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Yes, I know, it's a slightly farfetched idea but there is a solid economic background to it. It shouldn't happen in a world where purely neoclassical economics holds sway but an awful lot of modern economics is about finding out when and where those purely neoclassical assumptions don't hold. As a first stage, the existence of brands and product differentiation means that there's at least more complexity to the world than the standard assumptions allow.
Pondering on this is triggered by a rumour (perhaps well founded gossip is better?) that Apple is in negotiations with the carriers to increase the price it charges for the
"Our checks indicate Apple has started negotiating with carriers on a $100 iPhone 6 price increase," wrote Misek. "The initial response has been no, but there seems to be an admission (by wireless firms) that there is no other game-changing device this year. We think Apple might be able to get at least some of the increase, with the additional costs split between the carrier and consumer.
"A $50 ASP (average selling price) increase would offset most of the negative iPhone 6 gross margin impact and remove a major bear argument (on Apple's stock)."
So the argument is that as there's not going to be any great competition for high end phones this year then Apple might be able to push through a price increase. But we can go two stages further in this argument as well. The first is to point out that it's possible that Apple could raise the price, reduce sales a little, but still end up making more profit. This shouldn't be true in a purely neoclassical world, as above. For profit is maximised where marginal revenue equals marginal cost. It's only monopolists who can reduce sales, raise prices and thereby increase profits. But Apple is a monopolist in a manner of speaking. Sure, there's plenty of competition in smartphones but there's only one company that makes Apple smartphones (although Apple is making a good go of persuading a judge that Samsung has been trying to make Apple smartphones). So, depending upon how strong we think the Apple brand is they are a monopolist of sorts. The stronger we think the brand pull is the more we will think that they can make extra profits by raising prices and reducing sales. Perhaps.
Then we can go one stage stronger and consider whether the iPhone is a Veblen Good. This is where the value of the item is perceived as being determined by the fact that it is expensive. Owning an iPhone, in this formulation, would show that you are the sort of person who owns an iPhone. Thorstein Veblen, who we name these goods after, coined the theory of conspicuous consumption and that's what this is all about. All of us do it sometimes as well: we will purchase a produce precisely because it advertises something about us that we wish to have advertised. Perhaps that we've got the good taste to realise that this is the best product but in the purer form we're saying that we're rich enough to purchase this more expensive version of whatever it is. A $1,000 coat doesn't keep the rain out any better than a $50 one but those who make $1,000 coats make absolutely certain that they look as if they cost $1,000 not $50. Which is one of the reasons people buy them. Because it shows that we've got enough money to buy a $1,000 coat: conspicuous consumption or a Veblen Good.
If the iPhone is in fact a Veblen Good then raising the price could lead not to lower sales but higher profits, as above, but actually to higher sales and thus doubly higher profits. Which would be fascinating if it were true. And I'm sure that it is true for some people: we've all seen those queues of people waiting for hours to purchase on the first day of release of a new iPhone. $50 here or there just isn't going to change that behaviour much. So an iPhone is indeed a Veblen Good to some people. But the larger question is whether it is to all of the people who currently buy iPhones and on that I would wager that the argument is almost certainly wrong. The question then becomes, well, what's the balance of these effects? And the sad thing there is that absolutely no one, including Apple, will know until they try out a change in their pricing policy.
