Apple’s expensive iPhone 8 Part 2: The Snob Good Argument) – See Part 1 here.
The iPhone can arguably be considered a “snob good.” Such a good does not obey the law of demand, which states that as the price of a good rises, consumers will buy less of it. In other words, as price rises, quantity demanded falls. But as the price of a snob good rises, quantity demanded rises.
Consider a meal at a fancy restaurant. Is the food that wonderful that people are willing to shell out a few hundred dollars for a meal? Maybe they’re paying for more than just the food.
Does the hundred-thousand-dollar Patek Phillippe, Piaget, or Breguet watch keep better time than a ten-dollar Timex? Yet tens of thousands of consumers shell out all that money for these luxury watches. What else are these watches doing besides keeping time?
In my opinion, the ultimate snob good is the first-class plane seat. Ostensibly, all plane seats are equal. You sit for the same amount of time and fly the same number of miles as the passengers who are seated in the rest of the plane. Of course the airlines do everything possible to make the first-class passengers feel good about themselves – from sitting in wider seats with more leg room and having attentive stewards at their beck and call, to being the first to board and the first to de-board.
But the airlines do go that extra mile for their first-class passengers, by treating the rest of us as badly as possible. Seeing that gives them an added incentive to purchase first class seats.
You may have heard of the theory of conspicuous consumption, which was formulated at the turn of the twentieth century by Thorstein Veblen. It can be summed up in one sentence: People buy expensive goods so they can display their wealth.
So one may ask: Is the iPhone really a snob good? After all, aren’t some other phones comparable in quality and cost almost as much? That brings us to the economic concept of product differentiation.
Let us stipulate that most high-priced smartphones are basically the same. Each may have two or three markedly better features, but no one phone clearly stands out. After all, every phone is a computer, has a built-in camera, flashlight, watch, and sends and receives texts. Still, in the minds of buyers, one phone may be much better than all the others. In fact, so much better, that they are willing to pay substantially more. In most cases, that is what iPhone buyers believe.
Product differentiation is not about just different capabilities of a product. It is also a process that takes place in the minds of buyers. Apple fans – as well as the fans of other smartphones — truly believe that their phone is the best. Whether because of the way it functions, or simply the way it looks or feels, they believe they’ve purchased the best phone.
But iPhone buyers do enjoy one huge advantage. To the degree that an iPhone serves as a status symbol, then having one provides the owner with almost constant feedback – real or imagined – from the admiring glances of friends and strangers.
Buying the latest iPhone does wonders for one’s self-esteem. You have impeccable taste. You’re well off enough to afford such an expensive gadget. So, this fall, when Apple unveils the first thousand-dollar phone, tens of millions of loyal customers will be among the first to get their hands on perhaps the most highly prized consumer product of all time. At just one thousand dollars, it will be a great bargain.
Of course, I could be wrong about all this. Apple might well be able to maintain its profit margin by charging $899 for the 128 GB model and $999 for the 256 GB model of the iPhone 8. Or perhaps even slightly less for each. Surely this strategy would not just shield the company from the thousand-dollar sticker shock, but also from fierce price competition from their rivals.
But not breaking this symbolic price barrier when unveiling perhaps the most anticipated consumer product of all time would not only forego at tremendous marketing opportunity. It would violate the company’s advertising slogan, “Think different.”
But wait! There’s more, folks! If Apple doesn’t charge at least one thousand dollars for the iPhone 8, it will forego taking advantage of the product’s most important marketing appeal – the fact that the iPhone may be the world’s greatest snob good.
(Full disclosure: I own some shares of Apple stock.)
Steve Slavin has a PhD in economics from NYU, and wrote sixteen math and economics books, including a widely used introductory economics text now in its eleventh edition (McGraw-Hill). The Great American Economy (Prometheus Books) will be published in August. He is a Professor Emeritus at Union County College, and previously taught at Brooklyn College, New York Institute of Technology, and St. Francis College.