Apple Pay and Network Effects
Recently, Apple released Apple pay, an app that enables mobile transactions. For years tech companies like Google and Softcard have been trying get their customers to make in-store purchases with their smartphones. In the three weeks since Apple released Apple pay major retailers have seen an increased number of people checking out with their i-phones. Whole Foods has processed more than 150,000 I-phone payments while McDonalds says that Apple Pay has accounted for 50% of its tap to pay transactions. Walgreens has also seen mobile payments double since the release of Apple pay. This phenomenon is related to the economy under Network Effects and tipping points of equilibrium. A customer’s willingness to use Apple pay is not only determined by that person’s reservation price for the product, but also by the fraction of the population who might use the product. A person’s reservation price for Apple pay may depend on the ease and speed of mobile transactions. For example, people might favor having one less item to carry when they go out, or the ease with which the app can access a person’s bank account for more funds. Despite a customer’s personal value for the product, he/she will be unwilling to use it if retailers and other merchants do not support the technology that facilitates these transactions. This is why it is important for Apple to ensure that an initial number of retailers have the technology that enables these payments, so that direct benefit effects will encourage more customers to try the product, and the company can get past the first critical point of equilibrium. Failure to raise awareness of the product or to ease the use of the new technology will keep the fraction of the population using mobile pay between 0 and the first critical point where there is downward pressure to the zero equilibrium. In this scenario, popularity of mobile pay dies out after the initial hype as it happened with Google and Softpay. However the strength of the Apple brand and the amount of merchants and customers who have enjoyed the Apple pay experience has helped the amount of people using Apple pay stay on a slowly growing trend. The mere increase in the number of people who are now aware of mobile payments has also increased the use of mobile transactions through competing Google and Softpay apps. To make this a widely used technology more retailers will have to adopt the near-field communication technology needed to process these payments and more people will have to be aware of the existence of mobile payments to tip past the first critical point where there is upward pressure toward a higher fraction of the population using Apple pay.
http://www.nytimes.com/2014/11/15/technology/apple-pay-gives-glimpse-of-mainstream-appeal-for-mobile-payments.html?ref=technology&_r=0