Charles Edison

"Economics, politics, and personalities are often inseparable." - Charles Edison

Thursday, February 10, 2011

Are Low Prices On Older Products Beneficial for Everyone?

A report in Yahoo! Finance discusses the prediction that several high-tech items will be cheaper in 2011. Different products have different reasons for lowering their prices. For example, the current versions of the Kindle and Wii are expected to be cheaper because newer versions are coming out this year. A lot of people don't consider the fact that they can still buy the older version of a product after the newer version comes out. Articles like this one may turn people to the fact that this is possible. My initial reaction would be that the companies selling these electronics would be upset about this because they may not have as many consumers wanting to buy their new product. But then I considered the fact that consumers are still buying what the producers are selling, even if it's cheaper. Companies don't want to lose out on the money they've made producing the older versions, so people taking advantage of these deals isn't bad news for them. Plus if people rush to buy the older versions when they become cheaper, they may become sold out or very scarce. This forces others to buy the newer version, so the company gets a win-win.

7 comments:

Smith said...

Great analysis, I agree that since the companies are still selling their products (new or old versions) they are still making money. Do you think the profit margin is higher on new or old versions of products? Why? Do you think companies keep the shortage surplus theory in mind during the production planning? Would companies ever purposely cause a shortage for their products? Why?

kern said...

Since the company has already spent the money to produce the product would they be happy for consumers to purchase at any reasonable price?

What about those consumers who couldn't afford the higher priced version? Doesn't the discount bring a whole new set of consumers into the market thus increasing the number of consumers which is a non-price factor of demand?

Alison said...

Smith:

I'm not sure if I understand what a profit margin is, but from what I gather is it the net profit? If so, I would think it would be bigger with the newer products since there is generally a higher demand for them.
I do think companies (such as Apple) keep the shortage/surplus theory in mind. If you have a shortage, that means you have high demand and that's very desirable. Apple knows how fast their iPhones sell, but there continues to be a shortage every single time a new one comes out. Why aren't they better prepared? I think they're doing it on purpose. It ensures they get all their money's worth, they have high demand, and sold out iPhones everywhere probably makes other consumers think that the phone must be worthwhile.

Alison said...

Kern:

I don't think they would be happy to sell it at ANY reasonable price, but I think they would be willing to let the price dip a bit. They spent the money to produce it, so they want to get SOMETHING back. Getting a little less money back is better than getting nothing at all because the price is too high.

I didn't think about the change in number of consumers idea. I guess that would increase demand for the older product, but only after a decrease in demand because of the new product. There's more hype around the new version and a lot of people want the best/newest thing, so demand for the old product goes down (because of change in number of consumers). But then it goes back up because of the new consumers that you mentioned. It just probably won't go back up to the level at which it was before.

Ethan said...

I would think that it would more beneficial for a company to sell its newer version of something at full price than its older version of something at a discounted price assuming, of course, that they cost roughly the same to produce. Let's say that the iPhone 4 is going against the iPhone 3GS. One sells for $200, with a contract, and the other sells for $100, with a contract. Although the iPhone 3GS will sell more, since it's cheaper, the iPhone 4 will have a larger profit margin because it costs more.

Matthew said...

Yes this does help everyone, both consumer and producer. With the large amount of people that get hyped up and save for the newer product the companies make such a large initial profit that even after reducing the prices of items hundreds or thousands of dollars over time does not hurt. Yet this is not entirely done by the companies. In the tech industry products have really short lifespans in reference to top of the line. Tech product's depreciation rate due to time is beyond remarkably high, with most products within 3-6months you can see prices get slashed up to and even some times exceeding 50% the initial price. Yes the manufacture is still making money and the patient consumer saves. Yet because their are always eager beavers when it comes to new products tech companies don't care how low the price gets over time because all they have to do is release a new product and they make millions over night.

joseph said...

A company could profit from selling the new and old model of a product. This could be done by producing the newer model while discontinuing the older model. However they would still sell the older model until they run out. This would be beneficial in a way that any model left over after the newer model has been released would be sold. Therefore the company would not have wasted valuable material completely.