In 2016, Apple launched the latest version of its iPhone, the iPhone 7. Unlike previous versions, this new phone came without a socket for headphones. Needless to say, Apple had a solution for this with its AirPods product, a pair of wireless ear phones which ‘instantly turn on and connect to your iPhone, Apple Watch, iPad, or Mac’, and ‘automatically plays as soon as you put them in your ears and pauses when you take them out’. The AirPods work through a Bluetooth connection.
For people who had previously listened to their audio with wired headphones, the new iPhone meant that they either had to buy new headphones which would connect with their new iPhone or choose another type of phone which retained the headphone socket. Can economics and the market model offer a prediction of what would happen in this market? After all, the smartphone market is not at all reflective of the competitive market model; there are only a few large suppliers of smartphones, products are differentiated in various ways (for example, through operating system), and producers are price-setters, not price-takers. There are millions of small consumers who are effectively price-takers, however, and maybe smartphones are more homogenous than might be thought.
The market model might look at the innovation by Apple and consider what the impact would be on substitutes and complements to the product. In particular, the removal of the headphone socket might prompt a change in the market for Bluetooth headphones. The market model might suggest, given Apple’s popularity, that manufacturers of headphones would seek to exploit technology to focus production more on Bluetooth headphones. Competitors to Apple might also abandon headphone sockets and go down the Bluetooth route with their new models. This would imply a shift in the demand curve for Bluetooth headsets with prices in the short run rising. Rising prices would encourage more producers to switch to producing Bluetooth headsets and the supply of Bluetooth headsets to increase.
It might well be the case that the price elasticity of supply for Bluetooth headsets is relatively elastic.
Equally, our model might also predict a fall in demand for wired headphones as more Bluetooth devices become available. Prices would begin to fall for these headsets and suppliers would gradually abandon production as they became less popular.
Critical Thinking Questions
1 The article suggests several predictions about the market for headphones as a result of Apple’s decision with its iPhone 7. Use the market model to sketch what might happen to the market for wired headphones and the market for Bluetooth headphones. In sketching your graphs, try to take into account the price elasticity of demand and supply as this might affect the outcome of your analysis and predictions.
2 Any model and theory has to be subject to empirical rigour. Do some research around the price and sales of wired and Bluetooth headphones to see if there is any evidence to support the predictions made by your analysis in Question 1. Does the evidence give weight to the market model or not? Explain.
3 What is the relationship between Bluetooth headphones and smartphones which do not have headphone sockets?
What effect has this relationship on the price elasticity of demand, income elasticity of demand and crossprice elasticity of demand for wired and Bluetooth headphones?
4 What would you suggest was the price elasticity of supply for manufacturers of Bluetooth headphones? In thinking about your answer, take into consideration the fact that existing producers of wired headphones will probably also be the manufacturers of Bluetooth headphones. What would the price elasticity of supply depend upon?
5 How closely do you think the market for wired and Bluetooth headphones matches the assumptions of the competitive market model? In your answer, ensure that you justify your judgements and give your reasoning.