10/12/2020 Assignment No.

01
Apple Watch (A) – The Launch

32.75/40
good

Submitted By: Fawad Azim

23224
Q1. Describe the smartwatch market. (2 points)
a) Who are the buyers? Identify three needs/ wants of the consumers that a
smartwatch fulfills.
Mostly, potential buyers of wearable technology are people who are concerned about
monitoring their health and related activities, and also communications such as send/ receive
notifications without using their mobile phones. The three (03) needs/ wants of smartwatch
consumers are as follows:
1. Personal assistance and information.
2. Medical & Health uses.
3. Wellness, tracking the sleep patterns, nutrition and movements (exercises)

b) Who are the sellers? Identify three sellers and highlight their differentiating
features.
Literally, a seller is an entity, who exchanges any good or service in return for payment.
Whereas following are the smartwatch sellers as illustrated in the case along with some
distinguishing features of three sellers.

S. No. Seller Market Share Differentiating Features (for Only 1st three
(2014) Sellers)
1 Samsung - Heart rate monitoring with super AMOLED 320
42% x 320 resolution.
- First standalone wireless smartwatch
- It can be used independently. Phone is only
required for updates and downloading apps.
2 Pebble - Agnostic approach (unbiased towards the use of
16% any specific OS to solve consumer’s problems)
- Seven (07) Days Battery life.
- Steel and a leather design
- Total control of playing music from a phone.
4 Motorola - The wearer could easily search, tweet, make a
11% call, check messages and send emails using this
smartwatch.
- Google Voice and Google Now functions.
- Round face
- Water resistance
5 Sony 12%
6 LG 5%
7 Misc. Brands 14%
Q2. Choose the right option in the below statements about the
smartwatch industry and explain your choice very briefly. (2 points)
a) Apple watch is a consumer/capital good.
Apple watch is ‘Consumer Good’ as it satisfies the need of a consumer directly and is not used
in future production.

b) Study of the smartwatch industry is a microeconomic/macroeconomic

topic.
This study on Smartwatch industry is a ‘microeconomic’ topic since we are analyzing only the
U.S. smartwatch industry in late 2014.
Q3. The Smartwatch Group predicted 250% annual growth in sales of
the smartwatch industry for several years. The industry sales were low
till middle of 2014 (about 700,000 smartwatches shipped worldwide).
But the sales were expected to surpass traditional watch sales in 2018
and become a six-billion-dollar market by 2020.
Sketch a diagram for (a) smartwatch market and (b) traditional watch
market to reflect the above scenario i.e. reflect the growth from 2014
to 2020. State your assumptions. (3 points)
Note: No need to mention specific number of units/dollars.
1/3
(a) smartwatch market you should have shown demand/supply for each market
Year 2014 2015 and then 2017
2016 shift demands according to2019
2018 the information

Sales 700000 1,750,000 4,375,000 10,937,500 27,343,750 68,359,375

Smart Watch Market Sales Growth

80000000
70000000 68,359,375
60000000
50000000 10,937,500
40000000
4,375,000
30000000
20000000 1,750,000 27,343,750
10000000 700,000
0
2014 2015 2016 2017 2018 2019

Year Sales

(b) Analysis for traditional watches;

Considering a significant increase in the sale of smartwatches, it is expected that sales of
traditional watches will decline. Because they are substitute products.
 Q4. Explain, using a demand-supply diagram, the “complementarity
between smartwatches and phones”. How are the “attributes and
pricing of accessories such as smartwatches a key weapon in the
mobile phone competitive battle”? (3 points)
graph of compliment (showing
movement along the curve) missing
2/3
Y Effect on Demand Curve due to increase in
D prices of Complimentary Goods.
D1
Demand curve of Smartwatch shift towards
left from D to D1 due to increase in price of a
complementary good (i.e. Phone) at the same
P
price.

D
D1
X
O Q1 Q

Price of an accessory is an important key weapon in the mobile phone competitive battle.
This is due to the fact that accessories are complementary goods for mobile phones. In case
the prices of accessories increases, the demand of associated phone devices will decrease. In
2015, CEO of Samsung has also acknowledged that 20% of smartphone users are willing to
switch b/w IOS & Android due to the change in prices of accessories. Example of a
smartwatch is best suited for the same.
Q5. Consider Figure 1 on Page 5 of the case study which shows the
Apple Watch pricing strategy and answer the following questions. (7
points)

a) What is/are the dependent variable/s in the model?

Quantity demanded of the Apple Watch per week is the dependent variable

b) What is/are the independent variable/s in the model?

Following the independent variables:
- Price of Apple Watch
- Price of Samsung Gear S Watch
- Price of Pebble Steel
- Price of mid-range IPhone 6 smart phone
- Quarterly targeted advertising budget.

c) Explain the “sign” of the coefficients of the following variables i.e.

explain why the coefficient of the variable is negative or why it is
positive? Use the right terminologies. 2/5
in ii - iv, should have mentioned substitute/
i) PAW has inverse relationship with quantity demanded ascompliment
the price of Apple Watch increases
quantity demand decreases.
ii) PGearS has a positive relationship with the quantity demanded as the price of Samsung Gears
S watch increases the quantity demanded also increases.
iii) PPebble has a positive relationship with the quantity demanded as the price of the Pebble
Steel increases the quantity demanded also increases.
iv) PiPhone6 has inverse relationship with quantity demanded as the price of the mid-range
iPhone 6 Smartphone increases quantity demand decreases.
v) A has a positive relationship with the quantity demanded as the quarterly targeted
advertising budget for the Apple Watch increases the quantity demanded also increases.
6. USE MICROSOFT EXCEL FOR THIS QUESTION
Consider the scenario that the Apple team had contemplated with the
following variable values, prior to the launch.
Q = -150,000 - 2400(Paw) + 1520 (P gears) + 1200 (P pebbels) - 1200 (P iphone6) + 44 (A)

a) Calculate the QAW, using the above values and the demand function in Figure
1. (1 point)
Q aw = -150000 - (2400*349) + (1520 * 380) + (1200 * 220) - (1200 * 299) + (44 * 15500)
Q aw = 177200

b) Calculate QAW only changing PAW to values given in the table. This means
keep PGearS , PPebble , PiPhone6 and A fixed. (2 points)
PAW 300 310 320 349 350 360 380 390 400

QAW 294800 270800 246800 177200 174800 150800 102800 78800 54800

c) Using the table above draw a demand curve (use MS Excel line chart option).
Take QAW on Y-axis and PAW on X-Axis. Like a typical demand curve, your curve
-.25 ais not properly labelled
should be downward sloping. (3 points)

Demand Curve
350000
300000 294800
270800
250000 246800

200000 177200
174800 150800
150000
102800
100000 78800

50000
54800
0
300 310 320 349 350 360 380 390 400

QAW PAW
d) For each of the situations below, explain the effect on the demand curve i.e. is
it a movement along the curve, a rightward shift, or a leftward shift? (10 points)
Calculate the change in QAW and label the variable as New_QAW. Use the same
range for PAW i.e $300- $400 to draw an updated demand schedule. Graph a new
demand curve (if there is a shift). Keep all other variables, except the one
mentioned, as fixed. For example, in (b) only PGearS changes to $400, rest of the
values remain as given above i.e. PAW = 349, PPebble = $220, PiPhone6 = $299,
A=$15,500
i) Increase in price of AW from $349 to $400
No change in demand curve, the change will be along the curve.

ii) Increase in price of Gear S from $380 to $400

P aw 300 310 320 349 350 360 380 390 400
New _Q
325200 301200 277200 207600 205200 181200 133200 109200 85200
aw
Q aw 294800 270800 246800 177200 174800 150800 102800 78800 54800

Increase in price of Gear S from $380 to $400

350000
300000
250000
200000
150000
100000
50000
0
P aw 300 310 320 349 350 360 380 390

P aw New _Q aw Q aw

In case of increase in price of Gears from 380to 400, Demand of Apple watch will increase
because Gear S is a substitute product for Apple watch.
iii) Decrease in price of Pebble from $220 to $150
P aw 300 310 320 349 350 360 380 390 400
New
210800 186800 162800 93200 90800 66800 18800 -5200 -29200
_Q aw
Q aw 294800 270800 246800 177200 174800 150800 102800 78800 54800

Decrease in price of Pebble from $220 to $150

300000
250000
200000
150000
100000
50000
0
300 310 320 349 350 360 380 390
-50000

P aw New _Q aw Q aw

In case of decrease in price of Pebble from 220 to 150 $, Demand curve for Apple watch is
shifting leftward.

iv) Decrease in price of iPhone6 from $299 to $250

P aw 300 310 320 349 350 360 380 390 400
New _Q aw 353600 329600 305600 236000 233600 209600 161600 137600 113600
Q aw 294800 270800 246800 177200 174800 150800 102800 78800 54800

Decrease in price of iPhone6 from $299 to $250

400000
350000
300000
250000
200000
150000
100000
50000
0
300 310 320 349 350 360 380 390 400

P aw New _Q aw Q aw
 In case of Decrease in price of IPhone 6, the demand curve will shift toward leftward because
IPhone 6 is a complementary product for smartwatch.

v) Increase in Advertising budget from $15,500 to $ 17,000

P aw 300 310 320 349 350 360 380 390 400

New _ Q aw 360800 336800 312800 243200 240800 216800 168800 144800 120800

Q aw 294800 270800 246800 177200 174800 150800 102800 78800 54800

Increase in Advertising budget from $15,500 to $ 17,000

400000

350000

300000

250000

200000

150000

100000

50000

0
300 310 320 349 350 360 380 390 400

P aw New _ Q aw Q aw

In case of increase in Advertising Budget, Demand curve will shift rightward.

8. Do you own a smartwatch? If not, find a friend or family member
who does. Ask yourself/them following questions. (3 points)

a) Which smartwatch brand do you/they have?

Huawei

b) What price did you/they buy it for?

US$ 100

c) What was your/their budget constraint when buying the watch?

US$ 75-$150

d) What was yours/their opportunity cost in buying the watch?

Explain in terms of what you/they gave up to buy it.
Wanted to buy Adidas Shoes but gave them up due to constraints on budget

e) Why did you/they choose the brand you/they did? What were the
“substitutes” or “complements” involved in the purchase decision?
Good renowned world-wide brand at a more affordable price compared to other well-known
brands like Samsung/Apple

f) Would you/they want to buy an upgrade when it is released?

May be

g) If yes, what is your/their reservation price for it? If no, why?

Will see, depends on the upgrade, I am happy with the features available in the current
version and would not want to invest more money in this gadget
h) The watch can most likely be resold. How much can you/they resell
it for? (If you/they don’t know exactly, come up with a reasonable
estimate, for example 60% of the original value)
Perhaps 75% of the original value

i) If you/they don’t sell it, what is the opportunity cost of keeping it?
Further delay in the buying decision of Adidas shoes -1
OC is the resale value forgone if watch is
kept