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Network effects on iPhone 8 Price

The price for a 64GB Iphone X is an exorbitant $999, a whole $300 more than the cost of the recently released Iphone 8. The contrast in quality between the two, however, cannot possibly be seen by a reasonable person as justifying the nearly ⅓ discrepancy in price. A number of hypotheses can attempt to explain the disparity, though for the scope of this course I will explain the difference in terms of network effects, in which reservation prices (which I will equate to market prices) are a function of the fraction of the population (z) that the crowd expects to purchase the item such that r(x)f(z).

A recent article in BGR business magazine stated that iphone 8 sales are expected to be somewhat slow given that “the more exciting iPhone X is just around the corner” (Heisler 2017). The sales are so low, and the price to match, due to the increased expectations for the purchase of the iPhone X. Given that the crowd expects a greater fraction of the population (let’s say, z=.70), then the crowd expects fewer people to purchase the iphone 8 (in this case, we could say z=.30, though note that the two products do not necessarily have to add up to 1). Now, let’s assume that F(z) = 3z. Since everyone’s reservation price is related to f(z), the crowd as a whole will be comfortable paying a much lower amount for the iPhone 8 than the iPhone X. This leads me to the conclusion that, regardless of the quality of the iPhone 8, its price would be higher if the iPhone X was not soon to be released given that this anticipation lowers the expectations of the population regarding z.

Survey claims that iPhone X demand may be lower than expected

 

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