Product differentiation – 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.

Kooba Cola: The Worst Business Strategy Ever?

One of the key lessons of economics is that competition serves to push firms toward serving the interests of consumers. When existing firms in an industry are making an economic profit, new firms will enter the industry, which increases the quantity of the good produced and lowers the good’s price. Entry is the essential mechanism that drives a competitive market economy towards achieving allocative efficiency—with the mix of goods and services produced matching consumer preferences—and productive efficiency—with goods and services being produced at the lowest possible cost. (We discuss allocative efficiency and productive efficiency in Chapter 1, Section 1.2.)

For entry to occur requires the efforts of entrepreneurs, who constantly search for opportunities to make a profit. (We discuss the role of entrepreneurs in a market economy in Chapter 2, Section 2.3.) Although, not well remembered today, Victor S. Fox was one of the more flamboyant entrepreneurs in U.S. business history. Fox was born in England in 1893 and moved with his family to Massachusetts three years later. As a young man, he started a firm to manufacture women’s clothing. In 1917, with the entry of the United States into World War I, Fox’s firm switched to producing military uniforms. In 1920, after the end of the war, Fox founded Consolidated Maritime Lines to buy from the U.S. government confiscated German and Austrian cargo ships. Fox also purchased a coal mine in Virginia to provide fuel for the ships. This effort ended in bankruptcy.

In 1929, Fox founded Allied Capital Corporation to invest in the stock market. This firm also failed amid accusations that Fox had broken securities laws. (Most of the information on Fox’s early career is from this site, which relies primarily on mentions of Fox in newspapers.) In 1936, Fox founded Fox Feature Syndicate to produce magazines. At that point, very few comic books were being published. That changed in April 1938, when National Allied Publications released Action Comics, featuring Superman—generally considered the first superhero to appear in comic books. Sales of Superman comic books soared and Fox responded by entering the comic book industry, publishing a comic book starring Wonder Man. Wonder Man was an obvious copy of Superman, which led Superman’s publisher to file a lawsuit against Fox for copyright infringement. Fox agreed to stop publishing Wonder Man, but continued to publish comic books starring superheroes who weren’t such obvious copies of Superman.

As this summary of Fox’s career indicates, he was an entrepreneur who was willing to enter a new industry whenever he saw a profit opportunity, even if he lacked previous experience in the industry. In 1941, the continuing success of Coca-Cola and Pepsi-Cola led Fox to attempt to enter the cola industry in what was his most audacious entrepreneurial effort. The high sales of his comic books gave Fox a platform to advertise his new soft drink —Kooba cola. The following are some of Fox’s advertisements for Kooba cola.

Fox also advertised Kooba on a radio program featurning the Blue Beetle, one of his comic book superheroes. In the print advertisements for Kooba, Fox seems to have focused on two points in an attempt to differentiate his cola from existing colas, particularly Coke and Pepsi. (We discuss the role product differentiation plays in competition among firms in Microeconomics and Economics, Chapter 13.) First, to help overcome the belief among some consumers that colas were an unhealthy drink, Fox emphasized that Kooba cola would contain vitamin B1. In 1941, vitamin B1 had only recently become available and was the subject of newspaper stories. Second, at 12 ounces, bottles of Kooba were nearly twice as large as the standard 6.5 ounce Coke bottle but would sell for the same 5 cent price. One of the advertisements above notes that a six-pack of Kooba had a price of only 25 cents.

How was Fox able to sell his new cola for about half the price per ounce of Coke or Pepsi? That’s unclear because—amazingly—at the time Fox was running these advertisements, not only was Kooba not “available everywhere,” as the advertisements claimed, it wasn’t available anywhere. Fox was heavily advertising a product that didn’t actually exist.

How did Fox hope to earn a profit selling a nonexistent product? Fox’s strategy was apparently to begin by heavily advertising Kooba in the hopes of sparking a demand for it. He seems to have believed that if enough people were inspired by his advertisements to ask for the cola at grocery stores and newsstands, he could approach an existing soft drink company and offer to license the Kooba name. He seems never to have intended to actually manufacture the cola, relying instead on royalties paid by the soft drink company he hoped to license the name to.

Perhaps unsurprisingly, Fox’s strategy failed. To capitalize on Fox’s advertising, a firm licensing the Kooba name would have had to find a way to make a profit despite selling the cola at a price about half the price charged by competitors. Because Fox had no experience in manufacturing colas, he presumably had no advice to give on how production costs could be reduced sufficiently to allow Kooba to be sold at a profit.

Fox engaged in other entrepreneurial efforts before passing away in 1957. Over the years, Fox pursued a number of business strategies, some of which were successful, at least for a time. But his attempt to make a profit by promoting a nonexistent cola ranks among the the most dubious strategies in U.S. business history. A strategy that likely left some consumers puzzled that a cola that appeared in advertisements was never available in store.

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.

Fanatics: The Unlikely Unicorn

A unicorn is a startup, or newly formed firm, that has yet to begin selling stock publicly and has a value of $1 billion or more. (We discuss the difference between private firms and public firms in Economics and Microeconomics, Chapter 8, chapter opener and Section 8.2, and in Macroeconomics, Chapter 6, chapter opener and Section 6.2.) Usually, when we think of unicorns, we think of tech firms. That assumption is largely borne out by the following list of the 10 highest-valued U.S.-based startups, as compiled by cbinsights.com.

Firm	Value
SpaceX	$100.3 B
Stripe	$95 B
Epic Games	$42 B
Instacart	$39 B
Databricks	$38 B
Fanatics	$27 B
Chime	$25 B
Miro	$17.5 B
Ripple	$15 B
Plaid	$13.4 B

Nine of the ten firms are technology firms, with six being financial technology—fintech—firms. (We discuss fintech firms in the Apply the Concept, “Help for Young Borrowers: Fintech or Ceilings on Interest Rates,” which appears in Macroeconomics, Chapter 14, Section 14.3, and Economics, Chapter 24, Section 24.3.) The one non-tech firm on the list is Fanatics, whose main products are sports merchandise and sports trading cards. Because a unicorn doesn’t issue publicly traded stock, the firm’s valuation is determined by how much an investor pays for a percentage of the firm. In Fanatics’s case, the valuation was based on a $1.5 billion investment in the firm made in early March 2022 by a group of investors, including Fidelity, the large mutual find firm; Blackrock, the largest hedge fund in the world; and Michael Dell, the founder of the computer company.

These investors were expecting that Fanatics would earn an economic profit. But, as we discuss in Chapter 14, Section 14.1 and Chapter 15, Section 15.2, a firm will find its economic profit competed away unless other firms that might compete against it face barriers to entry. Although Fanatics CEO Michael Rubin has plans for the firm to expand into other areas, including sports betting, the firm’s core businesses of sports merchandise and trading cards would appear to have low barriers to entry. There are already many firms selling sportswear and there are many firms selling trading cards. The investment required to establish another firm to sell those products is low. So, we would expect competition in the sports merchandise and trading card markets to eliminate economic profit.

The key to Fanatics success is that it is selling differentiated products in those markets. Its differentiation is based on a key resource that competitors lack access to: The right to produce sportswear with the emblems of professional sports teams and the right to produce trading cards that show images of professional athletes. Fanatics has contracts with the National Football League (NFL), Major League Baseball (MLB), the National Hockey League (NHL), the National Basketball Association (NBA), and Major League Soccer (MLS)—the five most important professional sports leagues in North America—to produce jerseys, caps, and other sportswear that uses the copyrighted brands of the leagues’ teams. (In some cases, as with the NBA, Fanatics shares the right with another firm.)

Similarly, Fanatics has the exclusive right to produce trading cards bearing the images of NFL, NBA, and MLB players. In January 2022, Fanatics bought Topps, the firm that for decades had held the right to produce MLB trading cards.

Fanatics has paid high prices to these sports leagues and their players to gain the rights to sell branded merchandise and cards. Some business analysts questioned whether Fanatics will be able to sell the merchandise and cards for prices high enough to earn an economic profit on its investments. Fanatics CEO Rubin is counting on an increase in the popularity of trading cards and the increased interest in sports caused by more states legalizing sports gambling.

That Fanatics has found a place on the list of the most valuable startups that is otherwise dominated by tech firms indicates that many investors agree with Rubin’s business strategy.

Sources: “The Complete List of Unicorn Companies,” cbinsights.com; Miriam Gottfried and Andrew Beaton, “Fanatics Raises $1.5 Billion at $27 Billion Valuation,” Wall Street Journal, March 2, 2022; Tom Baysinger, “Fanatics Scores $27 Billion Valuation,” axios.com March 2, 2022; Lauren Hirsch, “Fanatics Is Buying Mitchell & Ness, a Fellow Sports Merchandiser,” New York Times, February 18, 2022; and Kendall Baker, “Fanatics Bets Big on Trading Card Boom,” axios.com, January 5, 2022.