Apple and Price Discrimination

15 November 2016
15 Nov 2016
3 min read

Recently I was reading an article on Six Colors regarding Apple and how they’re using a retina screen to price discriminate different customer segments.

Price Discriminate? Let me explain.

Price Discrimination

Rather than the much worse type of discrimination, Price Discrimination is the idea of selling the same product in different markets at different prices to maximize revenue. Two common examples include giving a student discount and feature reduction in software. A student discount is used to get students to pay for a product they otherwise would not buy. They often don’t have the money to buy the good at full price1 so by using a student discount, a firm can still charge the same price to the old customers, yet also bring in a new source of revenue.

Similarly, another common example is hobbled software that can be sold for a lower price. Pricing software is complicated, but the key thing to remember is that the marginal cost is zero – it doesn’t cost more to produce an extra copy. However, by artificially removing features and selling it for a lower price, a software maker can appeal to different customer segments to maximize revenue. As an example, the popular statistics program Stata has five different versions of its product, all aimed at a different market segment. By having a cheaper version for students, Stata can capture the revenue it otherwise would lose if it just had one price point.

Retina and Price

Apple here is using this technique to differentiate between customer segments. Those who care about “pro features” are willing to pay for them 2, and the retina screen is an example of such a feature. In his article, Snell says that

This makes me wonder: To what degree are Retina Macs more expensive because the Retina display (and the increased graphics power required to drive them) adds to the cost of making the device, and to what degree is it a feature differentiator that Apple feels it can use as a way to get people to spend more money?

This is a classic example of price discrimination. By keeping the price of computers with a retina screen artificially high, Apple is able to segment the market into those that will pay more for retina, and those that care less about the feature. For those don’t care about a retina screen, they can buy a Macbook Air and still be happy with such a purchase. Apple still gets their money, and these users that are indifferent regarding a screen aren’t paying for a feature they don’t care about. Thus, Apple is able to capture revenue from both customer segments, making management, as well as the consumers happy.

  1. And a discount often has tremendous appeal ↩︎

  2. Or begrudgingly willing to pay ↩︎

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