This paper provides an economic analysis of the Apples iPhone 3G product, specifically: market
structure, determinants of demand, elasticity and non-price competition.
Article summary:
Apple has made its name by offering luxury products and technology services, last year it
was recognized by Fortune Magazine as the most admired company in the world. This article
shows how Apple has capitalized on the success of its latest i product line and addresses the
shortcomings of the original design. The birth of the original iPhone has already set the bar based
on the design and ease of use. The new iPhone 3G improvements include GPS satellitepositioning technology that will compete with the external GPS device. It will work with the new
generation of mobile networks, running at faster speeds. Lastly, the new security systems will
benefit corporate customers.
In addition to the improvements, the iPhone 3G is available at an affordable starting rate
of $199. Apple has created an affordable yet powerful phone that should surely gain attention of
consumers. Of course, while the device itself is discounted, the monthly usage fees will be at an
increased rate. With this new business model approach, Apple will be competing against Nokia
and Samsung.
Comment: Effective and concise summary
Market structure:
Apple is competing in one of the fastest changing markets. Market structure measures the
level of competition Apple faces within the industry. Apple has competitors such as HP, Dell,
Acer and Asus making it appear as Apple is participating in a competitive market; in a
competitive market, each firm is so small compared to the market that it cannot influence the
price of its product and therefore, takes the price as given by market conditions. Apple is
participating in a competitive market but more closely fits into a oligopolized market, one in
which 3 or 4 large firms supplies the entire market for a good, and those firms can choose any
price and quantity on the market demand curve. Apples competitors are offer similar, yet not
identical products. There have been competitors trying to enter the market, selling fake i
products in fake i stores; however, this market share is debatable because of the narrow
characteristics of an iPhone or iPod. Apple is able to maintain a unique product line and continue
the monopolistic nature of its i products. Comment: I like how you focused on the issue of
defining the industry when determining the market structure.
Determinants of demand:
With our knowledge of the market structure, we now understand Apple, specifically in the
iPhone market, participates in a oligopolized competition. This coincides with determinants of
demand because the market structure sets the stage. As defined by our textbook, determinants of
demand is the amount of the good, in this case, iPhones, which buyers are willing and able to
purchase. Demand determinants include:
Own price;
Prices of related products (including substitutes and complements);
Income;
And tastes and preferences.
Per the article, the iPhone 3G is selling at a bargain rate of $199, just below what the
industry sees as the pain threshold for the mass market. The iPhone price is set at a reasonable

Midterm Project
PMBA 315
rate creating a strong demand. Consumers can validate justify their purchase of the phone
because the other options available are similar in price. Also, iPhones do not decrease in price
until the next version becomes available. There is no incentive to purchase the existing product
because each version tends to address the shortcomings of the previous one.
The prices of related iPhone products are competitive; however, most users tend to purchase
an Apple product based on the Apple name and customer service. The components that
accompany the iPhone such as wall chargers, car chargers, headsets, etc. are unique to the Apple
brand. In addition, the purchase of the iPhone is all inclusive, serving as an iPod, extra storage
space and as a GPS. This eliminates the need for additional purchases of these capabilities.
Statistics show that with the release of the iPhone 3G model, the growth rate of lower income
individuals purchasing the phone increased. When Apple lowered the base cost to $199, it
instantly became a viable, affordable, and more attractive option for consumers who wouldnt
pay upwards of $400 for a cell phone.
Apple creates an image of luxurious items, with the iPhones sleekness and strategically
located stores (trendy regions). People want to be affiliated with luxury to appear wealthy.
Elasticity:
Elasticity is the percentage change in one variable resulting from a 1% increase in
another. The iPhone is not a pure luxury good, but is categorized more closely to a luxury vs. a
necessity Comment: I agree with your observation. It helps that is priced competitively; however,
there are other phone options available for a cheaper price Comment: Good set up for your
analysis on price elasticity. Consumers can also postpone the purchase for a later date, it is not an
essential item. The iPhone is not a good that is required to survive like food or water, examples
of purely inelastic goods. Apple has done a good job in benchmarking the competition to set its
price which has helped to maintain its inelasticity. The inelastic tendencies of the iPhone are to a
point because if the iPhone was priced too high, consumer demand would begin to seek out
alternatives.
Based on the devoted and loyal i customers, I would argue that the iPhone has a fairly
inelastic demand because a reduction or increase in price should not affect the quantity
demanded. On the other hand, statistics did show that the starting price of $199 introduced a new
consumer base.
Elasticity describes the price sensitivity of a good. If the price of the iPhone 3G was
double the introduction price, for example, $400, consumers would still purchase the phone.
Apple would still enjoy the similar success even if the phone did not compete with the other
smart phones available in the marketplace. There would still be a high demand for the iPhone
due to the dedicated customers and non-price competition.
Non-price competition:
Non-price competition is a marketing strategy "in which one firm tries to distinguish
its product or service from competing products on the basis of attributes like design and
workmanship. This is Apples competitive advantage and results in their success. Their product
line is unique and like no other. Others attempt to emulate but rarely innovate as well as Apple
does. Apple is one step ahead, offering something better that the rest. Apples differentiator is not
in technological innovation, rather, technological designs. One example is their magnetic plug
that connects the power to their laptops. Another example would be their solid aluminum
unibody product. Apples product differentiation makes their iPhone unique and creates a loyal
customer base-half of US homes own Apple products. Per the article, Apple has succeeded in

Midterm Project
PMBA 315
revolutionizing the consumer technology market. Comment: Good set and follow through with
a specific example of differentiation.
In addition to the technical designs setting the iPhone apart from its competitors, Apple
used custom built apps and programs to entice consumers. Only certain apps were available on
the iPhone and if you wanted access to this specific app, you had to purchase the iPhone. Of
course, this is no longer the case because apps that were solely available on the iPhone are now
available on other devices.
The iPhone is not just a mobile phone, but an expansion of the iPod. Apple was able to
carry the iPod customer base with its release of the iPhone. Thus, when Apple entered the mobile
phone market, the release of the iPhone was highly awaited by the Apple community. By merely
utilizing their already successful branding strategy, Apple was able to create anticipation of a
new product, one outside their forte of the music device. With this momentum, Apple has also
guided the community to make the iPhone a success.
Comment: You did a very good job on this project. Your paper was clear, concise, and
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