Apple’s Ecosystem: Information Cascades
Chapter 16 of the textbook gave the example of how fax machines are an example of an information cascade that exemplifies the direct-benefit effect. In other words, you would only want to buy a fax machine if you know that other people also own fax machines: this way they are compatible. There is no point in owning a fax machine if nobody else owns one, it would be useless. In this sense, one benefits directly from choosing an option that a large population has already adopted.
While fax machines are dated by now, the concept of information cascades and the direct benefit effect are still applicable. In fact, the world’s largest tech company Apple heavily relies upon the information cascade to continuously innovate and receive immense recurring revenues. Ultimately, Apple is able to charge such high prices (over $1,000 for a new iPhone) because they know people want and need the compatibility factor. There are proprietary technologies like FaceTime or iMessage that aren’t compatible with any brands. When purchasing my new iPhone, this was something that crossed my mind: the overwhelming majority of my friends and family have iPhones, so I will reap the direct benefits of being able to text and video chat with them. This is explained by the article when it says “Apple continued to build out this ecosystem by changing the way its products interacted with one another.” For example, I can use my Airpods on my phone or computer, but can’t use my Airpods with a non-Apple product. People can take phone calls or use siri on the mac, iPad, Apple watch, and iPhone. Ultimately, Apple capitalizes on the information cascade to generate sales: “The more Apple devices you used, the better they worked together.”
Other companies, like Samsung, focus more on the product quality itself. This is not to say that Apple products are poor quality, but tech insiders will often say that the new Samsung Galaxy S21 is better than the newest version of the iPhone. For example, the Samsung Galaxy S21 has a more versatile camera and a higher refresh rate than the new iPhone. So, why is the iPhone continuously outselling the Galaxy? The CNBC article attached refers to Apple’s success as the “Apple ecosystem.” They mention that this is what gives Apple such a competitive advantage, as its competitors’ ecosystems are “much more chaotic” and “confuse most customers.” To reiterate: Apple’s ecosystem is extremely effective because as more and more people own the products, there is a large direct benefit to you following their footsteps. While product quality may be slightly inferior, Apple’s understanding and capitalization of the information cascade allows them to be the largest tech company in the world.
Sources:
https://www.cnbc.com/2017/05/01/why-people-keep-buying-apple-products.html
https://www.techradar.com/news/best-phone