Question

Apple introduces the iPod on October 23, 2001. Although the iPod was not the first hard-drive music player, it was the most elegant one at the time. Equipped with a tiny hard-drive, it was about a quarter the size of it competitors. Eventually, other firms produced products that at least some consumers were willing to buy instead of the iPod. Most consumers viewed its rivals’ products as generic, me-too players. Apple’s share of the hard-drive player market fell to 74% in 2009 from 95.6% in 2004. Due to its large scale, Apple has been able to produce the iPod at lower cost than its competitors. According to Piper Jaffray in 2005, the cost of Apple’s 30GB iPod was $10 per gigabyte compared to Creative’s ZEN Vision M at $11 per gigabyte, while Samsung and iRiver’s costs were between $15-$25 per gigabyte. In 2009, iSuppli estimated that Apple’s cost of producing an iPod Shuffle –which sold for $79 – was only $21.77. No other company could come close to matching Apple’s cost. Economist refers to such a market as one in which a dominant firm faces a competitive fringe. The competitive fringe acts like (competitive) price takers so that their collective supply curve is horizontal at p2=MC+x.

1. How did Apple set the price for the iPod when it was essentially the only game in town?
2. How did the presence of me-too rival products produced by firms with higher marginal costs affect Apple’s pricing in more recent years?

Answer 1

Apple sets its price base don markup margins on its marginal cost and assuring that its final retail prices are lower than competitors prices marginally.

Me too rival product led Apple to churn jts costs lower and keep prices much lower to ensure high profitability margins. Apple tried to pursue economies of scale and massive prpduction to keep costs low and tap its competitive advantage to remain ahead of curve.

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