The Profit Paradox at play with the iPhone mini 14

The Looming Demise of the iPhone mini - MacSparky:

The part that gets me is that they really shouldn’t be forced to make a decision. Isn’t Apple selling enough iPhones that they could afford to sell small, medium, and large versions of the pro and non-pro phones? You’d think they could make that work, but, for whatever reason, they are choosing not to.

David Sparks take the customer-centric Apple question, but the answer is business-centric.

I’m an owner of an iPhone 13 mini who is also currently reading The Paradox of Profit by Jan Eeckhout. As well as being a fascinating book in general, it also provides an excellent framework to answer the question about why there won’t be an iPhone 14 mini, posed by MacSparky, despite the fact they could.

Apple is a company that has market power. A company with market power will produce less, in the interest of profit.

If Apple were to produce more iPhones (and the mini, specifically) it would result in lower profit margins. iPhone minis have been sold at a lower price than other iPhones. What incentive does Apple have to continue selling something that doesn’t boost their margin? Companies continue to be incentivised to deliver profit; not the best market outcomes. They also wear the cost burden of another manufacturing line to maintain, for little benefit to the business.

As much as we Apple fans like to deify Apple Inc., they remain a corporation with shareholders who look to quarterly earnings reports and admire the gross margin the company delivers, which flows through to the bottom line, and thus dividends.

Producing an iPhone 14 mini might please a few million customers, but the economic incentives at play are perverse. Therefore, they will not make an iPhone 14 mini, and be rewarded for this action with greater profit margins.

Apple has sufficient market power such that would-be buyers of iPhone minis will not depart the iPhone brand in favour of Android, or another option (which there really isn’t, which introduces a whole other problem of there being a platform duopoly). What the customer will do is buy a higher priced iPhone that delivers better margins to Apple.

Therefore, Apple will be rewarded for producing less, at higher prices.

I highly recommend The Paradox of Profit to others who have an interest in macroeconomic theory.

Andrew Canion @canion