Thursday, June 25, 2009

Apple iPhone Price Elasticity

The market intelligence firm iSuppli has estimated the cost of the new iPhone 3G S to be $178.96 -- $172.46 of components and manufacturing expense of $6.50. I am not sure how accurate these are, but let's take them to be an estimate of Apple's marginal cost of production. They are probably pretty close.

From price theory, we know that optimal pricing implies the following markup relationship:

(price - MC)/price = 1/elasticity

or in words, the markup of price over marginal cost should be inversely related to elasticity.

Estimates of price are in the vicinity of $600: this is not what consumers pay, but what ATT likely pays for the phone. Using the $600 price and the above formula implies an elasticity of demand of 1.43. Probably not a bad estimate.

There are some interesting questions to think about in regard to what price one should actually use and how the impact of ATT's service revenues affect things. But I think that the above formula has to be based on the price Apple actually receives, and that would be the $600 figure.


email archiving said...

Its the brand and the patent that you are really paying and not the cost of materials to manufacture the iPhone. Of course the have to get back their research costs, advertising costs, and more.

Monica said...

Pretty effective piece of writing, thanks for the post.