The Payoffs of Smartphones
This day and age is riddled with ever-changing and advancing technology. One of the recent things to be in the forefront of this age is: Smartphones. These small boxes can do everything from counting the zits on your face to finding out where you parked your car, and more. But while these semi-magical devices may seem god-sent to many, there are others who wouldn’t get one, even at knife-point. One of the reasons for this resolve is: the “package”.
http://financiallyfit.yahoo.com/finance/article-110607-6607-1-what-smartphones-really-cost
To manufacturers, smartphones only cost the values of their components needed to make it and assembly time. To buyers, they cost manufacturing price (with interest) and the rest of the contents in the “package” (a 2-year contract that allows phone companies to charge you well over the worth of the phone over the term of the contract). Therein lies the dilemma: are smartphones value to the buyer, worth the arm and leg overall cost of a multi-year contract?
This dilemma ties closely to the idea of Matching Markets. Consider three consumers: X is completely sold on the hype of smartphones, Y just wants a new phone, and Z wants a smartphone for its capabilities but doesn’t want a contract. Also consider three sellers: A is a high-end store, B a phone store, and C is general store. A is selling smartphones without a contract, B is selling smartphones with contracts, and C is just selling smartphones.
In this matching market situation, there are only three buyers (X, Y, Z) and three sellers (A, B, C). Each buyer only one wants one smartphone and each seller only has one smartphone. Therefore there must be an equilibrium that is mutually beneficial to all. Aligning values between buyers and sellers in the form (value of A to buyer, value of B to buyer, value of C to buyer), we have X=(high, high, high), Y=(low, medium, high) and Z=(high, low, high). Then choosing only an equilibrium that results in social-welfare maximization gives: X choosing B, Y choosing C, and Z choosing A. This equilibrium makes sense as only buyers Y and Z had any constraints in their options. Y solely wanted a phone and is more likely to just go to a general store looking for a phone. Z, looking for a smartphone, would head to the phone store. X, who’s value for the smartphone was the highest overall, would go to the high-end store looking for the top of the line product.