Retailers Aim to Clear Stock of Tablets
Since the release of Apple’s iPad more than 2 years ago, a handful of other PC and smartphone developers have jumped into the market to produce similar products priced at $499. Even at the same matching price point, producers such as Samsung, Motorola, and RIM have struggled to find buyers for their devices. Hewlett Packard, the dominant producer of enterprise and home PCs, dropped their tablet price to $99 to clear their stock and end all development and production in the tablet market. The reason for this is that Apple’s iPad is perceived by the buyers as a superior product due to the strength of the “Apple Brand” and the large number of Apps on its AppStore. These are advantages that the other sellers are not able to replicate.
Recently, Amazon has announced a new tablet: the Kindle Fire. The tablet is being released at a price point of $199, and has induced price wars among the other Android-based tablets. While the tablet developers themselves are not cutting prices, it is the retailers who are selling the tablets at reduced prices. The retailers aim to find market clearing prices to sell all of their inventory. It is not beneficial for a retailer to sell only the Kindle Fire while the Motorola Xoom and Blackberry Playbook stay on the shelves.
As a toy model, imagine that the perceived value of the Kindle Fire to the average customer ranges between $150 and $300, and the values are spread evenly across this range for the total set of customers. Then 2/3 of the population perceives the price as a deal and will purchase the Kindle Fire. Compare this with the Xoom and Playbook, which previously had values from $400 to $550, are now devalued to have value between $250 and $400 due to the existence of the cheaper competitor. If retailers were to sell these products at $499, they would sit on the shelves and only the Kindle Fire would be sold. To find market clearing prices, retailers like Best Buy sell the Xoom and Playbook at $300 and $350. This makes the buyers see comparable profit from purchasing any of the tablets, and will help all of them be sold. While this may sell the tablets at reduced profit or even a loss, it is a better alternative than for some of the products to stay on the shelves and never be sold. This is the behavior we are seeing at retailers right now.
http://betanews.com/2011/09/29/let-the-tablet-price-wars-begin/