reference to make another product look better” (Kunz 2010). The author argues that using such a strategy the customers are willing to pay more. The author makes flawed statement regarding the prices of the iPhone, stating that they are cheaper than the new models of the iPod, while practically having the same features and more. The flaw in such assumptions is in that the price is cheaper for subsidized phones only, i.e. those which do not include the price of an AT&T plan (Apple 2010). The normal price is approximately twice as much as the iPod. Nevertheless, the author makes a point in that the price of Apple’s products is high. In that regard, an examination of pricing strategies might be required.
Theoretical Background
Setting the price strategy, a few aspects should be known for reference. Such aspects include the type of product market, demand supply, and accordingly, pricing strategies. First of all, such aspects as product markets shall be explained, as the type of such market might influence the correlation between demand and supply as well as the pricing strategy selected for a product. There are several characteristics that can be used as criteria in differentiating between different product markets types. The types of product markets, in that regard, include perfect competition, monopolistic competition, oligopoly and monopoly. The type of the market, in that regard, can be decisive in the product strategies to be used. Accordingly, the type of the market is influential in the way demand and supply interacts.
Perfect competition, although rare, can be seen as a reference type of markets, i.e. benchmark for the way firms might act in competitive markets (Hubbard and O’Brien 2010). Firms in such market sell identical products and it is difficult to control the price of products sold. Accordingly, it is easy for new firms to enter such market. A good example, ironically and no pun intended, is the apple market, in which profits cannot be earned in the long run (Hubbard and O’Brien 2010). The exact opposite of such a type of market is monopoly, which is a market in which there are no close substitutes (Musgrave and Kacapyr 2009). As a term referring to both industry and a firm, monopoly implies that a higher price is charged while smaller quantities are produced (Hubbard and O’Brien 2010).
The interaction of demand and supply is an important aspect in the formation of the price, in which several variables are important. Such variables include the quantity of the product demanded, substitutes, expected future prices and other. In that regard, such variables might influence the interaction of demand and supply, which in turn might influence the pricing policies of the product sold. The strategy of high prices can be said to be applicable for a target audience for which the firm will be confident that they will buy the product. The cases for which the strategy of high prices is applicable might include innovative products, which are protected by patents and which does not have analogues in their category. An important concept in that regard is price discrimination, i.e. identical goods sold in different prices.
Analysis
It can be stated that there is a point in the analysis provided in Kunz (2010), although in general Kunz provided an approach related to marketing, rather than economics. Setting the type of the market for Apple, it can be stated that there are different categories of products, and accordingly, different competitors and substitutes in each category. With the article focusing on the line of new mp3 players, such a market can be taken for comparison. In that regard, the market of Apple’s mp3 payers can be described as monopolistic competition. Such classification can be seen through a few factors, the most important of which is the availability of substitutes, the degree of elasticity and the number of competitors (Musgrave and Kacapyr 2009).
The dependency on the degree of innovation in Apple can be seen through all the products introduced, where the high price set even in the examples shown in the article, can be explained in the number of technological innovations introduced in each product generation. Accordingly, the competition in such a market had a market share below 10%, being in disadvantage with one of Apple’s strongest features the connection to iTunes (Yoffie and Kim 2010). Buying products from a monopolistically competitive firms, the price paid by consumers is greater than marginal cost, and “the product is not being produced at minimum average cost, but they able from being able to purchase a product that is differentiated and more closely suited to their tastes” (Hubbard and O’Brien 2010, 425). The latter is specifically applicable to apple’s products in all categories, where the products are differentiated from other competitors with firms trying to catch up. As an example, the wireless connectivity, touch screen, and type of storage can be seen as a few examples of Apple’s innovations and products differentiation.
Such category implies certain pricing strategies related to concepts of brand management and price discrimination. In terms of price discrimination, such concepts can e used to explain why the early adopters of an innovative product will pay higher prices. Accordingly, such prices will decrease with time. In that regard, price discrimination rather than price decoys can e used to explain the price set for first generation of devices, with their subsequent decrease. As a supportive example, the first model of iPhone was priced at $499, at a time when handsets that “cost more than $300 accounted for only 5% of worldwide mobile phone sales” (Yoffie and Kim 2010). Subsequently with the introduction of new models, the price of the first one decreased. Brand management, in that regard, is an indication that the company succeeded in differentiating its products (Hubbard and O’Brien 2010, 426). The differentiation between the iPhone and the iPod touch covered in the article merely was transferred into differentiation in brands, despite the fact that the differences in technical specifications might not be striking. The pricing strategy is one way to maintain such brand differentiation over time.
Conclusion
The present paper provided an overview of several concepts in microeconomics in order to analyse the article “How Apple plays the pricing game” by Ben Kunz. The present paper provided an overview of the types of products market, monopolistic completion, and price discrimination. In that regard, it can be concluded that such concepts are more useful to explain the pricing strategies of Apple, rather than the concept of price decoys provided in the article. It should be stated that the prices of Apple’s products are higher that the prices of its closest competition, due to the nature of the market, the industry and the competition.
References
Apple. 2010. iPhone 4 2010. Web.
Hubbard, R. Glenn, and Anthony Patrick O’Brien. 2010. Microeconomics. 3rd ed. Boston: Prentice Hall.
Kunz, Ben. 2010. How Apple plays the pricing game 2010. Web.
Musgrave, Frank, and Elia Kacapyr. 2009. AP microeconomics/macroeconomics: Barron’s Educational Series.
Yoffie, David B., and Renee Kim. 2010. Apple Inc. in 2010 2010.