Why Apple is driving app prices down: an economic explanation

That explains why it is in Apple's interest for prices to be low , but not really why prices are as low as they are.

I imagine this is because of there is relatively little "value" in most mobile apps.

A great number are basically just novelties or an alternative to using a browser for some specific task.

A popular area in mobile stores is games, but most mobile games are more of the "Play for 10 minutes on the train" variety than "sit down and play multiplayer until the sun comes up" games. I might pay $40 for a game in the latter camp, but would be hesitant to spend more than $5-10 on the former.

You could apply similar economics to desktop PC apps, where some similar effects can be observed in some cases. You could still argue that it is in a computer manufacturers interest for all software to be cheap or free but you still see plenty of big ticket desktop software that hasn't been particularly disrupted by low cost alternatives.

Examples would be office, photoshop and the ilk.

I'm currently taking a microeconomics class and seeing someone discuss all of the concepts my class covered in a single article was pretty cool! Thanks.

Quick niggle: FTA "So we can generalise: if the price of a good falls demand for it’s substitutes will rise."

Should be

"... if the price of a good increases..."

This didn't make sense. The title states Apple not only has influence on prices but actively affects them. After eight paragraphs of introduction, the author reverses his hypothesis to low priced apps drive Apple sales.

The simple truth for low priced apps is well established: market land grab. When creating a new market it's essential to grab as much of the market as fast as possible. Some companies will grab as much as they can regardless of risk while others will be conservative and only grab as much as can be defended. Success requires the lowest possible barriers to entry by users, including price.

Its an interesting post, but it seems to stop short of explaining the full situation.

Apps are complementary goods to smartphones, but I imagine in the case of the App Store, substitution forces are more overwhelming in price determination. I say this because as a Windows Phone user, it was common to see higher prices for similar apps compared to other stores. The Windows Phone store having far few developers and thus far fewer substitutes.

The complementary nature of the Apps can also work in the other direction. The more people who purchase iPhones and iPads, the more demand for the apps, which actually exerts upward pressure on app prices. The question is just what is more important to the user, hardware or software, and I think while the post makes one point, one could argue just as easily that the hardware dominates the decision.

As with any econ problem, the forces at play are numerous, so this is no slight of the post, just some other factors to consider.

The problem with this analysis is that it assumes Apple has a strong influence over the price of apps. Sure there may have a subtle weighting for free apps in their search algorithm, but this is different to sorting apps based on price.

At the end if the day, if an app isn't free, it's down to the App developer community to set the price as a collective. However it only takes one rouge developer to trigger a "race to the bottom". In my opinion, it is developers who have created low prices on the App Store, not Apple!

The model has shifted from front-end (pay $X for application with all features) to back-end (application is free or $.99, pay $X for features).

Malarkey. Where is his evidence app prices have fallen, or better yet, apps have become less profitable.

App prices are low because Apple sets low reference prices, eg. $10 for Office, combined with developers with little marketing skill who can't communicate a value prop and instead think basic econ, that is to say, lower prices = more sales.

The average indie developer (and the entire android ecosystem) is more interested in having users than having profit. iOS types talk profit share, android types talk marketshare. It's a difference fundamentally in what the product is, iOS is an Operating System, Android is an Advertising System, hence you see lower prices on Android because the product is its users.

It's a classic overly competitive economic case where the benefits of reduced production cost accrue to consumers rather than producers, such is the case in textiles and the well known case of Berkshire Hathaway.

The similarities between textiles and software are interesting because they are dominated by high capital costs (software is fundamentally a capital good with huge labour inputs), and low costs of reproduction.