Monopoly Profits Through Failing Products?
Josh Wright over at Truth on the Market has an interesting response to Dave Hoffman’s Is Apple Exploiting Consumer Optimism? The question is whether Apple may be selling iPods that it knows will fail in order to lock consumers into future iPod purchases and to tax consumer optimism. Dave writes:
But Nocera might be right in his implied argument that consumers are behaving irrationally by ignoring evidence like this, which would explain Apple’s growing market strength. The optimism bias is among the most robust of the cognitive tics exposed by experimental behavioral law and economics literature. We consistently underestimate the likelihood of bad things happening to us.
Here is a taste from Josh’s response:
Ok, so what happens in the competitive market for iPod-type machines when consumers do not have the ability to correctly “price” the durability of the machine (or the short length of the warranty)? Because each consumer is biased in this manner, the initial sale is extremely valuable to the seller since it increases the probability of future sales. But in a zero profit equilibrium, sellers (aware of these future, bias-induced sales) will compete away the supra-competitive return by offering consumers favorable terms. For example, lowering the price. Completely biased consumers still receive the benefit of competition because sellers compete for the right to sell to them and appropriate the profits associated with the bias. This is good for consumers. But, the allegation here seems to be that this is not a competitive market. Rather, Apple is presumed to have power over the pricing of iPod-type machines. The economics change now because Apple does not live in a zero profit equilibrium — so NOW wouldn’t this theory of anticompetitive harm be viable? I dont think so. If Apple is a monopolist, it strikes me as implausible that they would collect their monopoly return through repeat purchases induced by having machines disappoint consumers by breaking down early.
Shouldn’t Apple be offering mixed bundles instead of short-lived iPods?
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February 7th, 2006 at 12:18 am
If apple is a monopolist, then a very simple theory of monopoly price + quality choice says that they don’t have the incentives to provide “enough” quality, which would explain faulty ipods. I don’t quite see the need to resort to a dynamic theory of sales to explain the simple fact that if there were more substitutes for ipods in the market, then apple would adjust quality upwards.