REMEMBER those great television ads for Apple computers—the Mac guy versus PC guy ones? (Since I no longer watch television—definitely not a necessity for me, by the way, which has nothing to do with a recession—I don't know if these are still running, but they were very funny.) They did a good job of building up Apple as a brand that was more sophisticated, easier to use, less prone to crashes, etc. Having been a Mac user for several years (I bought my first Mac in 2004, I think, or maybe 2005), I clearly believe some of this: compared with my last PC laptop, my Macs have been far less prone to crashing, for example. Nevertheless, it's an open (and interesting) question what, apart from their being "cool" (and, I'd venture to say, better designed and more user-friendly), lies behind the Apple price premium. That, as most people who have considered switching know, can be considerable. In terms of processing power, speed, memory, and so on, how do Macs and PCs actually compare? And does Apple innovate in terms of basic hardware quality as often or less often than the likes of HP, Compaq, and other producers? This question is of broader interest from an economist's point of view because it also has to do with the age-old question of whether competition or monopoly is a better spur to innovation. In a certain sense, Apple is a monopolist, and PC makers are in a more competitive market. (I say in a certain sense because obviously Macs and PCs are substitutes; it's just that they're more imperfect substitutes than two PCs are for each other, in part because of software migration issues.) It may appear at first blush that the answer is obvious—competition, naturally. But arguments on either side are plausible. Schumpeter argued long back that because a monopolist reaps the full reward from innovation, such firms would be more innovative. The case for patents relies in part on a version of this argument: companies are given monopoly rights over a new product for a period of time in order for them to be able to recoup the costs of innovation; without such protection, it is argued, they would not find it beneficial to innovate in the first place. On the other hand, others have argued that competition spurs innovation by giving firms a way to differentiate themselves from their competitors (in a way, creating something new gives a company a temporary, albeit brief, "monopoly"). A new paper from economists at the New York Fed uses the Mac-vs-PC divide as a way into these questions. It's results are probably of interest to anyone who uses either kind of computer (ie, virtually everyone). The paper uses data on the frequency with which Apple introduces new models, how it prices, and so on and compares it to what PC manufacturers, who are directly competing with each other but only indirectly with Apple, do. In a nutshell: The three "PC" manufacturers (Hewlett Packard, Sony and Toshiba) have short product cycles, frequent staggered entry, and declining prices over the lifetime of the good. In contrast, Apple has long product cycles, less frequent and more uniform entry, and flatter price contours. In more detail: sales of a new model decline over time, both for Macs and PCs. But Apple keeps its computers on the market about twice as long as Windows-based PC manufacturers. By the third month since the introduction of a new model, the PC manufacturers in the sample have sold 90% of their units; by contrast, Apple has sold only 38% of the units it will sell. It takes Apple seven months to reach that 90% mark. In nearly 30% of months, Apple's entire product line is composed of models that are at least a month old; the corresponding fraction for HP is just 1%. In the period the paper had data for, Apple went for as long as nine months without introducing a new desktop computer; the corresponding length of time for HP was one month, for Compaq three months, and so on. (Incidentally, Sony is the laggard in the PC industry, at least according to this data, although it still introduces new models more rapidly than Apple does). Of course, it is entirely possible that the "new models" trotted out by PC manufacturers embody no innovation. But that doesn't seem to be the case: the authors use the post-Intel-chip period to see how often different manufacturers become the first to adopt a new Intel CPU and find that over their 35-month period, Apple adopts a new CPU before anyone else seven times, Toshiba does so 12 times, and HP does so 14 times. And while HP and Toshiba rarely keep using a CPU that is more than three months old, Apple at times has one that's seven months old. Broadly speaking, therefore, the average Mac available to buy at a randomly selected point in time would embody significantly older hardware technology than a corresponding PC. Pricing strategies, too, are markedly different: PC prices fall rapidly as the model ages, but Apple does not follow this model, keeping prices roughly constant. So either people who buy Macs care less about some of these features than PC users do, or other compensating features of Macs make up for what they lack. (This isn't entirely implausible, I think—if a nominally less fast computer crashes only a fraction of times a faster one does, who's to say that the faster one's better?) On the other hand, a price-conscious consumer who cares less about pretty design might find that waiting a few months into the launch of a PC model gets him significantly more processing power per dollar than if he were to buy a Mac. http://www.economist.com/node/21009953?fsrc=nwl
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Goa-launch of the well-received *Into The Diaspora Wilderness* by Selma Carvalho on Aug 29, 2010 (Sunday) at 11 am at Ravindra Bhavan, Margao. Meet the author, buy a signed copy (only Rs 295 in Goa till stock lasts). http://selmacarvalho.squarespace.com/
