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Expensive Apples

26 Oct

Yesterday’s microeconomics class about monopolies was quite fascinating, especially the idea of profit maximisation in a monopoly as at first it is counter-intuitive.

Here’s how I see the profit maximisation theory applying to a well-known company: Apple. Let me know if I’m wildly off the mark and I’ll go back to my text-books.

Apple has a kind of monopoly in the high-end personal computing market. I have read that it has a 90% share of the $1000+ market. Most of the personal computing market has had it’s profits squeezed massively, whereas Apple, I believe, is one of the most profitable companies out there, and is especially profitable compared to other computer manufacturers.

I’ve often read Apple critics say that if Apple were to just lower its prices it would take a bigger share of the personal computing market and would get more revenues as a result. However, I would say that Steve Jobs, as well as being a great product guy and a bit of a psycho, is also a great economist. Perhaps he has got Apple computer sales ticking along at their profit maximisation point and he knows that if they were to sell more Apple computers they would actually reduce their profits.

I asked our Prof about this and he said “I don’t know”, which a bit less than satisfying. I did ask how they can make more profits with a given product line if they’re at the profit maximisation point, and the answer was “they can’t”. So the only way to grow profits is to move in to new product lines.

I was looking forward to this lecture as I’m familiar with another monopoly: the market for MBA loans in the UK (rant warning). There is only NatWest serving the market and one of the things that suffers in a monopoly is customer service. Interestingly, students from Insead have set up their own MBA financing marketplace, Prodigy, where alumni actually invest in new MBA students.

Lastly, I point you in the direction of Mungonomics.

Who gets depressed? The rich. Everyone else is too busy.