The Impact of iPhone Exclusivity Arrangement on Demand for Smartphones

In this paper, we examine how an exclusivity agreement between Apple and wireless carriers in six developed countries affected the purchase of iPhones. Under this arrangement, one wireless carrier in each country became the exclusive distributor of the iPhone for a given period of time. The restriction would lead to a bounded choice set of consumers attached to non-exclusive carriers and thus would affect their choice of smartphone. To measure how this limited access to the iPhone would affect smartphone sales and consumer welfare, a structural model of consumer demand is developed and applied to a unique data set comprised of a panel data of mobile handset sales for a five-year period from 2008 through 2012 in the six countries considered. The model accounts for the possible endogeneity of the exclusivity duration, for heterogeneous consumer taste, and for variations in iPhone availability across consumers. The parameters estimated by this model suggest that the exclusivity arrangement ultimately resulted in a significant reduction in iPhone sales and an overall loss in the sale of all smartphones. Specifically, while it was estimated that the exclusivity arrangement would lead to a decrease in iPhone sales of approximately 26.2 million and an increase in the sale of other smartphones of only 15.1 million in the six countries. Our results also suggest that although the restricted availability of the iPhone may have led to a substantial reduction in consumer welfare, a revenue-sharing agreement between Apple and the wireless carriers may have mitigated the company's loss of profit.