Apple Pricing Strategy

According to the article “Apple Pricing Strategy: Don’t Diminish the Brand” published on 6^th March 2009, (http://www.macobserver.com/tmo/article/apple_pricing_strategy_dont_diminish_the_brand) the article states that Apple doesn’t try to compete with PCs directly on price for several reasons that are well known. Cut throat pricing leads to diminished profits and loss of shareholder value. It diminishes the hard won reputation of the Apple brand.”

 In Malaysia, Apple is a well known company which is a premium brand of computer and smart phone. Can a reduction on price of products increase the quantity demanded for the products as well as the revenue of the company? Firstly, we know that Apple is an oligopoly company because there is more than one party in the industry which is producing the same product like Apple. On top of that, Apple has a few numbers of firms such as Microsoft, Samsung, HTC, and so on to compete with. An oligopoly is like monopolistic competition, it lies between perfect competition and monopoly. It either produces some identical product or differentiated product which is only compete the price of other competitive party. Therefore, they have to stay aware what kind of pricing strategy is best suits for them in order to not to let their loyal customer flow to others competitive company. On top of that, before setting up a price of the product, they have to aware whether the demand on their product is elastic or inelastic in the market. If the demand of their product is elastic in the market, setting up a higher price on the product might cause them to lose customer. People may look for substitution brand such as Samsung and HTC. In short, demand elasticity will affect the total revenue of a company.

In the law of demand, it says that the lower the price of a good, the larger is the quantity demanded and the higher the price of good, the smaller is the quantity demanded holding other variables constant. Generally in an economic form, if Apple increases the price of their product, quantity demanded of the Apple product will be decrease. This is because Apple product such as iPhone and iPad are considered as luxuries goods. People can still live without using a smart phone. A rational consumer will seek for substitution brand such as Samsung which produce a most likely the same product like Apple. Therefore, an increase of price will decrease the demand of a good. In other words, the price elasticity of demand for Apple product is elastic whereby increase in price will result a huge reduction on the quantity demanded of the good. Let’s see the situation in a graphical way.

The above figure shows the relation between the price and demand of the Apple Macbook. Assume that the price of a Macbook increased and the demand for the Apple Macbook is elastic. Initially the market price of Macbook is set at P1 and the quantity of demand is set at Q1. When there is an increase of price, there will be movement along the demand curve. The price will goes up from P1 to P2. Increase of price will decrease the quantity demand of Macbook because people will look for substitution brand such as Samsung. Therefore, quantity demand will decrease from Q1 to Q2. From the above drawing, we can see that the demand curve is flatter. This is because changes of price will leads to a bigger impact on the changes of the quantity demand.

According to the Apple’s profit margin in America, Apple has a shockingly high profit margin from the year 2008 to 2012.  From the report, we can’t deny that Apple has a very good market value and the company has developed very well.  The question is how could they maintain their sales in the market when the market competition is getting higher and higher from time to time? This is mainly because they have strong and excellent business strategies such as having the highest prices and lowest unit costs in the industry. They understand the market demand very well. A product of Apple such as iPhone is a very good example. The new launched iPhone always brings the new features and new design to iPhone market. However, the price of the new launched iPhone is most likely the same from time to time. Referring to iPhone’s  comparison chart in America, the price of the new launched iPhones are always the same which is $199 for a 16GB iPhone, $299 for a 32GB iPhone, and $399 for a 64GB iPhone. In an economical theory, a luxury is always having an elastic demand. Apple understood this theory and they applied this in their pricing strategy. That is how Apple preserves their market’s value until today. Figure below is showing the relation between total revenue and a price cut effect.

If the demand of Apple computer is elastic, a price cut will increases the total revenue, which is shown at the left area of the graph. On the other hand, if the demand of Apple computer is inelastic, a price cut will decrease the total revenue, which is shown at the right area of the graph. When the demand of Apple computer is at the unit elastic, the maximum of total revenue can be achieved, which is shown at the highest point of the revenue curve.

As for today, I personally think that the economical theory mentioned above is not applicable in every country. In fact, it depends on which country and also the consumer background. Let’s use Malaysia as a selected country. I personally think that price elasticity of demand on Apple iPhone in Malaysia is not elastic but it is inelastic in reality. Somehow if there’s an increase of price on the new launched Apple iPhone will not really affect the sales of the iPhone’s market because Apple tends to have a lot’s of loyal customer and the products are recognized by the public. For those who are affordable, they will still demand for the product of Apple as using a Iphone seems very normal to them. It is not like an increase of price of iPhone will cut down the sales of the product. From my own experience, whenever a new generation of iPhone is pre-launched, we can see the curiosity and a great feedback from the people, whereby everyone is discussing what would a new feature will have in the coming new iPhone product? How does the new iPhone design going to look like? Some people even created some fake information about the new design of iPhone 5 previously and the information was spread via the social network, Facebook. This is proven that Apple is a premium brand and it is recognized by the public in the country like Malaysia. This is because people believe that Apple products have a good quality and it is worth to buy.

 On top of that, if the price elasticity of demand is elastic, a minor increase of price on the new launched iPhone will reduce a great amount of buyer of iPhone? From what I see today, I doubt that. We can see a lot’s of iPhone user in Malaysia especially in the crowded city such as Kuala Lumpur. This is because Apple owned lot’s of loyal customer in Malaysia as people believe that it is worth to spend the money on buying a quality products from Apple. Unless the market has come out some product which is better and more innovative compare to Apple current product such as Iphone 5, in that case it might influence Malaysian from choosing Apple’s product and Apple product will be takes over by the new market probably. Otherwise, I don’t think that increase in price of Iphone will bring much negative effect on the Apple market such as decrease of demand of Apple product in Malaysia.

What Affect the Housing Supply and Demand?

One of the natural behaviors of humanity is that everyone hopes to be perfect in life. To makes life become easier and perfect, human tends to have unlimited wants. Due to the limited resources, we can’t fulfill all the unlimited wants. Market equilibrium point is formed when the demand curve equals to supply curve, which is the best determinant to fully utilize or avoid wastage of the resources that satisfies the plans of buyers and sellers. According to an article “Housing supply and demand – are we nearing equilibrium?” from Star Online, published on 26^th November 2011 (http://biz.thestar.com.my/news/story.asp?file=/2011/11/26/business/9974676&sec=business), the article states that the main determinants of the demand for housing are demographic whereby the core demographic variables are the population size and population growth. An increase of population will affect the demand and supply of houses in a market. How does it really affect the market equilibrium in both short-term and long term? As we know, land is getting scarce and it is not easy to get a permitted license for house development as well. It takes time for the developer to look for lands to build houses; procedures are needed and it takes time for developer to get a permitted license from government as well.

Graph above is showing the relationship between quantity of house (x-axis) and price of house (y-axis) in Malaysia. Initially, the market equilibrium point is set at the point e1 with the equilibrium price P1 and the equilibrium quantity at Q1. When there’s an increase of population, people will demand more for the house because everyone needs a shelter. Therefore, demand curve will move to rightward which is from D1 to D2. New market equilibrium point is formed at e2 with the increasing of both equilibrium price and equilibrium quantity, which is from P1 to P2 and Q1 to Q2. This is because the demand of house has increased but the supply of house is remained due to scarcity of land as well as insufficient of house developer in the short-run. Things might be happened differently in the long-run. Let’s assume that the government gives more licenses to the developer and quantity demanded for the house is still remained high in the long-run. Due to an increase of price of houses in the short-run, more suppliers come into the market as they believe that this is a good opportunity to earn more revenue. Hence, supply in the market will increase. Let say when the supply increase is less than the increased of demand due to the scarcity of land. In this situation, supply curve will shift to left which is from S1 to S2, whereby the shifting is not as big as the demand curve because of the limited of land available. Eventually, new market equilibrium point will be formed at e3 whereby the equilibrium price will decrease from p2 to p3 and the equilibrium quantity of house will increase from Q2 to Q3 after the increase of supply.

Besides the changes of population in a country, change in income is also one of the factors that will affect the market equilibrium point. An increase of personal income able to increase the purchase power of an individual and vice versa. In other words, a change in income will affect an individual’s buying plan, which is also called as income effect. Figure below is an assumed example of increased in price of house itself because of the greediness of developer tends to makes more money while the income of the citizen remain unchanged.

Initially the price of houses is set at P1 and the quantity demand of houses is set at Q1. Supposed that the developer set a higher price for the houses because they want to earn more while the income of the citizen remain the unchanged. An increase in price of houses itself will only result a movement along the curve whereby price of houses will increase from P1 to P2. Some of the buyers are not affordable to buy the houses after the changes because their income is still remain unchanged. Therefore, the quantity of demand for the houses will decrease from Q1 to Q2.

Besides the changes of demand, changes of supply will also affect the market equilibrium. As for supply, the typical factors that change supply of houses are the cost of production, price of existing stock of houses, and the technology used in the construction. For example, an increase of cost of production will reduces the revenue of the supplier. Hence, supplier will decrease the supply of house to solve the issue. Eventually, this will affect the market equilibrium because equilibrium of price and quantity will no longer the same after the increased of housing price. On top of that, short-run supply tends to be price elastic whereby increase in cost will have more effect to the supply. When the cost of production for building houses is higher, firms will cut down the supply of houses. If this is the case, problem such as lack of house due to the cut down of supply will happened.

According to the article, due to the factors that keep affecting the demand and supply for housing, policy intervention is needed to ensure the majority of the population has equal access to own homes. Nevertheless, I disagree with this statement as policy intervention will bring a negative effect to the market too. Below is an example in an economical graph. Assume that if government imposed price ceiling on the housing market.

A price ceiling occurs when government set a legal limit on the highest price of a good that can be in a market. An effective price ceiling will be set below the natural market equilibrium point. From the figure above, the price ceiling is set below the equilibrium market price (P2) which is at P1. Any price above P1 is illegal. This action will increase the quantity of housing demanded. Due to the exceeding of quantity demanded over the quantity supplied, there is a shortage on the housing market which is at the range from Q1 to Q3 stated above (QD>QS). When there’s a shortage in the housing market, search activity increases and it is costly when this activity is involved. It will be a loss for both consumer and producer which is located at the box B on the above figure. This is because the total of surplus for the consumer and producer had been cut down from the area A,B,C,D to C,B,D; they have to bear the losses in the area A. Furthermore, a shortage of housing creates an illegal trading in black market housing. This is because most of the sellers are not willing to sell their house at the price set by the government as it is too low for them and it’s a loss to them. Therefore, buyer and seller will make an illegal arrangement whereby the price of house will be higher than the price set by the government, which is at the price P2, P3, and P4. A price ceiling set below the equilibrium price leads to an inefficient underproduction of housing service. The marginal social benefit (DD) of housing exceeds the marginal social cost (SS).  As a result, both consumer surplus and producer surplus will be decrease and it is called as deadweight loss in the shaded area A.

To avoid market inefficiency in the housing market when the policy intervention is involved, I suggest solution such as deregulation to be proposed. This can avoid thing like black market happens in the housing market. Nevertheless, when there’s a government intervention on the housing market, it is preferable to carry a research towards the housing market accurately. This is to ensure the supply and demand in the housing market is checked before any decision is made by the government. By doing this, objective of increasing home ownership among the majority of the population can be achieve.

Tenaga National Berhad (TNB) overcharging consumers !

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                 According to the article "Owners allege overcharging by Tenaga National Berhad (TNB)" published on The Sun, 25 October 2011, several factories and residential property owners who claimed they had been overcharged by TNB after their meters were changed without consent called on the Energy Commission. First of all, TNB is a utility giant which also known as Oligopoly in Malaysia.

                Oligopoly is from a Greek word meaning "a few" where there are a few firms dominate the market for a good and services. The product the sold could be homogenous or differentiated. Homogenous products are petroleum products, aluminum, metal, steel and electricity whereas differentiated products are airline, cars, beer and cigarette.  Although they have control over price by manipulating the quantity of the product supplied which means price can be reduced but they usually are not simply because it makes greater profits, often by restricting output and this would make low-income earner suffer. Oligopoly has strong entry barriers just like monopoly. In my opinion, government should start regulating these type of company in Malaysia. Firstly, a lot of consumers has been complaining  "After the new meter was installed, their monthly electricity bills rose from around RM50 to RM60 monthly to about RM150." In addition, we consumers have no rights to refuse TNB's request to change electricity meter and no evidence showing that current meter are faulty. Oligopoly firms may or may not choose to maximize profits. However, Tenaga National Berhad choose to maximize their profit but this will result in price rose. Price will exceed marginal cost of production and result in misallocation of resources. They usually denied wishes of consumers because they are not willing to sell at lower price. 

                I think the reason TNB overcharging is because they are lack of competition which may result in exploitation of consumers and lack of incentive to improve quality of product. There are also complaints by consumers "I made several calls to TNB Subang Jaya. Sometimes the calls were put on hold, and on those times I got through I was passed from one department to another and subsequently cut off.", this shows that TNB has reduction in customer services. There are some company entered the market, one named "YTL Power" entered the market but there are barriers to entry which makes TNB hard to maintain its position. One of the barrier, TNB may have access to cheaper inputs where TNB able to purchase its capital and machines at concessionary rates and this will provide TNB with an cost advantage over new firms. Secondly, non-collusive oligopoly faces 2 possible demand curves which is highly elastic and highly inelastic. The kinked demand curve will formed if it met the two requirements. If one firm raises its price, consumers can buy from other firm at cheaper firms so that more expensive firm losses sales. In general, rival firms will not match price rises but will match reduction in price. Increase in price causes a loss of sales revenue and loss of market share. However, only very successive advertising and brand allegiance could avoid these to happen. The top half of the demand curve represent " rival ignore" demand curve where relevant  for price increases. On the other hand, if one firm decides to lower its price, the rival firms tend to follow otherwise they would lose the market share to the competitors.                

       

                The second half of the demand curve represent "rival follow" where competitors follows when price cuts. Therefore, the fact that rival firms will always follow price reductions but ignore price increases produces a kink in the industry demand curve.

                Moreover, there are also collusive oligopoly and cartels where firms in an industry reach an covert agreement to fix prices, divide up market share or restrict competition between themselves.  There is a tendency for collusive oligopolists to behave just like monopolist by maximizing joint profits. The pink segment shows the supernormal profit earned by the oligopolists with collusion.

However, differences  in cost and demand conditions, secret price concession and cheating act as an obstacles to collusion. If firms have identical or similar demand and cost conditions, they will tend to behave collusively and maximize joint profits, price and output will be same as those monopoly firms. Since Tenaga Nation Berhad is a electricity company, measured by cent/kWh, costs will be the same. In Malaysia, electricity company is controlled by government, so the effect will not be that bad because of regulation. 

                Cartels is a form of collusion which involves a formal written agreement about price and production. For example, output must be controlled and the market must be shared in order to maintain the agreed price. However, there are obstacles to collusion, first of all, demand and cost differences as stated above. Secondly, number of firms is another obstacles to prevent collusion, this is because when there are more firms in the market, the more difficult it will be to achieve collusion. Also, cheating among oligopolists will also makes collusion difficult. Some firms will engage in somewhat "secret" price cutting so that they can make additional business for themselves. Last but not lease, collusion will fail if recession occurs during that period because slumping markets cause average costs to rise.

                The performance of oligopoly is very complicated. Many economists would argue that the outcome of oligopolistic markets will be similar as in monopoly where production occurs where price exceed marginal cost and this is short of that output where average cost is minimized. Neither allocative nor productive efficiency is likely to occur. However, some would say oligopoly is less desirable than monopoly because monopoly is often subject to government control or regulation to avoid abuse of market power. Collusion may give similar price and output as monopoly, but maintaining the outward appearance of several competing firms. Oligopoly firms are dynamic efficient because of competition, it provides a strong incentive to be technologically progressive. Cost-reducing production technique and improved product that may make TNB unique among competitors. In short, both short term profits and long term survival makes oligopolists under continuous pressure to innovate. 

                In conclusion, government may want to make the market more competitive so that there won't be market failure and inefficient company that wasting resources. By doing this, it will help low-income group to afford cheaper electricity and it would help consumers to compare price between the firms. Also, if the firms want to gain higher sales, the price will be even lower, therefore, this will benefits the consumers.