Price elasticity of demand - operating systems and Snow Leopard


A lot of my colleagues from the Faculty of Economics think their study was mostly a waste of time. Too much focus on old, out of date concepts and approaches, too little focus on real life. I can't argue with that, it is a bit old school and theoretical, so it's up to the student to make the most out of the abstract things he learned. But you can't do that before you see the real world. And you also have to put a bit of thinking into the whole picture. Then you are able to see that basic concepts, such as supply and demand are everywhere (not only in economics and business) and can fully explain why the sweets of the most scarce flavor in the box taste the best.

Another interesting concept in economics is price elasticity. To put it in simple words, it explains how people react to different prices of the same commodity. Elementary goods, such as food, are not elastic; if a loaf of bread costs 50 cents or 2 €, the bakers will sell about the same amount, because people need it for living and they will buy it anyway. On the other hand, luxury goods are very elastic. If a basic car would costs 5.000 € or 20.000 €, the people would react strongly to it, and only a few people would buy cars because they would be too expensive.

There's a whole theory behind it on how to find the optimal price for goods. Record labels don't want to see it and the whole record industry is in a crisis, while music piracy is in bloom. In my opinion, I would buy a lot of records, if they would cost 5 € each. In real world, I won't buy many because they cost 20 € each. So, the big question at hand is: would the global record industry sell more than 4 times the number of records they do if the price was 4 times cheaper? I think they would - and if I am right, this would mean that music records are price elastic.

These days we are witnessing a very good example on price elasticity of software and it looks like Apple has done it again. They're offering their newest operating system Snow Leopard for 29 € to users of the previous version (Leopard). Rumors have it you can put it also on the prior version (Tiger), which I hope is true, because I already bought it (it is possible according to AppleInsider). So, at the same time Windows users are struggling not to let go of Windows XP and are sticking to the past, Apple is giving away their new operating system for a price of a good meal and everybody wants it. Pretty smart for market penetration and building customer loyalty.

I wouldn't pay 150 € to go for a new version of an operating system, which is about the regular price of Windows Vista or Mac OS, specially if the current one works. But 30 € completely changes the story. The result is interesting; it caused a demand overflow and here in Slovenia you had to make a reservation and wait for a week to get it. When I went to the store, everybody was buying Snow Leopards. I understand the cult of Mac, but this was amazing and a good example of market supremacy.

Looks like the strategists at Apple know their economics as well as they now their marketing.

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written 19.9.2009 13:25 CET on chronolog
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