Ch10: Consumer Choice and Behavioral Economics – HubbardOBrienEconomics.com Blog

Is the iPhone Air Apple’s “New Coke”?

Image created by GPT

Most large firms selling consumer goods continually evaluate which new products they should introduce. Managers of these firms are aware that if they fail to fill a market niche, their competitors or a new firm may develop a product to fill the niche. Similarly, firms search for ways to improve their existing products.

For example, Ferrara Candy, had introduced Nerds in 1983. Although Nerds experienced steady sales over the following years, company managers decided to devote resources to improving the brand. In 2020, they introduced Nerds Gummy Clusters, which an article in the Wall Street Journal describes as being “crunchy outside and gummy inside.” Over five years, sales of Nerds increased from $50 millions to $500 million. Although the company’s market research “suggested that Nerds Gummy Clusters would be a dud … executives at Ferrara Candy went with their guts—and the product became a smash.”

Image of Nerds Gummy Clusters from nerdscandy.com

Firms differ on the extent to which they rely on market research—such as focus groups or polls of consumers—when introducing a new product or overhauling an existing product. Henry Ford became the richest man in the United States by introducing the Model T, the first low-priced and reliable mass-produced automobile. But Ford once remarked that if before introducing the Model T he had asked people the best way to improve transportation they would probably have told him to develop a faster horse. (Note that there’s a debate as to whether Ford ever actually made this observation.) Apple co-founder Steve Jobs took a similar view, once remaking in an interview that “it’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” In another interview, Jobs stated: “We do no market research. We don’t hire consultants.”

Unsurprisingly, not all new products large firms introduce are successful—whether the products were developed as a result of market research or relied on the hunches of a company’s managers. To take two famous examples, consider the products shown in image at the beginning of this post—“New Coke” and the Ford Edsel.

Pepsi and Coke have been in an intense rivalry for decades. In the 1980s, Pepsi began to gain market share at Coke’s expense as a result of television commercials showcasing the “Pepsi Challenge.” The Pepsi Challenge had consumers choose from colas in two unlabeled cups. Consumers overwhelming chose the cup containing Pepsi. Coke’s management came to believe that Pepsi was winning the blind taste tests because Pepsi was sweeter than Coke and consumers tend to favor sweeter colas. In 1985, Coke’s managers decided to replace the existing Coke formula—which had been largely unchanged for almost 100 years—with New Coke, which had a sweeter taste. Unfortunately for Coke’s managers, consumers’ reaction to New Coke was strongly negative. Less than three months later, the company reintroduced the original Coke, now labeled “Coke Classic.” Although Coke produced both versions of the cola for a number of years, eventually they stopped selling New Coke.

Through the 1920s, the Ford Motor Company produced only two car models—the low-priced Model T and the high-priced Lincoln. That strategy left an opening for General Motors during the 1920s to introduce a variety of car models at a number of price levels. Ford scrambled during the 1930s and after the end of World War II in 1945 to add new models that would compete directly with some of GM’s models. After a major investment in new capacity and an elaborate marketing campaign, Ford introduced the Edsel in September 1957 to compete against GM’s mid-priced models: Pontiac, Oldsmobile, and Buick.

Unfortunately, the Edsel was introduced during a sharp, although relatively short, economic recession. As we discuss in Macroeconomics, Chapter 13 (Economics, Chapter 23), consumers typically cut back on purchases of consumer durables like automobiles during a recession. In addition, the Edsel suffered from reliability problems and many consumers disliked the unusual design, particularly of the front of the car. Consumers were also puzzled by the name Edsel. Ford CEO Henry Ford II was the grandson of Henry Ford and the son of Edsel Ford, who had died in 1943. Henry Ford II named in the car in honor of his father but the unusual name didn’t appeal to consumers. Ford ceased production of the car in November 1959 after losing $250 million, which was one of the largest losses in business history to that point. The name “Edsel” has lived on as a synonym for a disastrous product launch.

Image of iPhone Air from apple.com

Apple earns about half of its revenue and more than half of its profit from iPhone sales. Making sure that it is able to match or exceed the smartphone features offered by competitors is a top priority for CEO Tim Cook and other Apple managers. Because Apple’s iPhones are higher-priced than many other smartphones, Apple has tried various approaches to competing in the market for lower-priced smartphones.

In 2013, Apple was successful in introducing the iPad Air, a thinner, lower-priced version of its popular iPad. Apple introduced the iPhone Air in September 2025, hoping to duplicate the success of the iPad Air. The iPhone Air has a titanium frame and is lighter than the regular iPhone model. The Air is also thinner, which means that its camera, speaker, and its battery are all a step down from the regular iPhone 17 model. In addition, while the iPhone Air’s price is $100 lower than the iPhone 17 Pro, it’s $200 higher than the base model iPhone 17.

Unlike with the iPad Air, Apple doesn’t seem to have aimed the iPhone Air at consumers looking for a lower-priced alternative. Instead, Apple appears to have targeted consumers who value a thinner, lighter phone that appears more stylish, because of its titanium frame, and who are willing to sacrifice some camera and sound quality, as well as battery life. An article in the Wall Street Journal declared that: “The Air is the company’s most innovative smartphone design since the iPhone X in 2017.” As it has turned out, there are apparently fewer consumers who value this mix of features in a smartphone than Apple had expected.

Sales were sufficiently disappointing that within a month of its introduction, Apple ordered suppliers to cut back production of iPhone Air components by more than 80 percent. Apple was expected to produce 1 million fewer iPhone Airs during 2025 than the company had initially planned. An article in the Wall Street Journal labeled the iPhone Air “a marketing win and a sales flop.” According to a survey by the KeyBanc investment firm there was “virtually no demand for [the] iPhone Air.”

Was Apple having its New Coke moment? There seems little doubt that the iPhone Air has been a very disappointing new product launch. But its very slow sales haven’t inflicted nearly the damage that New Coke caused Coca-Cola or that the Edsel caused Ford. A particularly damaging aspect of New Coke was that was meant as a replacement for the existing Coke, which was being pulled from production. The result was a larger decline in sales than if New Coke had been offered for sale alongside the existing Coke. Similarly, Ford set up a whole new division of the company to produce and sell the Edsel. When Edsel production had to be stopped after only two years, the losses were much greater than they would have been if Edsel production hadn’t been planned to be such a large fraction of Ford’s total production of automobiles.

Although very slow iPhone Air sales have caused Apple to incur losses on the model, the Air was meant to be one of several iPhone models and not the only iPhone model. Clearly investors don’t believe that problems with the Air will matter much to Apple’s profits in the long run. The following graphic from the Wall Street Journal shows that Apple’s stock price has kept rising even after news of serious problems with Air sales became public in late October.

So, while the iPhone Air will likely go down as a failed product launch, it won’t achieve the legendary status of New Coke or the Edsel.

Technological Change Smacks Snacks

Photo from cnbc.com

What causes consumer demand for a product to decline? Why does demand for some products suddenly rise? As we discuss in Chapter 3, changes in the relative price of a substitute or a complement cause the demand for a good to shift. For instance, the following figure shows the recent rapid increase in the price of eggs, due in part from the spread of bird flu. We would expect that the increase in the price of eggs will shift to the right the demand curve for egg substitutes, such as the product shown below the figure.

Sometimes a shift in the demand for a product represents a change in consumer tastes. For instance, as we discuss in an Apply the Concept in Chapter 3, for decades most people wore a hat while outdoors. The first photo below shows people walking down a street in New York City in the 1920s. Beginning in the 1960s, hats started to fall out of fashion. As the second photo shows, today few people wear hats—unless they’re walking outside during the winter in the Northeast or the Midwest!

Photo from the New York Daily News

Photo from the New York Times

Technological change can also affect the demand for goods. For example, the development of network television, beginning in the late 1940s, reduced the demand for tickets to movie theaters. Similarly, the development of the internet reduced the demand for physical newspapers.

A recent example of technological change having a substantial effect on a number of consumer goods is the introduction of GLP–1 drugs, beginning in 2005. These drugs, such as Ozempic and Mounjaro, were first developed to treat type 2 diabetes. The drugs were found to significantly reduce appetite in most users, leading to users losing weight. Accordingly, doctors began to prescribe the drugs to treat obesity. By 2025, about half of the users of GLP–1 drugs were doing so to lose weight. A recent article in the Washington Post quoted Jan Hatzius, chief economist at Goldman Sachs, as predicting that by 2028, 60 million people in the United States will be taking a GLP–1 drug.

Many consumers who use these drugs decide to change the mix of foods they eat. Typically, users demand fewer ultra-processed foods, such as chips, cookies, and soft drinks. The percentage of people in the United States who are considered obese—having a body mass index (BMI) of 30 or greater—had been increasing for decades before declining slightly in 2023, the most recent year with available data. It seems likely that the increasing use of GLP–1 drugs helps to explain the decline in obesity.

People taking these drugs have also typically increased the share of foods they eat with higher levels of protein and fiber. These changes in diet are likely to lead to improved health, reducing the demand for some medical services. The number of people experiencing significant weight loss has already begun to reduce demand for extra-large clothing sizes and increase the demand for medium clothing sizes.

How much has the use of Ozempic and similar drugs reduced the demand for snacks? A recent study by Sylvia Hristakeva and Jura Liaukonyt of Cornell University and Leo Feler of Numerator, a market research firm, presents numerical estimates of changes in demand for different foods by users of GLP–1 drugs. The authors assembled a representative sample of 150,000 U.S. households and the households’ grocery purchases from July 2022 through September 2024. They estimate that the share of the U.S. population using a GLP–1 drug increased from 5.5% in October 2023 to 8.8% in July 2024.

The study finds that households with at least one person using a GLP–1 drug reduced their total grocery shopping by 5.5 percent or $416. The study gathered data on changes in the categories of food that households were buying six months after at least one person in the household began using one of these drugs. The figure below is compiled from data in the study.

As expected, purchases of snacks declined. The category of “chips and other savor snacks” (bottom row in the figure) declined by more than 11 percent. Purchases of sweet bakery products, cheese, cookies, soft drinks, ice cream, and pasta all declined by more than 5 percent. Purchases of yogurt, fresh produce, meat snacks, and nutrition bars, all increased. An article in the Wall Street Journal noted that “food makers are starting to understand better and cater to, in some cases with products specifically designed for” users of this drug. The image below shows some of the new products that Nestle—a major candy producer—has introduced to appeal to users of GLP–1 drugs. Nestle’s Vital Pursuit line of frozen packaged foods contain high levels of protein and fiber.

It’s too early to gauge the full effects of GLP–1 drugs on consumer demand. But it’s already clear that GLP–1 drugs are a striking example of technological change affecting demand in a major industry

Did Stephen King Stumble into One of Our “Pitfalls in Decision Making”?

The cover of Steven King’s novel The Stand. (Image from amazon.com)

In Microeconomics, Chapter 10, we have a section on “Pitfalls in Decision Making.” One of those pitfalls is the failure to ignore sunk costs. A sunk cost is one that has already been paid and cannot be recovered.

In his book On Writing: A Memoir of the Craft, King discusses his writing of The Stand (a book he describes as “the one my longtime readers still seem to like the best.”) At one point he had had trouble finishing the manuscript and was considering whether to stop working on the novel:

“If I’d had two or even three hundred pages of single-spaced manuscript instead of more than five hundred, I think I would have abandoned The Stand and gone on to something else—God knows I had done it before. But five hundred pages was too great an investment, both in time and in creative energy; I found it impossible to let go.”

King seems to have committed the error of ignoring sunk costs. The time and creative energy he had put into writing the 500 pages were sunk—whether he abandoned the manuscript or continued writing until the book was finished, he couldn’t get back the time and energy he had expanded on writing the first five hundred pages. That he had already written 300 pages or 500 pages wasn’t relevant to his decision because if a cost is sunk it doesn’t matter for decision making whether the cost is large or small.

Is it relevant in assessing King’s decision that in the end he did finish The Stand, the novel sold well—earning King substantial royalties—and his fans greatly admire the novel? Not directly because only with hindsight do we know that The Stand was successful. In deciding whether to finish the manuscript, King shouldn’t have worried about the cost of the time and energy he had already spent writing it. Instead, King should have compared the expected marginal cost of finishing the manuscript with the expected marginal benefit from completing the book. Note that the expected marginal benefit could include not only the royalty earnings from sales of the books, but also the additional appreciation he received from his fans for writing what turned out to be their favorite novel.

When King paused working on the manuscript after having written 500 pages, the marginal cost of finishing was the opportunity cost of not being able to spend those hours and creative energy writing a different book. Given the success of The Stand, the marginal benefit to King from completing the manuscript was almost certainly greater than the marginal cost. So, completing the manuscript was the correct decision, even if he made it for the wrong reason!

The Curious Case of the GE Refrigerators

Is the refrigerator above different from the refrigerator below?

Consumer Reports is a magazine and web site devoted to product reviews. Their November-December 2024 issue noted something unusual about the two GE refrigerators shown above. (The images are from the geappliances.com web site.) At the time the issue was printed, the first refrigator above had a price of $2,300 and the second refrigerator had a price of $1,300: Consumer Reports notes that:

“These look-alike fridges offer equally impressive performance, have the same interior features … and are from the same brand. So why the $1,000 price difference? We don’t know.”

(Note: GE referigators, and many other products branded with the GE name are no longer produced by the General Electric company, which dates back to 1892 and was co-founded by Thomas Edison. Today, GE is primarily an aerospace company and GE appliances are produced by the Chinese-owned Haier Smart Home Company.)

If we assume that Consumer Reports is correct and the two refrigerators are identical, what strategy is the firm pursuing by charging different prices for the same product? As we discuss in Microeconomics, Chapter 15, Section 15.5 firms can increase their profits by practicing price discrimination—charging different prices to different customers. To pursue a strategy of price discrimination the firm needs to be able to divide up—or segment—the market for its refrigerators.

Firms sometimes use a high price to signal quality. The old saying “you get what you pay for” can lead some consumers to expect that when comparing two similar goods, such as two models of refrigerators, the one with the higher price also has higher quality. In the appliance section of a large store, such as Lowe’s or the Home Depot, or online at Amazon or another site, you will have a wide variety of refrigerators to choose from. You may have trouble evaluating the features each model offers and be unable to tell whether a particular model is likely to be more or less reliable. So, if you are choosing between the two GE models shown above, you may decide to choose the one with the higher price because the higher price may indicate that the components used are of higher quality.

In this case, GE may be relying on a segmentation in the market between consumers who carefully research the features and the quality of the refrigerators that different firms offer for sale and those consumers don’t. The consumers who do careful research and are aware of all the features of each model may be more sensitive to the price and, therefore, have a high price elasticity of demand. The consumers who haven’t done the research may be relying on the price as a signal of quality and, therefore, have a lower price elasticty of demand.

If what we have just outlined was the firm’s strategy for increasing profit by charging different prices for two models that are, apparently, either identical or very similar, it doesn’t seem to have worked. Note that the model shown in the first photo above is the one that had a price of $2,300 when Consumer Reports wrote about it, but now has a price of $1,154.40. The model shown in the second photo had a price of $1,300, but now has a price of $1,399.00. In other words, the model that had the lower price now has the higher price and the model that had the higher price now has the lower price.

What happened between the time the issue of Consumer Reports published and now? We might conjecture that there are few consumers who would be likely to pay $1,000 more for a refrigator that seems to have the same features as another model from the same company. In other words, segmenting consumers in this way seems unlikely to succeed. Why, though, the firm decided to make its formerly higher-price model its lower-price model, is difficult to explain without knowing more about the firm’s pricing strategy.

Did Taylor Swift’s Fans Break Economics?

Image generated by GTP-4o of a woman singer performing at a concert.

The answer to the question in the title is “yes” according to a column by James Mackintosh in the Wall Street Journal. In the Apply the Concept “Taylor Swift Tries to Please Fans and Make Money,” in Chapter 11 of Microeconomics, we discussed how for her The Eras Tour, Taylor Swift reserved more than half of the concert tickets for her “verified fans.” The tickets sold to verified fans for an average price of $250.

On the resale market, prices of the tickets soared to $1,000 or more. Yet only about 5 percent of tickets purchased by verified fans were resold. Mackintosh’s wife and “eldest offspring” were in in the other 95 percent—they had purchased their tickets at a low price but wouldn’t resell them at a much higher price. Moreover—and this is where Mackintosh sees economics as breaking—if they didn’t already have the tickets they wouldn’t have bought them at the current high price.

Not being willing to buy something at a price you wouldn’t sell it for is inconsistent behavior because it ignores a nonmonetary opportunity cost. (As we discuss in Chapter 10, Section 10.4.) If Mackintosh’s wife won’t sell her ticket for $1,000, she incurs a $1,000 opportunity cost, which is the amount she gives up by not selling the ticket. The two alternatives—either paying $1,000 for a ticket or not receiving $1,000 by declining to sell a ticket—amount to exactly the same thing.

Mackintosh recognizes that the actions of his wife and offspring reflect what he calls a “mental bias,” which he correctly labels the endowment effect: The tendency to be unwilling to sell something you already own even if you are offered a price greater than the price you would be willing to buy the thing for if you didn’t already own it.

As we discuss in Chapter 10, the endowment effect is one of a number of results from behavioral economics, which is the study of situations in which people make choices that don’t appear to be economically rational. So, Mackintosh’s family—and other Swifties—didn’t break economics. Instead, they demonstrated one of the results of behavioral economics.

Solved Problem: How Much Did Using a Ticket to a Taylor Swift Concert Cost You?

Supports: Microeconomics, Macroeconomics, Economics, and Essentials of Economics, Chapter 1.

Photo of Taylor Swift from the Wall Street Journal.

Suppose that as a “verified fan” of Taylor Swift, you are able to buy a ticket to one of her concerts for $215. The price of the ticket isn’t refundable. (We discuss how Taylor Swift handles the sale of tickets to her concerts in the Apply the Concept “Taylor Swift Tries to Please Fans and Make Money” in Microeconomics and in Economics, Chapter 10, and in Essentials of Economics, Chapter 7.) You had been hoping to work a few hours of overtime at your job to earn some extra money. The day of the concert, your boss tells you that the only overtime available for the next month is that night from 6 pm to 10 pm—the same time as the concert. Working those hours of overtime will earn you $100 (after taxes). You check StubHub and find that you can resell your ticket for $1,000 (afer paying StubHub’s fee).

Given that information, briefly explain which of the following statements is correct:

If you attend the concert, the cost of using your ticket is $215—the price that you paid for it.
If you attend the concert, the cost of using your ticket is $1,000—the amount you can resell your ticket for.
If you attend the concert, the cost of using your ticket is $1,000 + $100 = $1,100—the amount you can resell your ticket for plus the amount you would have earned from working overtime rather than attending the concert.
If you attend the concert, the cost of using your ticket is $1,000 + $100 – $215 = $885—the amount you can resell your ticket for plus the amount you would have earned from working overtime rather than attending the concert minus the price you paid to buy the ticket.

Solving the Problem

Step 1: Review the chapter material. This problem is about the concept of opportunity cost, so you may want to review Chapter 1, Section 1.2.

Step 2: Solve the problem by using the concept of opportunity cost to determine which of the four statements is correct. Economists measure the cost of engaging in an activity as an opportunity cost—the value of what you have to give up to engage in the activity. Using this definition, only statement c. is correct; if you decide to use your ticket to attend the concert you will give up the $1,000 you could have received from selling the ticket plus the $100 you fail to earn as a result of attending the concert rather than working overtime. Note that the price you paid for the ticket isn’t relevant to your decision whether to attend the concert because the price of the ticket is nonrefundable. (The amount you paid for the ticket is a sunk cost because it can’t recovered. We discuss the role of sunk costs in decision making in Microeconomics and Economics, Chapter 10, Section 10.4, and in Essentials of Economics, Chapter 7, Section 7.4.)

At Wendy’s Price Discrimination Encountered Behavioral Economics

Wendy’s management intends to begin using dynamic pricings in its fast-food restaurants. As we discuss in Microeconomics and Economics, Chapter 15, Section 15.5 (Essentials of Economics, Chapter 10, Section 10.5), dynamic pricing is a form of price discrimination, which is the business practice of charging different prices to different customers for the same good or service. The ability of firms to analyze customer data using machine learning models has increased the ability to price discriminate.

One form of price discrimination involves charging customers different prices at different times, as, for instance, when movie theaters charge a lower price during afternoon showings than during evening showings. As a group, people who can choose whether to attend either an afternoon or an evening showing are more sensitive to changes in the price of a ticket—that is, their demand for tickets is more price elastic—than are people who can only attend an evening showing. Price discrimination with respect to movie tickets results in movie theaters earning a greater profit than if they charged the same price for all showings.

In a conference call with investors in February, Wendy’s CEO Kirk Tanner indicated that next year the firm would begin using dynamic pricing of its hamburgers and other menu items by charging different prices at different times of the day. Tanner didn’t provide details on how prices would differ in high demand times, such as during lunch and dinner, and low demand times, such as the middle of the afternoon. Some business commentators, though, assumed that Wendy’s dynamic pricing strategy would resemble Uber’s surge pricing strategy. As we discuss in Microeconomics, Economics, and Essentials of Economics, Chapter 4, Section 4.1, Uber increases prices during periods of high demand, such as on New Year’s Eve.

The idea that Wendy’s would increase prices at peak times sparked a strong reaction on social media with many people criticizing the firm for “price gouging.” Rival fast-food restaurants joined the criticism. Burger King posted on X (formerly Twitter) that “we don’t believe in charging people more when they’re hungry.” As we note in Microeconomics and Economics, Chapter 10, Section 10.3 (Essentials of Econmics, Chapter 7, Section 7.3), surveys indicate that many people believe that it is fair for firms to raise prices following an increase in the firms’ costs, but unfair to raise prices following an increase in demand.

One way for firms to avoid this reaction from consumers while still price discriminating is to frame the issue by stating that they charge regular prices during times of peak demand and discount prices during times of low demand. For example, recently one AMC theater was charging $13.99 for a 7:15 PM showing of Dune: Part Two, but a “Matinee Discount Price” of $10.39 for a 1:oo PM showing of the film. Note that there is no real economic difference between AMC calling the evening price the normal price and the afternoon price the discoung price and the firm calling the afternoon price the normal price and the evening price a “surge price.” But one of the lessons of behavioral economics is that firms should pay attention to how consumers intepret a policy. Many consumers clearly see the two pricing strategies as different even though economically they aren’t. (We discuss behavioral economics in Microeconomics and Economics, Chapter 10, Section 10.4, and in Essentials of Economics, Chapter 7, Section 7.4.)

Not surprisingly, following the adverse reaction to its annoucement that it would begin using dynamic pricing, Wendy’s responded with a blog post in which it stated that its new pricing strategy was “misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants. We have no plans to do that and would not raise prices when our customers are visiting us most.” And that: “Digital menuboards could allow us to change the menu offerings at different times of day and offer discounts and value offers to our customers more easily, particularly in the slower times of day.” In effect, Wendy’s was framing its pricing strategy the way movie theaters do rather than the way Uber does.

Wendy’s CEO probably realizes now that how a pricing strategy is presented to consumers can affect how successful the strategy will be.

Shrinkflation in the Comic Book Industry

Action Comics No. 1, published in June 1938, is often consider the first superhero comic book. (Image from comics.org.)

In a political advertisement that ran before the broadcast of the Super Bowl, President Joe Biden discussed shrinkflation, which refers to firms reducing the quantity of a product in container while keeping the price unchanged. In this post from the summer of 2022, we discussed examples of shrinkflation—including Chobani reducing the quantity of yogurt in the package shown here from 5.3 ounces to 4.5 ounces—and noted that shrinkflation complicates the job of the Bureau of Labor Statistics when compiling the consumer price index.

This yogurt remained the same price although the quantity of yogurt in the container shrank from 5.3 ounces to 4.5 ounces.

Shrinkflation isn’t new; firms have used the strategy for decades. Firms are particularly likely to use shrinkflation during periods of high inflation or during periods when the federal government implements price controls. Firms also sometimes resort to shrinkflation when the the price of a product has remained constant for long enough that the firms fear that consumers will react strongly to the firms increasing the price.

Comic books provide an interesting historical example of shrinkflation. David Palmer, a professor of management at South Dakota State University published an article in 2010 in which he presented data on the price and number of pages in copies of Action Comics from 1938 to 2010. When DC Comics introduced Superman in the first issue of Action Comics in June 1938, it started the superhero genre of comic books. Action Comics No. 1 had a price of $0.10 and was 64 pages.

After the United States entered World War II in December 1941, the federal government imposed price controls to try to limit the inflation caused by the surge in spending to fight the war. Rising costs of producing comic books, combined with the difficulty in raising prices because of the controls, led comic book publishers to engage in shrinkflation. In 1943, the publishers reduced the number of pages in their comics from 64 to 56. In 1944, the publishers engaged in further shrinkflation, reducing the number of pages from 56 to 48.

In 1951, during the Korean War, the federal government again imposed price controls. Comic book publishers responded with further shrinkflation, keeping the price at $0.10, while reducing the number of pages from 48 to 40. In 1954, they shrank the number of pages to 36, which remains the most common number of pages in a comic book today. At that time, the publishers also slightly reduced the width of comics from 7 3/4 inches to 7 1/8 inches. (Today the typical comic book has a width of 6 7/8 inches.)

By the late 1950s, comic book publishers became convinced that they would be better off raising the prices of comic books rather than further shrinking the number of pages. But they were reluctant to raise their prices because they had been a constant $0.10 for more than 20 years, so children and their parents might react very negatively to a price increase, and because no firm wanted to be the first to raise its price for fear of losing sales to its competitors. They were caught in a prisoner’s dilemma: Comic book publishers would all have been better off if they had raised their prices but the antitrust laws kept them from colluding to raise prices and no individual firm had an incentive to raise prices alone. (We discuss collusion, prisoner’s dilemmas, and other aspects of oligopolistic firm behaviour in Chapter 14 of Microeconomics and Economics.)

The most successful publisher in the 1950s was Dell, which sold very popular comic books featuring Donald Duck, Uncle Scrooge, and other characters that particularly appealed to younger children. Because the prices of Dell’s comic books, like those of other publishers, been unchanged at $0.10 since the late 1930s, the firm didn’t have a clear idea of the price elasticity of demand for its comics. In 1957, the firm’s managers decided to use a market experiment to gather data on the price elasticity of demand. In most cities, Dell kept the price of its comics at $0.10, but in some cities it sold the identical comics at a price of $0.15.

The experiment lasted from March 1957 to August 1958 when the company discontinued it by reverting to selling all of its comics for $0.10. Although we lack the data necessary to compare the sales of Dell comics with a $0.15 price to the sales of Dell comics with a $0.10 price, the fact that no other publisher raised its prices during that period and that Dell abandoned the experiment indicates that the demand curve for Dell’s comics was price elastic—the percentage decline in the quantity sold was greater than the 50 percent increase in price—so Dell’s revenue from sales in the cities selling comics with a price of $0.15 likely declined. Dell’s strategy can be seen as a failed example of price leadership. (We discuss the relationship between the price elasticity of demand for a good and the total revenue a firm earns from selling the good in Chapter 6, Section 6.3 of Microeconomics and Economics. We discuss price leadership in Microeconomic and Economics, Chapter 14, Section 14.2.)

In March 1961, Dell increased the price of all of its comics from $0.10 to $0.15. At first, Dell’s competitors kept the prices of their comics at $0.10. As a result, in September 1961, Dell cut the price of its comics from $0.15 to $0.12. By early 1962, Dell’s competitors, including DC Comics, Marvel Comics—publishers of Spider-Man and the Fantastic Four—along with several smaller publishers, had increased the prices of their comics from $0.10 to $0.12. The managers at DC decided that raising the price of comics after having kept it constant for so long required an explantion. Accordingly, they printed the following letter in each of their comics.

H/T to Buddy Saunders for the image.

Comic book publishers have raised their prices many times since the early 1960s, with most comics currently having a price of $4.99. During the recent period of high inflation, comic publishers did not use a strategy of shrinkflation perhaps because they believe that 36 pages is the minimum number that buyers will accept.

The first 25 years of the comic book industry represents an interesting historical example of shrinkflation.

The Economics of Apple’s Vision Pro

Photo from apple.com.

On Friday, February 2, Apple released Vision Pro, its long-awaited, much discussed virtual reality (VR) headset. The Vision Pro headset allows users to experience either VR, in which the user sees only virtual objects, as for instance when the user sees only images from a video game; or augmented reality (AR), in which the user sees virtual objects, such as icon apps or web pages superimposed on the real world (as in the two photos below). Apple refers to people using the headsets as being engaged in “spatial computing” and sometimes refers to the headsets as “face computers.”

Photo from Apple via the Wall Street Journal.

Photo from Apple via the Wall Street Journal.

Vision Pro has a price of $3,499, which can increase to more than $4,000 when including the cost of the insert necessary for anyone who wears prescription eyeglasses or contact lenses and who chooses to buy additional storage capacity. The price is much higher than Meta’s Quest Pro VR headset (shown in the photo below), which has a price of $999.

Photo from meta.com.

In this post, we can briefly discuss some of the economic issues raised by the Vision Pro. First, why would Apple charge such a high price? In her review of the Vision Pro in the Wall Street Journal, Joanna Stern, the site’s personal technology writer, speculated that: “You’re probably not going to buy the $3,500 Apple Vision Pro. Unless you’re an app developer or an Apple die-hard ….”

There are several reasons why Apple may believe that a price of $3,499 is profit maximizing. But we should bear in mind that pricing any new product is difficult because firms lack good data on the demand curve and are unsure how consumers will respond to changes in price. In our new ninth edition of Economics and Microeconomics, in Chapter 6 on price elasticity we discuss how Elon Musk and managers at Tesla experimented with the cutting the price of the Model 3 car as they attempted to discover the effect on price changes on the quantity demanded. Managers at Apple are in similar situation of lacking good data on how many headsets they are likely to sell at $3,499.

If Apple lacks good data on how consumers are likely to respond to different prices, why pick a price four times as high as Meta is charging for its Quest Pro VR headsets?

First, Apple expects to be able to clearly differentiate its headset from Meta’s headset. If consumers considered the two headsets to be close substitutes, the large price difference would make it unlikely that Apple would sell many headsets. Apple has several marketing advantages over Meta that make it likely that Apple can convince many consumers that the Meta headset is not a close substitute for the Vision Pro:

Apple has a history of selling popular electronic products, such as the iPhone, iPad, Air Pods, and the Apple Watch. It also owns the most popular app store. Apple has succeeded in seamlessly integrating these electronic products with each other and with use of the app store. As a result, a significant number of consumers have a strong preference for Apple products over competitors. Meta has a much more limited history of selling popular electronic products. For instance, it doesn’t produce its own smartphone.
Apple has an extensive network of retail stores inside and outside of the United States. The stores have been successful in giving consumers a chance to try a new electronic product before buying it and to receive help at the stores’ Genius Bars with setting up the device or dealing with any later problems. Meta operates few retail stores, relying instead on selling through other retailers, such as Best Buy, or through its online site. For some consumers Meta’s approach is less desirable than Apple’s.

Second, as we discuss in Economics and Microeconomics, Chapter 15, Section 15.5, charging a high price for a new electronic product is common, partly because doing so allows firms to price discriminate across time. With this strategy, firms charge a higher price for a product when it is first introduced and a lower price later. Some consumers are early adopters who will pay a high price to be among the first to own certain new products. Early adopers are a particularly large segment of buyers of Apple products, with long lines often forming at Apple stores on the days when a new product is released. That firms price discriminate over time helps explain why products such as Blu-ray players and 4K televisions sold for very high prices when they were first introduced. After the demand of the early adopters was satisfied, the companies reduced prices to attract more price-sensitive customers. For example, the price of Blu-ray players dropped by 95 percent within five years of their introduction. Similarly, we can expect that Apple will cut the price of Vision Pro significantly over time.

Third, because Apple is initially producing a relatively small number of units, it is likely experiencing a high average cost of producing the Vision Pro. The production of the components of the headset and the final assembly are likely to be subject to large economies of scale. (We discuss economies of scale in Economics and Microeconomics, Chapter 11, Section 11.6.) Apple hasn’t released information on how many units of the headset it intends to produce during 2024, but estimates are that it will be fewer than 400,000 and perhaps as few as 180,000. (Estimates can be found here, here, and here.) Compare that number to the 235 million iPhones Apple sold during 2023. We would expect as Apple’s suppliers increase their production runs, the average cost of production will decline as Apple moves down its long-run average cost curve. As a result, over time Apple is likely to cut the price.

In addition, when producing a new good, firms often experience learning as managers better understand the most efficient way to produce and assemble the new good. For example, the best method of assembling iPhones may not be the best method of assembling headsets, but this fact may only become clear after assembling several thousand headsets. Apple is likely to experience a learning curve with the average cost of producing headsets declining as the total number of headsets produced increases. While economies of scale involve a movement down a static long-run average cost curve, learning results in the long-run average cost curve shifting down. This second reason why Apple’s average cost of producing headsets will decline contributes to the liklihood that Apple will cut the price of the Vision Pro over time.

Finally, we can discuss a key factor that will determine how successful Apple is in selling headsets. In Chapter 11 of the new ninth edition of Economics and Microeconomics, we have a new Apply the Concept, “Mark Zuckerberg … Alone in the Metaverse?” In that feature, we note that Meta CEO Mark Zuckerberg has invested heavily in the metaverse, a word that typically means software programs that allow people to access either AR or VR images and information. Zuckerberg believed so strongly in the importance of the metaverse that he changed the name of the company from Facebook to Meta. The metaverse, which is accessed using headsets likes Meta’s Quest Pro or Apple’s Vision Pro, is subject to large network externalities—the usefulness of the headsets increases with the number of consumers who use them. The network externalities arise because many software applications, such as Meta’s Horizon World, depend on interactions among users and so are not very useful when there aren’t many users.

Meta hasn’t sold as many headsets as they expected because they have had difficulty attracting enough users to make their existing software useful and the failure to have enough users has reduced the incentive for other firms to develop apps for Meta’s headsets. Initially, some reviewers made similar comments about Apple’s Vision Pro. For instance, even though streaming films in 3D is one of the uses that Apple promotes, some streaming services, including Netflix and YouTube, have not yet released apps for Vision Pro. Some important business related apps, such as FaceTime and Zoom, aren’t yet available. There are also currently no workout apps. As one reviewer put it “there are few great apps” for Vision Pro. Another reviewer wondered whether the lack of compelling software and apps might result in the Vision Pro headset suffering the fate of “every headset I test [which] ends up in my closet collecting dust.”

So, a key to the success of the Vision Pro will be the ability of Apple to attract enough users to exploit the network externalities that exist with VR/AR headsets. If successful, the Vision Pro may represent an important development in the transition to spatial computing.

A Reporter for NPR Encounters the Challenge of Network Externalities on an EV Road Trip

An electric vehicle (EV) charging station. (Photo from the Associated Press via the Wall Street Journal.)

Secretary of Energy Jennifer Granholm recently took a road trip in a caravan of electric vehicles (EVs). The road trip “was intended to draw attention to the billions of dollars the White House is pouring into green energy and clean cars.” A reporter for National Public Radio (NPR) went on the trip and wrote an article on her experience.

One conclusion the reporter drew was: “Riding along with Granholm, I came away with a major takeaway: EVs that aren’t Teslas have a road trip problem, and the White House knows it’s urgent to solve this issue.” The problem was that charging stations are less available and less likely to be functioning than would be needed for a road trip in an EV to be as smooth as a similar trip in a gasoline-powered car. The reporter noted that in her experience with her own EV: “I use multiple apps to find chargers, read reviews to make sure they work and plot out convenient locations for a 30-minute pit stop (a charger by a restaurant, for instance, instead of one located at a car dealership).”

EVs exhibit network externalities. As we discuss in Microeconomics and Economics, Chapter 10, 10.3 (Essentials of Economics, Chapter 7, Section 7.3), Network externalities are a situation in which the usefulness of a product increases with the number of consumers who use it. For example, the more iPhones people buy, the more profit firms and individuals can earn by creating apps for the iPhone. And the more apps that are available, the more useful an iPhone becomes to people who use it.

In this blog post, we discuss how Mark Zuckerberg’s Meta Platforms (which was originally named Facebook) has had difficulty selling Oculus augmented reality headsets. Many people have been reluctant to buy these headsets because they don’t believe there are enough software programs available to use the headsets with. Software designers don’t have much incentive to produce such programs because not many consumers own a headset necessary to use the programs.

The difficulty that Meta has experienced with augmented reality headsets can be overcome if the product is sufficiently useful that consumers are willing to buy it even if complementary products are not yet available. That was the case with the iPhone, which experienced strong sales even before Apple opened its app store. Or to take an historical example relevant to the current situation with EVs: When the Ford Motor Company introduced the Model T car in the early twentieth century, many people found that owning a car was such an advance over using a horse-drawn vehicle that they were willing to buy one despite there being realtively few gas stations and repair shops available. Because so many cars were being sold, entrepreneurs had an incentive to begin opening gas stations and repair shops, which increased the attractiveness of using a car, thereby further increasing demand.

As the NPR reporter’s experience shows, consumers choosing between buying an EV or a gasoline-powered car are in a situation similar to that faced by early twentieth century consumers in choosing between cars and horse-drawn vehicles. One difference between the two situations is that Congress and the Biden administration are attempting to ease the transition to EVs by subsidizing the construction of charging stations and by providing tax credits to people who buy EVs.