Blackberry Pricing and the Wealth of the 21st Century

Steven Horwitz

My wife and I went smartphone shopping yesterday and came home with two Blackberrys:  a Tour for me and a Storm for her.  (After 18 hours, I already get the whole "crackberry" thing!)  Two points on the economics of Blackberrys:

1.  The total net cost for BOTH phones was a whopping $49.98.  A new two-year contract with Verizon, two $100 mail-in rebates, and a $100 "new after two" discount did the trick.  We spent almost as much on two car chargers as we did on the phones!  Contemplating the awesome technology that fits into my pocket, which is really right out of Star Trek when you think about it, and realizing that BOTH phones had a net cost of 2.6 hours of work at the average private sector wage (and notably less than that at my salary) is yet another moment of appreciation for the near-miraculous world in which we live.  Yes, there are monthly costs to using it (printers and ink cartridges anyone?), but still:  about an hour of work at my salary to get two of the most advanced pieces of communications technology around and ones that would indeed look like science-fiction to someone who died 30 years ago?   Amazing.

2. We were talking with the salesman (from whom we have bought every cellphone we've ever owned) about the pricing of Blackberrys and he pointed out that Jody's Storm was half the price of my Tour, even though the Storm is the fancier model with a touch screen and the whole iPhone feel to it.  He said "it might seem strange that the newer, fancier phone is cheaper" but before he could say anything, I quickly said "well I'm sure the Tour is in demand from business users who don't want to learn the touch screen and want the latest of the more 'traditional' BB, while the Storm is for people like Jody who might get an iPhone or Droid instead."  He said "yup."

I quickly replied:  "it's just like staying over a Saturday night for plane tickets - segmenting your market by price elasticity."  He gave me that sad, shake of the head that economists often get from people when we go geek.

It's not quite price discrimination because it's not the same good, but it is a good example of how prices are not driven just by costs but by the sellers' perceptions about demand and the relevant substitutes.  Subjectivism matters on the supply side too.  The Storm is perceived to have a market with more substitutes than do the Tour and the Curve, hence it has to be priced more competitively. 

Whatever the explanation, walking home with two BBs for less than $50 provides both the personal satisfaction of a great bargain and some deep appreciation for the power of the competitive market to deliver better and better goods at cheaper and cheaper prices.

Comments

[Gerard O'Neill]

Amen to 'the power of the competitive market' though you might want to factor in the cost of replacing that Storm. They introduced it here last year in Ireland to go head-to-head with the iPhone and it died a death (according to a die-hard blackberry-using friend of mine).

I'm a die-hard iPhone user myself: but that's the competitive market for ya!

[Steve Horwitz]

Was that the original Storm, which sucked, or the Storm 2, which we bought and is supposed to be much better?

[Jim Vernon]

"The total net cost for BOTH phones was a whopping $49.98. A new two-year contract with Verizon ..."

Seriously? You don't understand bundling and what you actually bought?

Best regards,
Jim

[Steve Horwitz]

Oh I understand what I bought (printer and cartridges as I said in the post), but I stand by the general claim. And since I'm very happy with my service from Verizon, I'm happy to take the cross-subsidy.

[David Hillary]

Steve, interesting example of price discrimination. I did a presentation for a management accounting class last semester and the issue was 'price skimming' where a seller will release a product with a higher price to get a lower sales volume of those willing to pay more, before dropping the price to get the next tier of users. We suggested this was an example of price discrimination, but the tutor didn't agree. She was basically insisting it had to be the same good on sale at the same time with different prices. What do you think?

[Steve Horwitz]

Interesting question of whether it has to be "at the same time" to really be price discrimination. Most of the examples we use in class (eg, student prices at the movies) are "at the same time" and I think that's probably correct. Otherwise, where does one cut off the time span? Is it price discrimination that the buyers of the first Mac paid way more per "operations per second" than a buyer in 2010 does? I don't think so. If not, why is any time cut-off non-arbitrary?

[David Hillary]

Steve, I guess the key idea is that it has to be 'the same product' which would imply same place, time, specifications etc. But, as you have pointed out, sellers can change time, place and specification as a means of discrimination between customers. The example you have used before is weekend stop-overs in travel services. This is a difference in specification and/or time. Another example would be business hours and after hours prices for cellphone calls, given most business use is during busines hours. Software vendors often have a free version with limited features, and full features for paying users. Drug companies often charge different prices for the same drug in different countries. Couldn't you also ask whether these differences are arbitrary or not? When does a difference make it a different market and a different product? I suspect the economist would suggest the answer is the degree of substitution between the products, and/or cross elasticity of demand.

Given all these examples, it is tempting to put 'price skimming' in the same 'price discrimination' category. If the cross elasticity of demand by buyers in periods 1 and 2 is highly positive, then why not?