Question

Throughout the 1990s when personal computers (PCs) were widely used, improvement in PC technology almost always resulted in a decrease in price of PCs. Nowadays people use smartphones, but improvement in technology is usually accompanied by an increase in the price of the smartphone (every new model of the iPhone or Samsung is more expensive than the previous one), which is exactly the opposite of what happened in the PC market.

What is different about the smartphone market (or about the improvement in smartphone technology) that is different from the PC market (or the improvement in PC technology)? Please give an explanation.

Answer 1

Introduction:-

In today's modern society, the role of both smartphones and personal computers is undeniably one of the key reasons why some economies have seen rapid growth and development in the recent times. Both the technologies are interconnected and have made processes much faster and have helped in connecting the global world with one another respectively.

It is truly expressed in the case study, that during the early 1990's, the PC revolution caused a major downside in the cost of computers and other personal devices and as innovation took place, the cost of the products saw a major decline.

On the contrary in today's time, the cost of each smartphone far extends each previous model which is sold in the market respectively. This can be explained in economic terms as follows:-

Explanation and Case Specifics:-

Economically speaking, the reason why major technological companies have increased the price of each subsequent smartphone is primarily because of reduced returns to scale. This is defined as a phenomenon in which the company gets lesser returns even when it deploys more funds because technology becomes stagnated and significant ammount of research is then required to maintain a stable profit level.

Previously, during the early 1990's the penetration of the market was extremely low, and deploying new capital would be sufficient to improve technology in Personal computers because as a product it was still relatively new and development of new features was not as costly. Further the market was expanding and new customers for the product would easily get added and the addition of customers could allow companies to reduce prices since there profit levels was increasing.

On the contrary, in today's time, the demand is stagnant to a certain extent for smartphones and a company has to make significant investments in research and technology to retain customers. At the same time, this cost cannot be borne by the company alone since the profit margins are much lower due to the intense competition which previously was missing.

Conclusion and Summary:-

Thus, to summarize the same discussion in points, following are the reasons why companies today charge higher:-

1) Diminished Returns to Scale which means that the overall profits which a firm would make in the 1990's was much higher in terms of the margin. To maintain profits constant investment in research and development is required which needs to passed on to the customer respectively.

2) Change in Demand Pattern:- The demand pattern in the early 1990's was evolving and increasing but has stagnated for the smartphone market today. To maintain the same level of profits as indicated above, investment activities are needed which require money to be put into business. At the same time, those customers that are loyal to a brand because of the high research and development prefer sticking to one brand thus allowing for higher profit at times also.

3) Rising Costs of Research and Development:- As indicated the higher costs of research and development, than there were in the early 1990's can also be attributed to a rise in costs of subsequent smartphone prices respectively.

4) Catering to the needs of one and all:- Companies today try to widen their scope by providing less expensive phones also, but that is a different segment altogether. This ensures that the cost of advancement is covered at the top end, while continuous profits can be reaped in from previous inventions also.

Please feel free to ask your doubts in the comments section if any.