When Bad PR Happens to Good Economics

iPhone whiners got more than they deserved.

Remember the halcyon days of summer 2007, when people camped outside Apple stores in order to be the first one on their block with the iPhone? It was a simpler time, when USA Today offered videos on iPhone "buying strategies," and people like Evan Herman, 28, were scouting out stores for the best crowd, saying "half the fun is the experience of the line."

Alas, as actual apples ripen on the trees and autumn descends, those days are gone. Last week, Apple dropped the price of the iPhone by $200, to $399. The early adopters who had been enjoying the frisson of exclusivity (and perhaps the attentions of the opposite sex) every time they pulled their iPhones from their pockets were suddenly aghast: "I just felt so used as a consumer. They hyped up the iPhone for six months and built up our expectations, and then they grabbed our extra $200 and ran."

Initially, Apple stood firm, offering consumers a shrug and the cold comfort of "that's technology." But CEO Steve Jobs soon caved and offered $100 vouchers to earlier purchasers, though his statement wasn't terribly apologetic. There's "always someone who bought a product before a particular cutoff dates and misses the new price of the new operating system or the new whatever," he said.

"This is life in the technology lane. If you always wait for the next price cut or to buy the new improved model, you'll never buy any technology product because there is always something better and less expensive on the horizon." He could have been even more succinct. "This is life" would have done just fine.

Apple was trafficking in very basic economics. The practice of offering different sets of buyers different prices is called price discrimination, and all the cool kids are doing it. And some, like Apple, have taken a lot of flack for it.

The classic example of price discrimination gone awry is the great Coke vending machine scandal of a few years back. Some pointy-head at HQ had the idea the price of a can of Coke from a vending machine should fluctuate with the temperature. Thermometer-equipped vending machines would allow the company to charge more for an icy Coke on a hot day at the beach, and less when the weather was cool and pleasant.

The outrage of the Coke-drinking public knew no bounds, and neither did Pepsi's glee. Coca-Cola was forced to deny that it ever seriously considered the proposal.

Meanwhile, how did all these infuriated soda guzzlers with an overdeveloped sense of justice get to those hot beaches in the first place? They bought tickets from airline companies setting their pricing using exactly the same model.

So what's the difference? Why do people cheerfully accept price discrimination when it comes to airline tickets, and become Internet activists when faced with the same phenomenon in vending machines and iPhones?

To say that someone was discriminating was once a compliment. It meant he was a man of taste, the sort of person who could see fine gradations in value and parse the good from the bad.

In later years, discrimination became a dirty word-inverted from it its original sense to mean someone who separated people into unfair and irrelevant categories and the treated some of them badly for no good reason at all.

Maybe that's why the idea of "price discrimination" is so alarming in this day and age. Perhaps those early iPhone purchasers feel themselves discriminated against-trapped by a form of latter day technological Jim Crow.

A few people are probably just acting in a rationally self-interested way: If you could whine a little and get a 100 dollars back on, say, your TV or a ridiculous designer handbag, you'd do it, right?

But most of the people who were whining seemed to feel genuinely wronged: "I feel totally screwed," they say. "My love affair with Apple is officially over." Unlike airline tickets, Cokes and iPhones are easily perceived as identical products, even under different demand situations. And as long as you're not clear on how the underlying economics works, it's easy to feel like you took a bath.

Econoblogger and author of Discover Your Inner Economist Tyler Cowen ranted (in a post sent from his iPhone) about whiny early adopters:

Who has pushed me over the edge? It is you people, you who resent Coase (1972), you people who induce wage and price stickiness and widen the Okun gap. You people, who don't know what it means to sit back and enjoy your consumer surplus. You beasts!

And to think you are all carrying around these wonderful icons of modernity in your pockets…

AAARRRGGGHH!

Economist Ronald Coase asks us to consider the case of a railroad that owns all of the land along its right of way. At first, the railroad will offer the land at a high price, and sell (say) half of it to people who urgently want the land. The next year, it will sell more of the land at lower prices, increasing its overall profits and making land available to people who were willing to wait out the initial sale in the hopes of getting a better deal. Everyone who wants land gets it, some people just pay more for the privilege of getting it sooner. Sound familiar?

Sure, it's good economics—even if it's bad PR, Apple did manage to sell 1 million iPhones in 74 days-but is it fair? Is it just? To find out, we need look no farther than question posed by rubber bracelets everywhere: WWJD? Not What Would Jobs Do?, of course, since we already know: he'd give in to the whiners and offer $100 credits good for Apple products in the future.

The parable of the workers in the vineyard is the Bible's final word on this point, and takes a much harder line than Steve Jobs. Jesus tells the story of a group of workers looking for employment. A few are hired in the morning for one denarius. As the day drags on, more and more workers were hired, with the last batch brought to the field only at the eleventh hour. Then it comes time to cash out:

The workers who were hired about the eleventh hour came and each received a denarius. So when those came who were hired first, they expected to receive more. But each one of them also received a denarius. When they received it, they began to grumble against the landowner. 'These men who were hired last worked only one hour,' they said, 'and you have made them equal to us who have borne the burden of the work and the heat of the day.'

"But he answered one of them, 'Friend, I am not being unfair to you. Didn't you agree to work for a denarius? Take your pay and go. I want to give the man who was hired last the same as I gave you. Don't I have the right to do what I want with my own money?"

As one writer put it: "if you're still upset about 'paying too much' for your iPhone, take it up with the man upstairs."

Or maybe this is all just an extraordinarily elaborate PR strategy after all. Consider a customer we'll call "Katherine." She would never wait in line for a gadget. She's just not quite geeky/status-seeky enough. And she doesn't track consumer electronics prices, nor does she browse in Best Buy or the Apple store for fun. But thanks to the hullabaloo about the price drop, she now knows that Apple phones are "cheap." Hard to imagine the fact would have penetrated her consciousness so quickly or so thoroughly as it has without a controversy to reinforce the message.

Perhaps Steve Jobs did have the parable of the workers in the vineyard in mind after all. After all, the tale wraps up with that famous phrase, certainly applicable to iPhone prices today: "So the last will be first, and the first will be last."

Katherine Mangu-Ward is an associate editor for reason.