Cheapening of Electronic Products

Introduction

When any new technology is introduced in the market, especially in the segment of electronics products, such as computers, cameras, headphones, and TVs, their prices decrease sharply over time. The technology in its initial phase is expensive and consumes a high percentage of disposal income, but prices start to decrease over time. As prices are falling, this means that technology is improving at a faster pace. 

Example

The following are some examples of falling prices of high-tech TVs:

In 1954, the Westinghouse, the first colour television of 15” was priced at $11,875.

In 1997, the Philips/Fujitsu Flat Plasma TV was priced at $22,924.

In 2007, the Pioneer Elit Kuro of 50” was priced at $7,046.

In 2012, the Panasonic Plasma of 55” was priced at $2,680.

In 2019, the Hisense 65H9F LED of a 65” 4K TV was priced at $599.

Similar price reductions are observed for other products such as digital cameras, mobile phones, dish antennas, laptops, and many other electronic devices. As time passed, the technological advancements caused the prices of electronic or high-tech TVs to fall significantly.

Explanation

One reason for a fall in the prices of electronic products is a higher rise in the supply of these products as compared to the rise in their demand. This is illustrated by the following diagram: 

In this graph, the quantity of electronic products is taken on the horizontal axis (x-axis), and the price of electronic products is taken on the vertical axis (y-axis). The initial demand curve is D0, and the initial supply curve is S0. The initial equilibrium is at E0 with an equilibrium price of P0 and equilibrium quantity of Q0. The diagram illustrates a rise in the demand from D0 to D1 for electronic products as more consumers are willing and able to buy these products due to an improvement in their incomes and their standard of living. However, there is a higher rise in the supply of these products from S0 to S1 as more firms are able to produce a higher output due to advancements in technology, which makes production less costly. The new equilibrium is at E1. The new equilibrium price is P1, and the new equilibrium quantity is Q1. The price is decreased from P0 to P1, and hence the electronics products are getting cheaper over time. 

Reasons of the Price Reductions of Electronics Products

The following are some reasons that explain the decrease in the prices of electronic products:

Quantum Improvements

The quantum improvements in the new technology, particularly electronic products, reduce the costs of production for manufacturers. The technological advancements of the last 50 years served as a main driving force to decrease the price of electronics. Moore’s law by Gordon Moore was an observation that stated that the number of transistors in an integrated circuit doubles about every two years, which leads to an augmented growth in computing power and hence allows more computing power for relatively lower costs. This quantum improvement in computing power and micro-chips has authorised more powerful goods to be produced for lower costs. In case of goods, such as new technology, TVs have augmented better and high-quality pictures with lower costs.

Economies of Scale

With the increased production, companies attain economies of scale, due to which the prices of electronic products decrease. When new electronic products are introduced in the market, at that time, firms have both low sales volume and high investment costs, which means there is less scope for economies of scale. When market expansion occurs, firms have to expand their production and get benefits from technical and other economies of scale. When the scale of operations increases, the long-run average production costs (unit cost) will reduce due to increasing returns to scale according to the law of returns to scale. This is called economies of scale. For example, in 1954, the sale of televisions was limited to a small section of the global market. But in 2019, their sales become relatively higher as compared to the global sales in 2017, which were about $229 million. The concept of economies of scale and a resulting fall in the prices of electronics products is illustrated by the following graph: 

In the above graph, the quantity of electronic products is taken on the horizontal axis (x-axis) and the cost is on the vertical axis (y-axis). The downward sloping long-run average cost (LRAC) curve shows that companies, in order to attain economies of scale, increase their outputs, which results in lower average manufacturing costs and reduced prices of electronics goods.

Increased Competition

As many firms enter the electronics segments, the competition is high in the market, resulting in a fall in the prices of these products to gain a competitive advantage. When the demand for electronic goods increases, more firms are encouraged to enter the market, and existing firms expand their production capacities. This increased price competition and the expansion of firms lead to reduced prices of these goods. The TV market is now highly competitive because consumers are now able to compare the prices of different options online and buy the cheaper ones. For example, when Apple first brought out the iPods, they were sold at premium prices of $399 in 2001, but other companies also developed cheaper music players within the same category, which had put pressure on Apple to decrease its prices also. Nowadays, there are many digital music players with cheaper prices, like $50.

Price Skimming

Firms in electronics markets use price skimming for their new and innovative products, in which initially prices are placed high to take benefits from customers with inelastic demand. Firms also want to recover high research and development costs for new product development as soon as possible before the entry of similar products by competitors. When a new technological product is introduced in the market, there is an incentive for the firms to set high prices for these products and capture the major demand of consumers with inelastic demand. For example, people who are interested in the latest technologies willingly pay high prices to get the latest electronic product or trend. When firms satisfy their need by serving the demand for customers with inelastic demand, then firms decrease their prices to sell to a wide range of customers who are more price sensitive.

Increasing Price Trend in Electronic Products

The prices of electronic goods do not always decrease or fall. For example, recently, the Apple iPhone’s prices have been set high. The new models are more expensive as compared to the previous ones, and there is not that much fall in prices. The reasons behind this are:

Instead of reducing prices of its smartphones and other products, Apple is improving its technology in order to offer more advanced features and more powerful phones as compared to its competitors.

In today’s modern era, phones are an essential part of everyone’s life; the price is not that important a factor. People prefer to invest in quality, superior specifications, and features rather than becoming price-sensitive. Hence, consumers in the market are not necessarily seeking cheaper phones or any other electronic products. They want to upgrade regardless of the product prices.

Pricing Strategies for New Electronic Product

For new electronic products, the following are some pricing strategies that can be applicable while launching a new product in the market:

Competitive Pricing

This pricing strategy is used to outperform the electronic products of the competitors on the basis of a competitive price. In competitive pricing strategy, companies first conduct research or survey and find out what pricing is offered to the consumers by competitors, then simply sell their products at comparatively lower prices to attract more customers.

Value-Based Pricing

This pricing strategy is based on what consumers think about the worth of a product when buying it, regardless of the actual value of the product. Customers willingly pay for those products that are perceived as high-value by them as compared to the more affordable alternatives.

Keystone Pricing

In keystone pricing strategy, retailers set the price of a product to twice its purchasing cost in order to earn high profit margins.

Discount Pricing

In this strategy, firms offer discount prices on an occasional basis, for example, seasonal sales, festival discounts, coupons, etc.

Conclusion

In conclusion, the price of electronic products decreases because this segment of the market is very competitive due to the potential of high profit margins. New firms willingly enter this segment because they also want to earn more. Due to intense competition, firms use low pricing strategies to attract customers to buy their products. The electronic product market does not always reduce the prices because many consumers are not price sensitive. All they want is good quality, reliability, and advanced features and technology for what they may even pay a high price for. In the electronic product segment, big firms are operating and doing large-scale electronics manufacturing, due to which average costs and hence prices fall.