Game Theory behind Amazon’s reason to not sell iPhones
The craze about the iPhone 6 has already rapidly taken over the nation like an epidemic. When Apple announced the iPhone 6 only a few days ago, as it did in the last seven generations of iPhones, customers have “flocked to every carrier website to get a guarantee of receiving the device.” Besides buying the iPhone 6 through pre-orders online, people can also purchase it by participating in what seems worse than Black Friday shopping- countless fervent Apple fans camp outside retailers such as Best Buy, Walmart, Target, Staples, and Radio Shack to get their hands on this new product. What shocks many is that Amazon, the world’s leading online retail site, does not feature Apple’s iPhone. This exclusion can be explained through a complicated game theory. Since 2007, when Apple first introduced the original iPhone, Amazon also made its way into the hardware business through its first Kindle e-reader. Since then, Amazon has expanded its hardware business in tablets, and even smartphones. According to NPD Group Analyst Stephen Baker, “Apple views them [Amazon] as a competitor.” However, Apple’s CEO, Tim Cook, denied the fact that Apple and Amazon has potential for competition. He stressed that Amazon is a retail company whereas Apple is a product company.
Assuming Amazon is one of the biggest competitions for Apple’s smart phones, Apple’s selling rate of its new iPhone 6 can be immensely impacted by Amazon’s sales of its own smartphones. Pricing or performance of a retailer can influence deals between retailers and manufacturers. If Amazon is selling its own device in the same platform as Apple’s products, Amazon is more like to be favorable in pricing towards their own products. However, having a discounted price for iPhone 6 can result in greater sales on Amazon, ultimately leading to greater profit. This goes back to the game theory about two students studying for an exam or a presentation. If two students both prepare for a presentation together, they will both get 100 on the presentation and 80 on the exam. If both study for the exam instead, students will get 92 on exam and 84 on presentation. The scores also change when one studies for an exam while the other prepares for the presentation. Similarly, simplistically speaking, Amazon and Apple can partner up and have the iPhone 6 sell through Amazon.com, leading to profit to both. Since the iPhone 6 guarantees a high demand, Amazon can profit from featuring the new iphone. Apple can also profit by partnering with Amazon by increasing their sales through having their phones sold in an internationally widely used retail site. However, the case is not so simple. There are so many variables that also affect each respective company’s revenues. If Amazon is not only selling the iPhone 6 but also pushing to increase sales on their own smartphones (in other words, not simply studying for the exam but also preparing for a presentation), Amazon featuring the new iPhone becomes a tricky problem.
As shown in the traffic model showing Braess’s Paradox, simply creating a new route of transportation between two places does not solve congestion problems. Amazon’s decision to feature Apple’s iPhones will not simply lead to higher revenues. What complicates this case more is Amazon’s decision to not sell iPhones on their site but to offer trade-in promotions. People who have bought the new iPhone and want to make some profit by selling their old iPhone can trade at Amazon for Amazon credit. In fact, Amazon is offering a slightly higher value for trade-ins than other carriers offering gift cards. How would this affect the equilibrium? Considering the strong correlation between purchase of a new iPhone and desire to sell an old iPhone, Amazon would essentially be profiting from Apple’s high selling rate of its iPhone 6. However, the payoff for Amazon is the decrease in revenue derived from the decrease in sales of Amazon’s smartphones due to its competitor, Apple, driving dominant smartphone sales. In terms of Amazon’s decision not to partner with Apple in featuring the new iPhone 6, how can we describe the Braess’s Paradox? Furthermore, in a network of infinite nodes of smartphone manufacturers and retailers, can we ever reach equilibrium?
http://www.cnet.com/news/why-doesnt-amazon-sell-iphones/
http://www.viralglobalnews.com/technology/apple-iphone-6-release-date-bring-shipping-delays-iphone-trade-ins-ebay-auctions/16892/
http://www.theverge.com/2014/9/11/6136717/iphone-6-plus-price-pre-order-retailers-carriers