The (micro)Economic Effects of the iPhone 5 Launch

     Fans of the iPhone series lined up in huge queues outside apple stores on September 21st as the new iPhone 5 launched worldwide. (Article: http://biz.thestar.com.my/news/story.asp?file=/2012/9/22/business/20120922130115&sec=business). The lines were much longer than for the IPhone 4S, the previous iPhone release. Even the pre-order for the iPhone 5, which occurred a week prior the launch, showed much promise for iPhone 5 sales when two million orders were placed within 24 hours. Even the pre-sale numbers were more than a 50% increase in sales compared to the iPhone 4S. In Sydney, approximately 600 people lined up outside the Apple store. Customers, who wished to purchase the iPhone 5, were limited to two units per customer. Some diehard fans of the iPhone had even camped out over 24 hours outside Apple stores to purchase the iPhone 5. Due to the high demand, there were concerns by sellers over the lack of supply of the iPhone 5. The iPhone 5 was believed to have been sold out in Japan and Australia, at the time of the article, and there were talks of bi-weekly restocking by Apple Inc.

     The primary focus of the article is the supply of the iPhone 5 versus the demand of the iPhone 5 by the consumers. Apple Inc sold a record setting 5 million units of iPhone 5 within 3 days of its launch however, these numbers fell short of expert predictions of 10 million units. Despite these predictions, Apple Inc has stated in a press release that the demand by the consumers exceeded the initial supply of iPhone 5s. The low supply could actually be an economic strategy by Apple Inc.  Looking at the graph below, you can see the supply and demand curve.


A low supply of the iPhone 5 will ensure that the demand will continue to stay high. In an ideal market, the high demand will also increase the price but price of the iPhone won’t increase for reasons explained in a later paragraph. The graph below shows the demand and supply curve when there is sufficient supply to meet the demand of the consumer.


The danger of having too much supply is the possibility of oversupplying the market with the iPhone 5. Compared to the first graph, we can note the point A is much lower down on the demand curve while the point B is much higher on the supply curve. Oversupply would mean lesser demand and possibly even having to drop the price due to too many iPhone 5s in the market. While the seller might want to sell at price P1, consumers are only willing to pay at price P2 as shown on the second graph.

     With the limited supply of iPhone 5 in the market, black markets are selling iPhone 5s at elevated prices. With the delivery date of iPhone 5s being pushed to four weeks, impatient consumers are turning to the black market for their iPhone fix. Within five hours, iPhone 5s were being sold in the black markets of China for as high as 9,000 yuan (equivalently to RM4,378). To put into perspective, 9000 yuan is approximately double the price of an iPhone 5 without a contract.

     In the United States, the iPhone 5 can be considered an inelastic even though it may not be considered inelastic in other countries. To most, a smartphone can be considered a luxury item however, this view is challenged when talking about a first world country. Compared to the average income in the United States, the price of an iPhone 5 is considered minimal. The per capita of the United States in 2011 was $50,054 or approximately $4,171 per month. The most expensive iPhone 5 in the United States (together with a two year contract with a network carrier) was $399 or just $199 for the cheapest. The iPhone 5 in Malaysia, on the hand, is expected sell for approximately RM1,300 to RM1,400 with a two year contract with a Malaysian network carrier. The per capita income in Malaysia is only RM28,000 as of the end of 2011 (RM2,300 per month). The purchase of the iPhone 5 accounts for 56% of the average income in Malaysia as opposed to 9.6% of the average monthly income in the United States

     The price of the iPhone 5 remains relatively unaffected by demands of the consumers due to the vast amount of competition in the smartphone industry . The smartphone industry has evolved. There are plenty of options when it comes to buying a new smartphone. There’s competition from the Samsung Galaxy S3, Motorola Droid RAZR HD, and Nokia Lumia 920 just to name a few. Each of these companies also have numerous varieties of smartphones as alternatives to the iPhone 5. This means the opportunity cost of the iPhone 5 is any of the vast variations of smartphones available on the market. This has made the iPhone 5’s price hypersensitive to the market. The majority of the public don’t have brand loyalty or the technical knowledge to differentiate the slight differences between leading smartphones. The price of the iPhone 5 and the Samsung Galaxy S3 is both $199 in the United States. In India, Samsung has resorted to slashing the price on the Samsung Galaxy S3 in response to the launch of the iPhone 5. This will most likely lead to iPhone 5 dropping its prices relatively earlier than most scheduled price drops for smartphones. As one company drops its price on a smartphone, other companies directly follow suit in order to compete as consumers become more and more informed and aware of the price of technology.

     There’s quite a few economic theories in place when it comes to the iPhone 5 sales. Apple Inc have made sure to supply just enough iPhone 5s to ensure there isn’t an oversupply in comparison to consumers demands’ to sustain high demand. Oversupply is bad especially for technology since technology loses monetary value very quickly. For the consumer, limited supply is bad. This means that consumers have to resort to a ‘first come first serve‘ system and or a lottery system since some stores run out of supply quicker than others. The cost of waiting (in line and for delivery) and searching for the iPhone 5 is also high due to the time lost. On the other hand, due to smartphones flooding the market, prices of smartphones are hypersensitive and remain relatively similar in the market. This makes it a cheap commodity for consumers in the developed world while it is still considered a luxury item in developing countries like Malaysia. As more and more smartphones are put on the market (sometimes as soon as semi-annually), we could possibly see a decline in demand in the near future.