Commentary
Commentary
Apple turned heads when it said it wouldn’t charge more for the iPhone 14. While prices of food and fuel are surging, smartphone prices have been on a steady decline over the years, says an economist.
New iPhone 14 Pros are displayed during an Apple event on Sep 7, 2022 in Cupertino, California. (Photo: Justin Sullivan/Getty Images/AFP)
BOSTON: Inflation in the US is surging to near a 40-year high, with prices on food, fuel and pretty much everything seeming to rise more every month.
Smartphones may be an exception.
Apple, for example, recently announced its new versions of the iPhone and other gadgets, and turned a lot of heads when it said it wouldn’t charge more despite higher costs to make the devices.
This is puzzling because companies typically raise prices in line with inflation – or at least enough to cover the increased costs of making their products.
Consumer price data tells an even more befuddling story. The latest consumer price index data suggests smartphone prices are actually down 20.4 per cent in August from a year ago, according to an index released on Sep 13.
That’s the biggest drop of any detailed expenditure item the US Bureau of Labor Statistics tracks, and contrasts with the overall 8.3 per cent increase in prices.
What’s going on?
As an economist teaching business school students, I enjoy exploring and explaining these economic puzzles. I believe there are two basic explanations – one for the data and another for Apple.
The story behind the consumer price index data is easier to explain, if a bit technical.
The 20 per cent drop over the past year isn’t unusual for smartphones. In fact, according to the index, they almost always go down from month to month. Since the end of 2019, smartphone prices have come down a whopping 40 per cent.
And though smartphones are showing the biggest drop in the index, tech gear more broadly – from computers to smartwatches – also tend to fall over time. In the previous 12 months, televisions are down 19 per cent and what the government calls information technology commodities are down 8.8 per cent.
Part of the reason for their steady decline is found buried in the US Bureau of Labor Statistics website. The consumer price index tries to measure a constant quality of goods and services in the economy. This means it seeks to track the price changes of the exact same set of goods and services each month. It’s comparing the price today with the price of the exact same thing a month or year ago.
For most goods, it’s not really an issue because their quality doesn’t change much over relatively small periods of time. For example, an apple you bite into today is pretty much the same as an apple you ate a year ago.
Smartphones and other technology-heavy gadgets are different. Because smartphones are constantly improving in quality – with the latest updates of an iPhone or Samsung Galaxy awaited breathlessly every year – it is more difficult to ensure you’re comparing prices of products of the exact same quality.
For rapidly improving items, the US Bureau of Labor Statistics uses what are called “hedonic regression models” to estimate these changes in quality over time. Hedonic models measure the same amount of satisfaction. While this sounds complicated, the goal is simple: To figure out how much each new smartphone feature changes the price.
As a consumer, you are essentially doing this whenever you decide whether it is worth paying the extra money for that marginally better camera or extended battery life when buying a new phone.
And so, the 20.4 per cent drop doesn’t mean you’re going to pay less for a new smartphone. But it does suggest you’re getting 20 per cent more bang for your buck versus the same phone a year earlier. Whether it’s worth it is another question.
That brings us to why Apple didn’t change its prices, even as the quality of the iPhone improved and supply chain costs went up.
Beyond the quality issues, one of the main ways supply chain problems are affecting phones is in the shortage of computer chips. If there is any product dependent on computer chips, it is smartphones. The shortage has resulted in delays to produce cars, trucks and many other consumer items.
The shortage has also increased the price of semiconductor parts. The US government’s producer price index shows the price of semiconductor parts like chips and wafers steadily rising since the COVID-19 pandemic began in 2020, after falling for years. Chip prices are likely going up 20 per cent in the next year.
For these and other reasons, analysts were expecting Apple to increase its prices.
Instead, Apple released its latest iPhone models at the same prices as the last two models, or US$799 for the iPhone 14 and US$999 for the pro version. Keeping prices constant during inflationary times means iPhones are getting relatively cheaper.
So why isn’t Apple increasing prices? Is it just being kind to its customers, who have fuelled tremendous profits for the company over the past decade?
Probably not.
With a gross profit margin of more than 40 per cent – meaning that’s how much it makes over the cost of producing all its products and services – Apple can probably afford to absorb increased chip and other component costs.
My best guess, since the smartphone market is fairly competitive, is that Apple is keeping prices the same to build market share in the US – beyond the record 50 per cent it recently hit – so the iPhone remains one of the best-selling smartphones.
So while the cost of almost everything we buy is rising, you can take some comfort in knowing at least one item is getting both better over time and not succumbing to an inflationary price spiral.
Jay L Zagorsky is Clinical Associate Professor at Boston University. This commentary first appeared in The Conversation.
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