The market for Apples
A common challenge for companies is to find the reservation price of their customers in order to gain the most profits from the highest number of people possible. Unfortunately, most sellers must price their product at a single price, losing those unwilling to pay at this price and missing gains from those that would have been willing to pay more than the asked price. If we look at problem set 3, question 6 we see a market where in order to achieve market clearing conditions a price is set that cuts out the buyer with the lowest willingness to trade. While in this example of 2 items and 3 buyers this makes sense, what would happen if we expand the market size to that of the cellphone market?
Consider a company like Apple. Their current “standard” iPhone is the iPhone5 which has a set price of approx. $200. If we apply this to a consumer base like that in question 6 we can assume there are consumers X who are not able to afford this price, consumers Y for whom this price is acceptable, and consumer Z who would be willing to pay more. If Apple were only to sell the iPhone5 they would be very far from perfect matching and market clearing is only achieved by losing potential profits from consumer Z and ignoring consumer X entirely.
To address this we have seen the previous action of releasing the iPhone “s” and the recent development of the iPhone “c”. Now the market (while not perfectly matching) achieves the goal of appealing to more consumers and clearing more product/consumer pairs. Apple is able to collect profits much closer to each buyer’s reservation value as consumer X can now afford to enter the market with the iPhone5c, consumer Y has likely already purchased the iPhone 5, and consumer Z can purchase the iPhone5s at their higher price. The result of this strategy is matching at closer to consumer’s reservation values, increasing value for Apple, and clearing more of the market, which adds value for consumers.
More: http://www.economist.com/blogs/schumpeter/2013/09/apples-new-iphones