The economics of iPhone pricing

Apple's surprising misstep on iPhone pricing could have come about because the company's executives took too many economics classes, and not enough psychology courses.

Earlier this summer it seemed Apple could do no wrong on the marketing and public relations front, but the company clearly did not foresee how its early adopters would react to the $200 drop in the price of the iPhone announced by CEO Steve Jobs last Wednesday. Steven Levitt, the man behind the book Freakonomics and currently writing a blog of the same name at The New York Times, has an interesting post today about the iPhone pricing flap and its probable causes. (Thanks, Daring Fireball).

Simply put, Levitt said it's solid economic practice for a company to charge as much as they can for a coveted new gadget, then lower the price over time as the early demand wanes. The problem is that people aren't stupid, and they can tell when a company is very clearly eyeing profits over the customer experience: that's where Apple misfired.

There's nothing fundamentally different between an iPhone sold June 29 for $599 and one sold yesterday for $399. There is some sentiment that with the introduction of the $349 iPod Touch, Apple needed to give people more of a reason to buy the iPhone, which uses almost exactly the same interface. As interesting a device as the iPod Touch is, however, it's not a phone.

Had the company come out with a different or better iPhone at around $599 and then lowered the price on the original, the early adopters probably would have found that easier to swallow. "A new, updated product makes it seem like the company is learning how to make iPhones better, so it would thus be easier for consumers to accept a price cut on the original," Levitt wrote.

Apple arguably has a more loyal base of early adopters than any other company in the tech industry. In January, in the pre-dawn hours outside San Francisco's Moscone Center, several of those waiting in line for Macworld declared unequivocally that they would buy an Apple-designed cell phone without knowing what it looked like, what it cost, or even whether or not it was real. But they too, have limits, although I'd bet the outrage mostly subsides by the next time Apple makes a major product launch--$100 store credit or not.