University of Redlands
Apple Inc (previously known as Apple Computers Inc) is a market leader and an iconic American company. They provide an interesting example of micro-economics as they operate in a competitive industry – high tech consumer electronics, but they have differentiated themselves so well, they operate almost like a monopoly. This paper will explore the uniqueness of Apple that makes them an economical oddity.
Apple Inc. (originally Apple Computers Inc.) was formed in 1977 and is a $500 billion company, employing 75,000 people worldwide. It sells consumer electronic products, software and digital content. Its primary product ...view middle of the document...
They don't talk about their products, they talk about their beliefs. Their mission statement is “Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet offerings.” They talk about their values, not their products or features.
This fierce loyalty has created a relatively inelastic demand structure, having similarities to a monopoly with no good substitutes -- because in the minds of loyal Apple customers, there are no suitable substitutes. Their pricing strategy is very similar to that of a monopoly. They still need to set the price to an appropriate level in order to maximize revenue; they still have a demand curve and a price at which nobody would buy the product. When Apple is deciding on a pricing strategy, their strategy will be similar to any other profit maximizing firm - to set a price which will maximize profit.
The computer industry is a monopolistic competition. Apple can gain market share by pricing its products lower, but it may be force to accept lower overall profit. According to Welkerswikinomics.com, “The goal of an imperfectly competitive firm like Apple is to increase its market power by increasing demand for its particular product through product differentiation, advertising, developing brand loyalty, and “hype”: all forms of non-price competition.”
The chart below, provided by Welkerswikinomics.com, illustrates how Apple increases profit through product differentiation.
The green line depicts a shifted demand curve due to Apple releasing the MacBook Wheel. The value perceived by consumers is higher, therefore the price Apple could charge at a given demand level increase. The green shaded are represents the profit Apple earned and is illustrated as being higher in the second graph due to the steepening demand curve.
Oil companies, which generally comprise an oligopoly, have a similar pricing challenge. While collectively, a few companies control the market and the prices, and they can charge more than if they were in a perfectively competitive market, the price is still constrained. If the price goes too high, people will use less by driving less and buying more economical cars. There is an element of consumer backlash as well. When consumers feel they're being taken advantage of, it injures the reputation of the company and the industry. Apple is in a similar position. The goal is to set the price as high as people are reasonably comfortable paying – at an economically technical level, this will be the price in which profit is maximized. As Apple’s demand curve is fairly predictable, they know from past experience the range the price should fall within. If the price is too high, their customers will simply retain their old products and their profit won't be maximized.
Another pricing strategy that Apple uses is price skimming, also...