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 smartphone, 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

The improvement in technology leads to decreasing costs to the producer and hence the supply increases.

The improvement in PC technology almost always resulted in a decrease in price of PCs and this is because the production efficiencies increased every time and thus helped producers shift the supply curve to the right. This led to falling prices.

However, the improvement in technology is usually accompanied by an increase in the price of the smartphone. This is because every company that produces a smartphone has a monopoly in its own way and that one thing distinguishes it from the other in extreme ways thus increasing the price. There are many RnD costs involved in the process which increases the costs along the brand value of the product. Also smartphone require marketing which is absent in computers thus the costs increase. Also the demand for a particular phone is not huge as there are a lot of market sellers thus resulting in higher prices.

All these differences make the reaction of prices in both the markets.