On June 29, 2007, Apple released the initial iPhone. Thousands of people waited

Question

On June 29, 2007, Apple released the initial iPhone. Thousands of people waited in line for hours and were willing to pay $600 for the 8 GB model. About two months later, Apple reduced the price of the iPhone by $200. A customer who paid the higher price for the iPhone named Dongmei Li sued Apple for $1 million, claiming that Apple engaged in illegal price discrimination.

a. Why did Apple charge a higher price to customers who purchased the iPhone within the first few months of its release?

b. Were Apple’s actions were illegal? What do you think the outcome of the case was?

c. Apple voluntarily offered a $200 rebate to all customers who purchased the iPhone before it was discounted. Why did they do this?

Explanation / Answer

Apple used Intertemporal price discrimination which provides a method for firms to separate consumer groups based on willingness to pay. The strategy involves charging a high price initially, then lowering price after time passes. Many technology products and recently-released products follow this strategy. This is possible due to people with high income has higher ability to pay and then latter in order get more market share Apple lower the price and hence they grouped customer into two category.

Apple action was illegal from whole society welfare point of view but there were no law that prohibits this kind of pricing so it need a suppoting arguments and consequence of lowering price on initially purchesed. Thise who purchased initially had paid whole amount willing to pay. So outcome of the case may be in fovour of that lady whi claims. On the ground that some consumer surplus should be given initially purchased group.

Voultry rebate is as a results of ethical system of pricing where Apple shold not worry large initially purchased gourp as they may purchase latter new iphone series. They are the first mover.

Intertemporal Price Discrimination = charging a high price initially, then lowering
price after time passes.
Intertemporal price discrimination is similar to second degree price discrimination, but
charges a different price across time. Second degree price discrimination charges a
different price for different quantities at the same time.

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