CEO’s Defense on Pricing of New Apple iPhones
Apple has been at the forefront of innovation since its release of the first iPhone ten years ago. After creating 18 models, the company has recently developed three more, the XS, XS Max, and the XR. As the technology and capabilities for these phones have advanced, the prices have risen exponentially as well. When the first iPhone debuted in 2007, it started at $499. Today, the prices for the latest models have more than doubled with the XS Max starting at $1099 and going up to $1,449 for models with more storage. ABC News’s article investigates CEO Tim Cook’s defense for the pricing of these expensive luxuries. Additionally, the pricing can be investigated through information covered in this course on known intrinsic values and prices.
As a technology company that has been in the market for over almost 50 years, Apple has definitely gathered enough data to be able to know their buyers’ intrinsic or true value for an item, or the price that they are willing to pay for new iPhones once they are released. The idea behind pricing for goods was discussed in the lectures on auctions, and although this consumer relationship does not fit in with the specific types of auctions discussed, the theory behind it can still be applied. For example, if Apple is considered as one individual entity, their value for their iPhones, including all additional costs in production and marketing, can be portrayed as the variable x. The true value of the new iPhones for consumers can also be quantified as a variable, y. The surplus that is created in this transaction is y-x. In this case, Apple must be receiving the surplus value rather than the consumers or else they would not be able to run such a successful company. Apple is able to take the surplus because, with data, the company must know the true value their phone is worth to their potential buyers and therefore sets their price around y. In fact, Cook states “we found that people want to have the most innovative product available and it’s not cheap to do that”. Apple believes that their consumers place a higher value on their devices as they have replaced traditional cameras, music players, and video cameras. Therefore, although many have been shocked about Apple’s high prices, consumers are still willing to purchase these phones for these prices. Of course, Apple does recognize that there is a wide variety of individuals interested in their phone with different values, so they have also created the iPhone XR this time around.
Additionally, the article also touches on how Apple products were exempt from Trump’s China tariffs. This tax imposed on $200 billion worth of Chinese imports has prompted China to reciprocate with a $60 billion tariff on US goods. As iPhones are assembled in China, these new phones should be impacted by the tax, but they were exempted. Cook states his rationale behind the governments decision: “I think they looked at this and said that it’s not really great for the United States to put a tariff on those types of products”. Again, conveying how he believes that the intrinsic value for his company’s products is high. This tariff war between the US and China is a perfect example of how different parties analyze and respond to strategies and actions through game theory. According to the Financial Review, China has more to lose than the US as it exports more than it imports, and it also places a higher value on its imports than the US does. Because tariff wars result from each side’s attempt to one-up the other, these instances can be interpreted as a variation of the Prisoner’s Dilemma that we discussed in class, an arms race. From the theoretical ideas concerning this situation, it can be expected that eventually China will stop raising its tariffs because it is not in their best strategy to do so.
https://abcnews.go.com/Technology/apple-ceo-tim-cook-defends-pricing-iphones/story?id=57903432