Consumer Squeeze

This was no love at first sight. It took me eight months after the launch of the iPhone to be talked into joining the world of “Phonies.” Launched (almost presciently) right before the subprime crisis hit last summer, the iPhone for me captured the essence of an era soon to end: Carefree, contented, insatiable.

Then, one day, as I took out my aging Samsung freebie to answer a call, a friend looked at me with awe: “This is no match for a Chevelle!” I was forced to agree by the voting majority at our table, so soon enough I was in search of alternatives.

No meticulous research was needed to conclude that a Blackberry would not be my optimal consumer solution:

“It’s sooo ‘matches-my-golf-clubs!’” was my friend’s verdict.

So left with no choice, I rushed to my local Apple store to buy the iPhone, no questions asked… but for the obvious: “How much?”

“Three-ninety-nine, no, no introductory discount, and do take a look at the accessories!”

Four hundred bucks for a phone!!??…

Economists have a measure of the satisfaction we draw from consuming: It’s called the “consumer surplus.” The idea is very simple: We measure your pleasure of consuming something by looking at how much you are prepared to pay for it. For example, however outrageous the thought of spending $400 for (the perfect!) match to my nom de plume, I did go ahead and paid it… therefore, I must believe my “iPhone experience” is worth at least as much.

Specifically, the consumer surplus is the difference between the maximum price consumers are willing to pay for, say, an iPhone (their reservation price), and what they actually end up paying (the market price). So suppose you are a gadget freak, with your sense of identity seriously compromised unless you own the latest item in gizmo-land. Then, your consumer surplus from owning an iPhone is tremendous: Four hundred bucks just looks like a great bargain!

But if you think that a phone is a phone, then you’ll likely come out of the Apple store like I did: Beset by a feeling that Apple has just squeezed out of you every single drop of your potential consumer surplus.

Of course, that’s precisely what companies would ideally love to do: Squeeze out the entire consumer surplus from every consumer. But this is not easy: It requires that they be able to identify each consumer’s type—e.g. “gadget addict” or “functional bore?”—and charge accordingly. That’s the logic behind “price discrimination.”

And while we have yet to see price discrimination in iPhones, airlines, for example, do it all the time: They charge different prices in order to extract as much consumer surplus as possible from different target groups: So… Are you an organized, middle-income traveler with a flexible schedule and a “prudent” wallet? Great, you can get cheap tickets by planning your holiday way in advance. But what if you’re that type who suddenly remembers your best friend’s wedding is in Vegas… next weekend?! Rest assured, the airline will smell your sense of urgency and price it appropriately.

Apart from your lifestyle preferences, companies will look at other factors in their “mission” to extract your consumer surplus. Your income, for example: Whether you think the iPhone “deserves” 800 bucks is irrelevant, if you can’t afford it. Going back to the airline example, business versus economy tickets is an obvious case of price discrimination driven by travelers' (or their companies') affordability (on top of the need for utmost flexibility and a flat bed).

In addition, your consumer surplus also depends on how “inelastic” your demand is. If you really can’t do without an iPhone, if life has no meaning if you can’t zoom in and out Angelina’s face with your fingertips, you’ll just buy it no matter the price—your demand is perfectly inelastic and your pleasure from the iPhone… infinite!

This will be particularly the case if there are no obvious substitutes for the product in question. What... you said the Blackberry? Look at it! So many buttons, yet none for the weather! And no room for your playlists! And then it’s also so corporate, so secure, SO… reliable!!

Not long after my purchase, my consumer “surplus” turned negative: I mean, what’s the use of a multi-touch screen display if touching the “Send” button is no guarantee for having your emails delivered? So I rushed back to the Apple store ready to throw the device at their face and demand my money back.

“Email? That’s not the iPhone’s forte”, said a store assistant, almost stunned with my complaint.

He found support from that same friend of mine, who had accompanied me, always dying for an excuse to visit an Apple store. “Your iPhone is a lifestyle statement. Sleek, professional, playful. And so what if, from time to time, an email fails and you come across as a disorganized, chaotic diva? Oh, and you do need a protective cover for it.”

Soon after, I was out of the store, iPhone still at hand, wrapped in a fluorescent yellow rubber case—at $29.95 plus tax. My reservation price for being able to find my iPhone in my… disorganized, chaotic handbag.


Glossary: consumer surplus, reservation price, price discrimination, inelastic demand, multi-touch screen display