Many of my editorial colleagues have taken issue of late with Apple’s high pricing of the Macintosh relative to PC counterparts. Over the years, it has been consistently asserted that Apple’s pricing is way out of line with the rest of the industry—a strategy which has been blamed for Apple’s failure to capture a greater share of the computer market.
 
Given such speculations, I’d like to offer a little economic analysis in the hopes of shedding some light on the issue. In the competitive market illustrated above, the market forces of supply and demand interact to determine the equilibrium point (e ), or what price/quantity mix will be demanded by consumers in a free market.
Now let’s apply this model to Apple: denoted by the curve S, supply refers to Apple’s supply of Macintosh computers; denoted by the curve D, demand refers to consumer demand for the Macintosh. These scales represent the various combinations of price (P) and quantity (Q), or how many Macintoshes will be sold at a certain price level.
Taking the assertions of fellow editors that Apple’s pricing remains much too high in the very competitive computer market, I am left to assume Apple has been enforcing a price floor for its Macintosh computers. That is to say, Apple has been setting the price of its Macs above market equilibrium (as denoted by the e , above). So for argument’s sake, let’s say Apple’s average Mac price has been set at P(fixed), and that as a result, only q1 number of Macintoshes are now being demanded and sold. This prestige pricing could easily account for Apple’s persistent failure to capture a larger market, but it does not reveal the whole picture.
In a competitive market (such as the computer market), Apple should be exper- iencing an excess supply of Macintosh computers. At price level P(fixed), Apple is willing to supply q2 number of Macintoshes, but only q1 are being demanded. Given Apple’s tendency for higher pricing, one might assume that Apple’s inventories are consistently overstocked. Indeed, that has happened in the past...but more often than not, Apple finds itself understocked, unable to meet demand even at the P(fixed) price levels. The persistent PowerBook droughts of the past and the current-day short supply of 8100’s fly in the face of the above analysis—there is definitely no gross excess supply of Macintosh computers in Apple’s warehouses. It would seem Apple’s economics are not consistent with those of company in a competitive market.
 
So what economics model does Apple subscribe to? The monopoly? In economic terms, monopoly would suggest Apple has been pricing the Macintosh at the price level de- termined by the quantity demanded at such point where marginal costs equal marginal revenue. In short, an optimal profit-maximizing price level is determined, with little regard for the actual quantity sold.
While such a model may help explain Apple’s pricing and supply situation, it does not make sense. There is little doubt Apple once adhered to monopolistic pricing, but at this point in Apple’s life, survival depends upon the ability to compete with the PC industry as a whole. In fact, Apple should be far more concerned about the quantity of Macs it sells, rather than the price. Though I am reluctant to admit it, Apple’s stra- tegy for increased market share should be consistent with a strategy to broaden a religion—getting the MacOS onto desktops everywhere, regardless of the price level required to do so. It’s a simple strategy, really…pricing Macs at ultra-competitive prices to encourage mass adaptation.
The important question to be asked is ‘Can Apple actually supply the number of Macintoshes demanded at a price level below market equilibrium, when it cannot even supply enough Macintoshes at over-equilibrium pricing?’ Herein lies the true explanation for Apple’s higher pricing and supply shortages.
 
Apple develops and produces many  
products. Unfortunately, as evidenced
by the repeat supply shortages, Apple
does not accurately forecast demand
for certain products and/or encounters
a variety of production slowdowns.
Additionally, in a drive to be techno-
logically competitive, Apple some-
times rushes products to market be-
fore sufficient numbers have been
produced. The resulting effect (in
economic terms) is a supply shock,
wherein the supply curve shifts to
the left (from S1 to S2 on the graph).
This has the effect of putting upward
pressure on the relative price level
of the Macintosh—pressure which, under normal circumstances, would result in the rising of the price level to accommodate for the actual number of Macintoshes Apple could supply.
But Apple wants to avoid premium pricing as much as possible, and genuinely wants to sell as many Macs as it can. At point a, then, Apple holds the market in disequali- brium, unable to supply qe number of Macintoshes and unwilling to raise the price of existing Macintoshes to P1. Subsequent Macintosh models sold by Apple, however, will not be as low priced as they could be…in an effort to accommodate previous supply blunders and avoid similar incidents in the future.
If Apple can gets its production and marketing efforts together, it could easily gain significant market share in a few short years. Instead of developing and offering multiple new low-end Macs (some based upon the ageing 68040 processor), why not rev-up production on one new PowerPC-based entry-level system? And sell the final product for $1299 US., including display, keyboard and CD-ROM?
