Reasons for falling price of electronic goods

With any new technology – especially electronic goods (TVs, computers, cameras), we tend to see a sharp fall in price over time. Initially, the new technology is very expensive, and a high percentage of disposable income, but over time, prices tend to fall considerably. There are a number of reasons to explain this fall in price.

  1. Quantum improvements in technology, reducing costs of production.
  2. Economies of scale from increasing production
  3. Increased competition as more firms enters the market, driving down prices.
  4. An element of price skimming. Initial high prices to take advantage of customers with inelastic demand.

Example of falling price of high tech tvs

  • 1954 Westinghouse – first colour tv $11,875 (15″)
  • 1997 Philips/Fujitsu Flat Plasma TV: $22,924
  • 2007 Pioneer Elit Kuro $7,046 (50″)
  • 2012 Panasonic Plasma $2,680 (55″)\
  • 2019 Hisense 65H9F – LED – 65 inch 4K TV  – $599

Source: Cnet + Amazon.

Why does new technology tend to fall in price so significantly over time?

supply-increase-more-than-demand2
Even with an increase in demand for electronic goods, the increase in supply has been greater causing lower price.

 

Improvements in technology

The main driving force of falling price of computers/tv/electronic items is the rapid improvements in technology that have occurred in the past 50 years. Moore’s law was an observation by Gordon Moore (co-founder of Intel) that the number of transistors in an integrated circuit doubles about every two years. This leads to an exponential growth in computing power and consequently allows more computing power for lower costs. This improvement in micro-chips and computing power has enabled more powerful goods to be produced for lower costs. With a good like TV, new technology has enabled better quality pictures with lower cost. Moore’s Law is starting to slow down. There will be slowing growth in technology as the size of microchips gets ever smaller. There will be limits. However, improvements in technology have often exceeded expectations.

Economies of scale

When new electronic products are first put on the market, firms have low sales volume and so they have both high investment costs and less scope for economies of scale. As the market expands, firms can expand production and benefit from technical and other economies of scale. As production increases, average costs will fall.

In 1954, tv sales were limited to a small section of the global market. In 2019, tv sales are substantially higher – global sales in 2017 were estimated at 229 million.

economies-of-scale-growth-in-firm

Diagram showing how economies of scale can lead to lower average costs and lead to lower prices.

Competition

As demand for electronic goods rises, it encourages more firms to enter the market, leading to an increase in supply and price competition to reduce prices. The market for tvs is now very competitive with consumers easily able to compare prices online and buy the cheapest. This increased supply puts downward pressure on pressure. When Apple first brought out an iPod it could sell for a premium price (in 2001, the release price was $399), but within a few years other companies had brought out cheaper digital music players, and this also pressured Apple to reduce its prices too. Now there are digital music players for less than $50.

Price skimming

When a new technological product is released, there is an incentive for the company to set a high price and capture the demand of customers with very inelastic demand. Some consumers who love the latest technology are willing to pay high prices to get the latest electronic good/trend. When the firm has sold to these consumers with very inelastic demand, they can lower the price to sell to a wider audience who are more price sensitive.

price-skimming-4k-tv

This is an explanation of how firms used price skimming to set high prices for the latest 4K TVs.

See more at Price skimming

Why does it seem the price of mobile phones are increasing?

The price of electronic goods doesn’t always fall.

  • Apple iPhones have recently been increasing in price. Latest models have tended to be more expensive, we are not seeing the same dramatic fall in price. The reason is
  • Rather than cutting price, Apple is using improvements in technology to offer more features and more powerful phones. The goal is not to provide cheaper phones, but offer better phones.
  • As phones are so integral to modern life, price is not the most important factor. Quality and features are more important. Therefore, consumers are not necessarily seeking out a cheaper phone, but keen to upgrade – even if more expensive.

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By on October 19th, 2019

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