Citing a firm survey of consumers, Morgan Stanley analyst Kathryn Huberty said that a $50 price cut could increase demand by 50 per cent and a $100 cut by 100 per cent.For a $199 iPhone, this would imply a price elasticity of demand of about -2. If so, a price cut would increases profit if the actual margin, (P-MC)/P, greater than the inverse elasticity, 50%. Remember,
MR>MC if (P-MC)>1/|e|
in which case you should sell more, which you do by reducing price.
to cut the price by 50% you would also have to cut the monthly price by 50%.
ReplyDeleteRichard is right. The iphone is a 2-part tariff. They cost more to produce than the list price. The $$ is made by the subscription revenue.
ReplyDeleteFor the profit calcs, what's missing is the very large subsidy per phone from AT&T. Consumers pay only a part of the revenue received by Apple.
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