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iPhone Demand Curves Slope Down

Posted by erweinstein on September 12, 2007

Least surprising headline of the week: “iPhone price drop leads to sales boost“.

Here is Steven Levitt’s discussion of Apple and iPhone pricing.

Professor Levitt’s analysis seems to suggest that there are non-trivial and possibly large “reputation” costs for a company changing the pricing, features, or extras on an existing product line. Obviously if the company fails to account for the sales effect of a reputation change, an apparently profit-maximizing pricing or production decision might not be optimal. I think the biggest difficulty would be finding a reasonable way to measure the reputation effects on sales (and disentangle them from other changes in demand and quantity demanded). Some field studies of how firms actually make these estimates might be useful as a starting point. I don’t think that the theoretical problems with this type of pricing behavior are quite as intractable as Levitt implies, although the empirical work might prove tricky. My overconfidence suggest that I should probably stop blogging and get to work…

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