Are Used Mobiles a Giffen Good?
The laws of supply and demand tell us that when price of goods go up, the demand for them goes down. A set of consumers either find substitutes for those goods, or altogether stop consuming towards that need. However, there are some needs for which non-consumption is not an option, such as eating food to survive. For these goods, demand actually goes up as prices go up. Consumers of higher priced goods in the category (meat) come looking for substitutes, whereas consumers of the cheaper goods (staple vegetables and food grains) are unable to find substitutes. These cheaper foods are Giffen goods. Economists worldwide have a renewed interest in this long-forgotten theory (since Alfred Marshall’s 1895 book The Principles of Economics) after two Harvard economists demonstrated in 2007 that rice and noodles in poor parts of China behave as Giffen goods.
At the time of writing this article in Dec 2008, India has over 300 million mobile subscribers and over 100 million mobile handsets have already been sold this year. Mobile phones are found in over 80% households in the major metros and over 55% households nationwide. Currently, 40% of all new mobiles sold in Mumbai are first-timers. There are Indians who do not have reliable access to electricity, drinking water, health-care and primary education but have reliable access to a mobile phone connected to the network. Behaviorally, mobiles have now become an essential part of the earning Indian’s work life; be it a farmer in rural India, a small businessman in semi-urban India or a day laborer in urban India. Mobiles help these citizens stay connected with information and opportunities that trade and employment depends on. Mobiles have found their place as a basic necessity in the life of an Indian.
Mobile handsets in India are dominated by North European, American and Korean brands and Chinese and Taiwanese parts. Even for handsets that are manufactured and assembled in India or close to home, reliance on imported parts has a direct impact on cost-of-goods-sold as the dollar rises and the rupee falls. Earlier in November, the largest mobile handset maker for India – Nokia – anticipated a 15% hike in handset prices for all new models. This price hike will quickly trickle down to the extended food-chain of mobiles in India, where the longevity and re-use of phones and parts is a vibrant and developed economy. Earlier this year, a large mobile retail store had estimated that 1/3rd of all Nokia handsets sold in India are used and sold by unauthorized dealers. Nokia alone sold close to 2.4 million new phones this calendar year (estimated) in Mumbai alone and has 75% market share.
Consumers would find options to buy six-month old phone models at less than half the price of new phone models of the same series. Gray markets that have perfected the art of salvaging mobile parts, then repairing and re-furbishing used mobiles, can expect to get more business from the price-conscious mass of consumers, especially the replacement customer. Due to the dependency on mobiles as a basic necessity, especially for new customers, the consumption of mobiles in the lower-end is unlikely to be impacted by a price hike. Consumers might take the extra effort to find more options that help them save a few hundred rupees on a good deal. Used mobiles will turn out to be a Giffen good.
Inspired by a post by Anand Rajaraman: Is Search Advertising a Giffen Good?
You can call 922-222-1947 to find great deals on used mobiles and other electronics items, connect directly with sellers near you and do phone pe deal. You can also use Chaupaati to directly reach buyers for items that you might want to sell.
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Hi Kashyap,
Interesting post which I must admit I did not read in detail the first time. It lingered at the back of my mind as I drifted about trying to look at mobile services itself (more relevant to my business) in this context.
Here are some of my thoughts: why I feel it’s difficult for any consumer electronics good to be a giffen good:-
1. They go through a life cycle and hence don’t compete with themselves but with newer versions of themselves.
2. Technology = progress and phone manufacturers for the past four quarters (surprisingly for my own investments I have been attending their quarterly calls) have been making continued investments in their ‘India’ and ‘China’ strategies - essentially phones custom designed and manufactured for these markets. Specifically for second hand phones, Motivation is low to sell a phone at a huge discount for the seller and similarly motivation is low for the buyer to buy something at a small discount to a price at which he could buy a brand new phone with better features. Big Bid - Offer spread meaning few transactions occur though a few do go through.
3. You have manufacturers who essentially control the market and are watching the bid-offer spread. Hence if they feel that too many transactions are happening, they could always change the economics and take the bid - offer spread back to a large value.
I suspect this is why we have not seen used mobiles, cars, laptops etc. being sold in some organized fashion.
Contrasting this with Anand’s post:- the big difference is there the person who is controlling the market is google in whose interest it is to make search a giffen good and who does control the economics deciding motivation of the market participants. Here the role is probably that of the manufacturer and who would not want second hand mobiles to become a giffen good. At least at the moment.
However these are interesting thoughts and interesting things to ponder upon. You might have seen that this month has been the first one in which GSM operator additions did not grow. For some, it declined.
I was chatting with a senior executive from the Sales organization of Nokia India, and a senior executive of Unilever the other day. The biggest problem for mobile handset makers in India seems to be price erosion, while the price of (fast moving) consumer goods is rising. Further, the handset makers in India are troubled by the lack of control they have over the large second hand market at the sub-3,000 Rs. price level.
As much as manufacturers might want to control the market, their motivation to feed the need for cheap phones is strongly perceived as cannibalization. They are likely to, therefore, lag behind in meeting market demand for cheap phones. Their goal is to continually offer more and justify keeping the price higher. In a down market, however, consumers will opt for cheaper alternatives if they are available. Unfortunately for the manufacturers, there exist legitimate means outside their control.
I agree that cars and laptops are a different issue altogether.
,..] blog.chaupaati.in is other useful source of tips on this subject,..]