The Economics of Apple Engraving

Categories Economics, Technology
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Thought I’d just make a quick note of something I had a think about this morning.

I’ve always wondered about the motivation of some firms to provide free services alongside the purchase of a product. For instance, I bought a guitar yesterday and was given a free case and a free set of strings. I didn’t know that I was going to receive these items in addition to the guitar and they certainly didn’t factor into my value appraisal when I considered purchasing. There doesn’t really appear to be any benefit for the retailer in providing these free accessories aside from general customer goodwill. Thus in a sense it’s rather irrational to be providing such free gifts.  I do; however, suspect a slightly more sinister motive for Apple’s provision of free engraving with it’s products.

I’m willing to assert that Apple provides free engraving and gift services in order to both limit and inflate the used market for Apple products. This rests on two fair weak assumptions.:

A – That people are less likely to sell on products that they have been given as gifts or carry some sort of personal value.

B – That the closer the used price is to the RRP of a product, the more likely people are to buy the product new.

These two assumptions together mean  firstly, that the supply of used Apple products is decreased when engraving is added – thus inflating the price. Then, as there is little difference between the RRP and used price, those in need of an Apple product are far more likely to buy new to ensure a reliable quality.

This provides a double benefit to Apple. Not only does it mean that they benefit from a higher level of new purchases, but it also provides them with a higher quality brand image as their products retain their value far better than their competitors.

A quick scan of Ebay shows that the two year old iPhone 5 sells for around £320 (down from £529 RRP) whereas a Samsung S3 of the same age falls from £500 RRP to £270. This effect becomes more apparent when we look at older models. An iPhone 4s has fallen to £210 from £499 whereas a Galaxy S2 is down to £110 from the same price.  An iPhone 4 now sells for around £150,  down from £499, compared to an S1 which is barely available at all on Ebay.  In very rough terms this shows that the price half-life of an iPhone is two years, compared to roughly a year of Samsung Galaxy phones.

Whilst this is fairly anecdotal evidence so far (and we can’t claim causation for definite), it certainly backs up the economic theory and adds credence to the claim that Apple has found a successful way to crush the used market for its products.

“It really is the gift that keeps on giving” – Apple

 

 

 

 

 

 

Currently studying Philosophy, Politics and Economics at St Annes College, Oxford University. I have a keen interest in applied economics, food and most types of sport.

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