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Matching Markets in Technology: What a Free iPhone 3GS Means Today

Barring the fact that you might live under a rock, it’s common knowledge that Apple unveiled its new iPhone 4S today, which boasts a better processor, battery life, camera and even Apple’s new voice recognition technology, Siri, along with a plethora of other features. Another announcement made today that can be easily overlooked, however, is that like every yearly announcement, the new model will start at the same price point as the old iPhone 4 model of $199 and $299 for 16GB and 32GB, respectively. Also, as usual, the lowest-size older model (the 8GB iPhone 4) will see a price reduction down to $99. What’s radically different from any other iPhone announcement past, however, is that this time there’s a third model being offered for free. That’s right. Customers, albeit only those with AT&T service, can now get an 8GB iPhone 3GS for nothing but a 2-year contract.

When looking at a simplified model of all of the complexities of the smartphone market, this move by Apple can be seen as a seller reducing their price in a matching market scenario. Looking at both monetary and psychological barriers of entry to buying an iPhone, this price reduction arguably increases the value of an 8GB iPhone 3GS dramatically. This large value increase will cause some buyers to value this particular iPhone more than some of the competition’s HTC, Android, and BlackBerry models. Consequently, the “old” edges between other smartphones and some buyers that used to represent their highest values will be eliminated and replaced with edges between them and the now highest-valued 8GB iPhone 3GS. There is enough of a wide variety in the smartphone market that Apple’s prices will be market-clearing, although it is likely that competitors will respond by offering a free version of their devices (if they haven’t done so already).

http://www.nytimes.com/2011/10/05/technology/apple-introduces-a-new-iphone-with-a-personal-assistant.html?pagewanted=2&ref=technology

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