Flagship Smartphone Matching Market
As another recent blog post pointed out, Samsung Galaxy Note 7 smartphones have been catching on fire and and exploding since their initial distribution to customers. The situation is particularly damaging to Samsung’s reputation because their replacement phones, despite the promise to fix the defect, continue to burst into flames, and this situation led Samsung to issue a complete recall of the product line.
Around the same time, Apple and Google have released the iPhone 7 and the Pixel respectively as their new flagship smartphones. In terms of new features, the iPhone 7 boasts an improved camera, a water resistant coating, and the absence of a headphone jack, while the Pixel provides the best smartphone camera ever created, compatibility with Google’s new DayDream virtual reality platform, unlimited cloud storage for full-resolution photos and 4K video, and even a headphone jack.
Customers who would like to purchase a new smartphone in the coming weeks necessarily participate in a matching market between Samsung, Apple, and Google for a new phone. Although the prices are set by the vendors (just as we discussed in class), the values (and effective payoffs) of the customers for each of the phones can vary significantly. Both the iPhone 7 and the Google Pixel cost around $650, and although Samsung’s Note 7 is no longer being sold, the price for a Galaxy S7, a similar replacement, is around $550. If all customers placed the same value upon all the smartphones, it would make sense for all customers to purchase a Galaxy S7, although this clearly is not the case; several other important factors contribute to the value customers place on the smartphones. For instance, customers may fear purchasing another smartphone from Samsung as they may assume it too could severely malfunction, and this would cause them to greatly lower their value of the phone, decreasing their payoff and possibly translating their preferred seller to Apple or Google. Additionally, the Pixel boasts a host of new features that are in many ways technically superior to that of the iPhone 7, and this may cause many potential smartphone customers to increase their value (and payoff) of the Pixel over the iPhone 7. However, plenty of other customers likely implicitly place higher value on the iPhone because they value iPhone hallmarks such as Apple brand loyalty, Apple product integration, or simplicity. Since both phones cost the same price, these differences in value that customers place on them directly determines their payoffs and determines which one they should purchase, given the payoff for a Galaxy S7 is not higher.