'iPhone 5s costliest in India', but don't read too much into it

Recently, a website created the iPhone 5s price index, a tool that compares various countries where the phone is available based on the percentage of the nation's average income that would be required to buy an unlocked 16GB iPhone 5s.

According to MobileUnlocked, the iPhone 5s costs $707.4 (including taxes) in the United States, which means the iPhone index in the country is 1.4. In other words, you would need to spend 1.4 percent of the American GDP (PPP) per capita (average American's income, in simpler terms) to buy Apple's flagship smartphone. Similarly, the index is 2.5 percent in the United Kingdom and while the exact percentage varies as the currencies fluctuate, it is more or less similar in other Western European countries. In China it is 9.6 percent and the index is even higher in lesser developed countries, with a maximum figure of 22.7 percent in India.

One interpretation that has been made by the likes of Washington Post and Guardian, which got picked up by Indian media as well, is that the iPhone 5s is more expensive in India than anywhere else in the world, even though the phone costs over US$ 1,000 in Hungary, Romania, Turkey and Jordan compared to approximately US$ 860 in India, due to its relative cost when compared with the average income.

Additionally, this index has been likened to the Big Mac Index, which was developed by The Economist in 1986 to reveal whether any given currency is under or overvalued by measuring the purchasing power parity (PPP). The Economist does this by simply comparing the prices of McDonald's flagship Big Mac burger across countries. However, there are reasons to be cautious while interpreting the iPhone index in a similar manner.

There is very weak correlation (of only 21%) between the two indices, which indicates that there is no consistency between the ranks of different countries between the two indices. More importantly, even though the iPhone is a homogenous commodity unlike the Big Mac (the Big Mac burger is modified to suit local culinary habits in different countries), it is not produced in every country. The phone is assembled by scouring components and raw materials from various countries, and thus does not uniformly incorporate the labour and capital costs of individual countries.

On the other hand, this index cannot be used to confidently assert that the iPhone 5s is costlier in India than elsewhere due to the very nature of the product and industry. Apple operates in a market, which in terms of competition is somewhere between monopoly and the mythical perfect competition. This is because while Apple's smartphones may have competition from other smartphones, what the company produces is unique in terms of its form factor, operating system and ecosystem, allowing Apple to charge a premium on its products.

As a consequence, Apple, like many other manufacturers, strategically prices its products depending on what its market intentions are. In the United States, for instance, their idea is to capture the market with their flagship smartphone, because, after all, the road to global smartphone dominance runs through the United States. iPhone 5s prices (in absolute terms) are thus the cheapest in the US at US$ 707.4, which are intended to target the average American resident.

In countries like India and China, the story is significantly different. The target is not the average Indian or even the average resident of a big city (a city such as Delhi has a per capita income which is more than twice as high as India's average). The target is those belonging to the richest monthly per capita expenditure class (often called the highest MPCE class) in the urban centres of India. For this reason, a simple price comparison to the per capita income of India does not reveal the affordability of the phone to the targeted classes in India.

Apple's India strategy has recently evolved to make an older model - the iPhone 4S - as their entry level phone, thus possibly intending to slash its prices to better compete with rival phones. However, even this phone is probably not intended to capture pan-India markets and instead focus on mid to high MPCE classes.

Thus, market strategy plays a big role in determining the prices of a luxury product such as an iPhone, when compared to, say, a burger, whose prices are far more sensitive to local production factors. Therefore, one needs to be careful with the inferences that are drawn from such an index.

The author would like to thank Aayushi Awasthy for her inputs.

Siddharth Singh (@siddharth3) works an economic analyst with an emerging markets consultancy and is an editor at InPEC, an online social sciences magazine.