If a company makes excessive profits, does it truly mean that the consumer is being ripped off? In the short run, it may definitely seem so, but in the long run, excessive profits can actually mean higher consumer welfare. How does this work?
It’s this little thing called incentive. With a high profit margin, companies have greater incentive to innovate and improve upon existing product lines. Not only that, they also have more cash to actually pour into Research and Development than companies with a smaller profit margin. The end result would be better and sometimes cheaper products for all of us in the long run, and hence as consumers, all of us benefit.
Of course, there is the usual arguments about how high profit margins actually lead to complacency and the stagnation of innovation. This is only true with a near complete lack of competition and without the threat of potential entrants – any firm facing competition would be forced to innovate and improve to protect their profit margin. If firms do not innovate and improve upon their products, over time, their high profit margin would be eroded by competition from other firms. Hence, it is actually within the firms’ self interest to continue to innovate despite high profit margins.
Let’s take my all time favorite company – Apple (APPL) – as an example. (Interestingly, it was a story about huge iPhone profits that prompted me to write this entry – link here) Despite huge profits brought about by runaway iPhone sales, Apple has continued to innovate and improve upon its product (and mind you, many such innovations are unprecedented in the cellphone market). Hardware wise, we have seen new hardware every year since the original iPhone launch back in 2007. Software/Firmware wise, it’s actually the same one major revision per year – iPhone OS 2.0 in 2008, bringing with it the iPhone App Store – not without its issues – but nevertheless a popular and welcome feature (as can be seen from the many “versions” of it across other mobile platforms – Blackberry App Store, Windows Mobile Marketplace, Android Market etc) and iPhone OS 3.0 in 2009, featuring many features demanded by iPhone users (eg. Copy and Paste/Internet Tethering/MMS etc). Moreover, the price of the iPhone has been dropping (partly thanks to carrier subsidy). As such, I really don’t mind paying a little extra if I know that the money would go a long way into improving the products.
But still, I definitely wouldn’t mind if Apple actually uses some of that money to ensure better build quality and quality check for its products. Just saying you know?
I wrote this piece last year in May. (Too bad the blog is no longer available)
I went down to the Apple Support Centre today to collect my new battery for my MacBook Pro. I must say I am rather pleased with the job they have done on my laptop. The sunken in Power button was fixed, and the bottom case with some bulging part above the lid button was also fixed. Even my very dirty screen was wiped for me. All this for the excellent price of $0, even though my warranty’s expired, all thanks to the exception code given to me by the very friendly Apple Staff on the support hotline.
But I couldn’t help thinking: what if I don’t have the exception code? Well, from the price list displayed at the Support Centre: it would cost me S$100 just to send the machine in for diagnosis, and extra costs for my replacement parts (the battery costs about S$235, and I am told that to fix my sunken in Power button, it would cost another S$100 to S$200) and of course transportation fees for the parts to come in from the US. So of course the guy recommended me Applecare, which extends the warranty of the product to 3 years from the date of purchase. Of course I politely declined his offer, given that it costs S$629. (Can you believe it, Applecare for the Macbook Pro is more expensive than any other Mac line – even more expensive than Applecare for iMac or the Mac Pro!)
Now, as we all know, Apple has poor quality control, and the problems and defects for it’s various products are numerous, especially issues of swollen batteries and excessive thermal grease. A look at the MacBook Pro’s wiki page on the Apple Defects Site and one could probably guess why lots of people chose to buy Applecare. Is it possible that Apple is so evil so as to deliberately lower their quality control, in hope of increasing sales of their wildly expensive Applecare plan? (The Applecare plan for the Macbook Pro is 20% of the price of the base model). I mean it is possible right? It would seem like a great chance to profit. (I have never seen exactly what’s in the Applecare box, but I can’t believe people actually pay S$600+ for a paper box)
But of course, to quote my friend: “Big brain, evil heart; everything’s possible.”
Now I am thinking that the bolded paragraph might just be true.
I have managed to get a large part of my new site/blog setup within one day of moving to my new host! However, I am still working on tweaking the theme (it’s not perfect) and of course getting a few plugins to extend the functionality of WordPress. But otherwise, this should be home sweet home.
More updates coming soon!
You can still view my old posts at http://xiaotian.wordpress.com