Is Apple Dumb?

Josh Wright —  28 October 2009

The Economist seems to think so, relying on evidence from this new paper by Joel Waldfogel and Ben Shiller.  Waldfogel and Shiller find that, relative to uniform pricing at $.99, alternative pricing schemes including two part tariffs and various bundling schemes could raise producer surplus by somewhere between 17 and 30 percent.  Those are large numbers, which raises the obvious question: why is Apple leaving so much money on the table? Or are they? I doubt it.

Reading the Economist article reminded me of something that I heard from both Armen Alchian and Ben Klein at different points during my UCLA days.  If your model is not predicting the behavior of real world agents you have a choice — blame the model for not predicting the actions of the agents or blame the economic agents for not acting like the predictions of the model.  The right answer is very, very rarely to blame the economic agents.

To be fair, Waldfogel and Shiller themselves explicitly note that they aren’t passing judgment on the uniform pricing scheme (though its a bit unclear exactly what else readers are supposed to do with the results).

3 responses to Is Apple Dumb?

  1. 

    I saw Waldfogel present this last year and he was clear that this was a pedagogical tool to demonstrate how to observe the effects of non-linear pricing from data similar to what a firm might actually obtain. He joked about sending a consulting invoice to Apple as a way to motivate why Apple might not want to pay.

  2. 

    Though I share the instinct, I think that may be too quick of a response.

    The questions used to be, why don’t movie theaters charge more on the weekends? And there were lots of explanations give, but most were wrong (in some sense), because now they do charge more on the weekends and less during the week.

    And sports teams now do charge more for games that are highly in-demand.

    If the model is right, then Apple–or someone else–will figure it out, given enough time.

  3. 

    I think it is important to remember that Apple has TWO sources of revenue related to iTunes: 1) the $.99 per song and other similar revenue (i.e., higher priced songs, movies, videos, etc.) AND 2) the device (i.e., iPods, iPhones, etc.). Pure speculation: Apple “leaves money on the table” under its uniform pricing scheme in order to sell more devices.

    (I will admit that I have not read the paper; perhaps the authors address this.)