Inkjet Prices, Printing Costs and Consumer Welfare
Larry F. Darby
Stephen B. Pociask
November 19, 2007
Inkjet Prices, Printing Costs and Consumer Welfare
Larry F. Darby
Stephen B. Pociask*
With the spread of computers into the average household, the costs of related technologies have become a source of rising concern to consumers. For instance, consumers are increasingly aware and concerned about the cost of using their computers, including the costs of software, maintenance and technical support and Internet services. In particular, there is increased awareness of computer printing costs reflected in the costs of inkjet printers and ink cartridges.
Inkjet printer prices appear in some senses to be affordable, even declining over the years as the number of features and functions have increased, much in line with other kinds of consumer electronic equipment. However, some consumers have expressed dissatisfaction, alarm and frustration over the price of inkjet printer ink cartridges. Since these cartridges are seldom interchangeable between printers, there appears to be diminished price competition in the inkjet cartridge market. This study analyzes markets for inkjet printers and inkjet ink, as well as the prevailing market dynamic influencing the level and structure of prices facing consumers.
Inkjet printers are priced with little or no margin and, according to some authorities, well below cost in many cases. The immediate result is to impede market entry. In turn, inkjet printer ink cartridges are priced inordinately high in most cases, as a means to compensate for low or negative printer margins, consistent with the well-known razor/razor blade model, wherein the durable assets (razors or printers) are sold below cost and “consumables” (blades or ink) are marked up substantially. Anecdotal evidence suggests that consumers are trapped by the purchase of low priced printers that lead to substantially higher ink usage costs down the road. The application of that pricing model is a profitable one for manufacturers of the linked products, but it costs consumers more in the long run.
The problem, in substantial part, is that consumers do not have readily available the information they need to make rational cost-comparative choices among printer manufacturers. For example, consumers are well-informed of the upfront cost of the printer, but it is harder to find the information necessary to determine ink costs per page, which are the major components of variable and total lifetime printing costs. Lured by the low cost of printers, consumers wind up signing what is effectively a long term lease for the purchase of higher priced ink. Producers are aware of the costs and margins for both printers and ink. Consumers are not. This asymmetric information serves the interests of producers, but not those of consumers. The overall impact of current pricing practices in the context of inadequate consumer information about total printing costs over the life of the printer is a transfer of economic wealth from unwary consumers to suppliers of printers and ink. Inadequate consumer information also serves to heighten barriers to entry of firms with more consumer-friendly pricing strategies and propositions.
The razor/razor blade model is used in different industrial and commercial contexts. It is not per se objectionable from a consumer or a competition policy perspective. Where consumers have competitive options and sufficient information to weigh their merits in terms of consumer welfare, there is no basis for consumer concern. However, where neither intensive competition nor necessary information is present, consumer welfare is adversely impacted.
More competition is helpful at the margin of course, but it is most helpful in increasing consumer welfare where the added competitive pressure is fueled by better products and, most importantly, better information about the costs and benefits to consumers of choosing among market alternatives.
Market alternatives convey value to consumers, but the value of competition and product alternatives for consumers is attenuated if consumers have insufficient information to choose rationally among them. Monopolistic competition, that is rivalry among branded goods and firms with some market power, becomes more and more efficient as and when consumers are able to compare on an equivalent basis the products offered by suppliers with market power owing to brands, first mover advantages and others. In that respect, the available evidence and this study’s analysis suggests that competition in the inkjet printer and ink sectors is not as intense as it might be, if consumers were made more aware of the cost implications of their printer choices. Potential impediments for maximizing consumer welfare and “red flags” in the printer and ink sectors include:
· High seller concentration in the industry;
· Imperfect information-based barriers to entry;
· Rising inkjet cartridge prices;
· Supernormal inkjet profits for integrated suppliers;
· Reduced consumer demand and use of printers and ink; and
· Overall reductions in consumer welfare.
Competition is present, but can and should work better on behalf of consumers. Providing consumers with better information would allow them to make choices that suit their printing needs and minimize their costs for doing so. That, in turn, would provide added discipline in the marketplace and encourage price competition that results in lower consumer costs for the combined purchase of the inkjet printer and its corresponding ink. In that general context, this study estimates that increasing consumer information and competition would avail sizable consumer welfare gains, conservatively estimated to be $6 billion per year once increased competition is fully realized in the marketplace.
The study concludes with a recommendation for a standardized product label that would permit consumers to rationalize their purchases on the basis of accurate information about the expected cost of ink per printed page. Markets fail to the extent that consumers are poorly informed about the value to them of alternatives. By providing this information to consumers, competition would be intensified, consumer costs for ink would decline and consumer welfare would increase – all without imposing regulatory burdens on the industry.
Inkjet Prices, Printing Costs and Consumer Welfare
A. Introduction and Purpose
Improvements in computer technology have enabled rapid growth in the number of homes with computers and a companion need for printers and ink. About three out of four American homes have a PC. The ratio is higher for homes with children. Some homes have more than one computer. Markets for printers and complementary products have grown and diversified enormously in recent years. Consumer choice has expanded to embrace wide ranges in price, functionality, quality, and assorted minor and major product differentiating characteristics. As detailed below, annual expenditures on printing systems are substantial. For the ordinary household, choosing among competing systems is both a complex and potentially costly undertaking.
The purpose of this paper is to explore pivotal economic aspects of the printer and ink industry as they impact the number, prices and qualities of consumer alternatives, and through them, overall consumer welfare. Section B is an overview of the printer and ink markets. It uses publicly available data to characterize their structure and participants, and to establish context for subsequent analysis. Section C addresses well-known razor-and-razor blade pricing strategies within which a vertically integrated vendor sets a relatively low price for a durable good (like a razor) in order to increase the demand for disposable consumer goods (like razor blades). This section establishes a foundation for subsequent analysis of similar pricing practices in printer and ink markets. Section D addresses the structure, conduct and performance of printer and ink markets. It emphasizes the contribution of information asymmetries to high seller concentration, barriers to entry, pricing practices and supernormal profits enjoyed by vertically integrated incumbents. Section E estimates the consumer welfare losses that result from the application of the razor and blade pricing model to printers and ink and focuses, in particular, on losses in consumer welfare from high ink cartridge prices. Finally, Section F discusses some implications for consumer policy.
B. Overview of Inkjet Printer and Ink Market
The market for printers is tied to the growth and replacement of the installed base of computers, as well as to changes in companion markets for software, applications, and equipment such as cameras and other imaging devices. While important, these matters alone account for only a relatively small part of the overall structure and dynamic of printer markets. Printers are used for a variety of purposes by different kinds and sizes of users ranging from giant corporations, through small and medium enterprises or institutions, to users in small or home offices, to plain old household uses by consumers and families. The market printing products is in fact made up of submarkets divided by a) technology – basically inkjet versus laser printer, b) type of product – the printer, ink and paper, and c) size/character of user – small volume users in small businesses and households versus high volume use by large business and institutional users.
As with other sectors in the broad information technology space, at any given time the market for printers reflects a complex vector of techno-economic forces shaping demand and efforts of established and new firms on the supply side to adapt to and profit from those changes. An important element of printer markets, and one it shares to some extent with other information technology markets, is its intimate relationship to markets for complementary goods like computers, but also more intimately with complementary products like ink and to a lesser degree paper.
By some estimates the worldwide digital printing market exceeds well over $100 billion. The inkjet printing industry accounts for approximately $50 billion of that amount. About half of the inkjet market is for equipment and the other half is for inkjet sales (predominantly ink cartridges). By another estimate, worldwide inkjet ink revenues account for $30 billion dollars, with 78% of sales by printer manufacturers and the remaining 22% share by refillers. Based on the relative share that the U.S. market comprises in similar IT products, the size of the U.S. share of the inkjet market is approximately one-third the size of the worldwide market.
Market Characteristics. Markets for printers and ink are divided along lines that reflect users’ ability to pay, volume requirements, speed, overall quality, specific user-sensitive characteristics, and, of course, the threshold cost of the primary durable asset – the printer. Small and medium-sized businesses and institutions comprise a market subset, as do small and home office businesses. The consumer market for noncommercial uses in domestic households is a third subset. While the lines may blur in particular circumstances, the divisions are workable for most business planning purposes and research analyses.
There are numerous printers on the market. They are marked by substantial multidimensional product variation. There are inkjets, laserjets, single, dual and multiple purpose platforms, multi-function peripherals (MFPs), some monochrome and others with varied color capability. Prices start at less than $100 while 30 models are priced at $2,000 or more.
In its reviews and tests of printer options in the US market, PC magazine listed 159 inkjet types, 77 of which were “standard all-purpose”, 46 of which were “photo all-purpose”, and 36 of which were “dedicated photo” printers. The magazine listed 185 printers selling for $200 or less. Seven firms provide 25 or more versions: HP leads with 114, followed by Canon USA with 81, Lexmark International with 61, Epson America with 42, Xerox with 27, Brother International, LTD with 26, and Dell with 25. Twenty or so other companies offer about 100 other versions among them.
Printer suppliers typically provide ink cartridges, originals as well as replacements. Several other suppliers offer compatible, new or recycled replacements, as well as bulk ink for refills. There are also active markets for assorted other complementary goods, including maintenance supplies, replacement parts, refilling hardware, memory, paper products and accessories.
Key Market Dynamics. Following a period of rapid growth the inkjet printer and accessories segment appears to be maturing as new installations decline and replacements take on a more important role. This is especially true in developed economies bordering the North Atlantic. Much of the global growth will most likely take place in Asia and south of the equator. While technology is always evolving and surprises may be in store, all signs indicate modest marginal impacts of technology in the near term.
Trends of consequence include replacement of single function printers with MFPs capable of copying, faxing, and/or scanning in addition to printing; shifts from monochrome to color; declining installed base of single function printers as a reflection of both market maturity and substitution of MFPs; reductions in the average price of cartridges; a leveling or decline in the quantity sold of inkjet printers and cartridges as measured by the number of units, while revenue may well decline faster as prices fall; continued growth in color printing, much of it photo-driven, at rates reflecting replacement of monochrome systems whose growth will fall. Original equipment manufacturer (OEM) cartridges account for over 78% of total cartridge revenue and there is no strong indication of redistribution to other sources, aftermarket cartridges or refills, in the near term.
Review of market data yields assorted and conclusive indications that consumers are not fully informed about the overall value propositions offered by printer/cartridge packages. This raises important questions about the extent to which consumers understand and act rationally in trading off initial printer costs vs. future cartridge or per page printing costs in ways that `minimize total printing costs.
U.S. Market for Inkjet Printers and Ink Cartridges. Printer market sizes may be variously estimated, depending on a) the metric used to measure them and b) the scale and scope of the definition adopted for reference. Thus, markets may be sized by the number of units (shipments) or by revenue. Each has some (dis)advantages, depending on the use of the numbers. Differences turn on changes in the structure of prices and composition of output. Market definitions may include printers of all kinds; from all vendors; for all countries/regions; or, in all price ranges. Or, the definition may be limited to simple or complex subsets of these characteristics.
According to Gartner, Inc., worldwide page printer shipments (of all kinds, by all vendors) exceeded 21.4 million units in 2005, an 18.6 percent increase from 2004 shipments of 18.1 million units. Gartner explained the source of growth is related to both pricing and the growth of small and medium-sized businesses. According to Gartner: “Vendors experienced significant growth in the color page printer market due to aggressive pricing, as the average selling price of these devices declined 21 percent in 2005… Monochrome page printer shipments remain strong due to the growth in small and midsize business (SMB) and remote workers that need inexpensive printers.” Again, global growth is uneven, inasmuch as mature markets are growing at relatively low rates, while markets in the developing world are growing much faster. Overall, U.S. inkjet printer sales appear to have been down in recent years and are likely to be flat at current price levels.
Prospects in the ink cartridge market are a bit different. Based on varied sources, worldwide inkjet cartridge revenue is at or above $30 billion and growing. The North American share is one-third or more and falls in the range of $10 billion to $11 billion per year. In terms of cartridges shipped, TechWeb cites Lyra Research and estimates 1.5 billion units total inkjet cartridges shipped worldwide in 2006, including 514 million in North America. At $20 per unit, that is around $10 billion, which is consistent with other estimates. As previously noted, about 78% of ink for inkjet is purchased through aftermarket OEM sales and the remainder is purchased through retail generics, refillers, remanufacturers and do-it-yourselfers.
C. The Inkjet Market: “Razor-and-Blade” Pricing Practices
Pricing practices of incumbents who integrate the supply of printing machines and ink for them are often likened to the so-called razor-and-blade pricing strategy. The name derives from the practice of the inventor of disposable razor blades, King Gillette, who commenced more than a century ago the marketing practice of selling the permanent platform (razors) at below cost and the consumable complement to the platform (blades) at a significant mark up over cost.
Dimensions of the Razor-and-Blade Pricing Model. The basic economics of the razor-and-blade pricing model derive from a combination of interrelated phenomena: a) product complementarity, b) switching costs, c) consumer lock-in and d) information asymmetry. Taken together these relationships in printer and ink markets give rise to market imperfections that diminish consumer welfare.
Products are complementary when the value of one is related closely to, or entirely dependent on, the presence of another. Printers and ink, peanut butter and bread, left and right shoes, computer hardware and software exhibit complementarity of differing degrees. Consumers may be locked in by complementarity. The lock-in may be absolute or relative and depends on the magnitude of switching costs.
Switching costs refer to inconveniences, out of pocket expense, lost opportunities and other costs incurred by buyers as a result of changing from one supplier or product to another. These may be small, in the case of switching from one brand of tea to another, or large, as in the cases of switching computer operating systems, switching broadband providers, switching printers or switching any other durable asset that is linked to another good or service through complementarities in use. High switching costs make it difficult for new firms to win customers from incumbent providers and thereby increase market security and profits of incumbents. Switching costs may lock-in consumers to an inferior product offering by adding to the cost of finding and substituting a better one. Such is the case when owners of particular durable goods, like razors and printers, are tied to the purchase of complementary consumables, like blades or ink, by the fact that using other blades or ink will most likely require incur costs of switching to another type of durable asset (razor or printer.) The greater the cost of switching, the more binding the tie.
The razor-and-blade model itself is widely applicable. It can be observed in markets as widely varied as mop sticks and mopping devices; computer operating systems and applications; game devices and games; cell phones and wireless network services; coffee makers and filters; cameras and lenses; and others that link primary and secondary products. If the products are operable only with each other, then consumers can break the lock and access alternative secondary products only by purchasing another primary product (mop handle, operating system, razor, game platform device, coffee maker or camera). The obstacle to doing so is the cost of switching, which may be high or low depending on, among others, the price of the new product, the age of the old, the cost of complementary products for both products, and the availability or cost of acquiring information about the lifetime costs of the services yielded by the tied products.
The Razor-and-Blade Pricing Model in Markets for Inkjet and Ink. It is well documented that incumbent printer makers (HP, Epson, Canon, Lexmark and others) variously rely on the razor and blade pricing model, and that ink profits offset losses or low margins on printers. The Wall Street Journal recently wrote:
Printer makers, led by Hewlett-Packard Co., have long used the razor-and-blade pricing model, in which the hardware is sold for little or no profit. They derive most of their profits from ink…
The President of Lyra, a research firm specializing in printer market analyses, recently explained with an illustration:
A company sells a $100 inkjet printer and loses $30 or $40 on the sale, but every few months the consumer buys a new cartridge and the manufacturer makes ten dollars or so. After 199 days, profit from the cartridges has made up for the loss on the printer, and after three years, the manufacturer has run up a tidy $160 profit.
Along the same lines, a recent MSNBC reporter observed:
[Analysts have been concerned about] HP’s Imaging and Printing Group, a closely watched division that includes the high-margin inkjet cartridges that have been long been the company’s cash cow.
Information, Efficient Consumption and Consumer Welfare. The razor and blade model is of no concern in highly competitive markets where consumers are fully and accurately informed about competitive products and prices. Readily available product information allows consumers to make decisions that suit their needs. For instance, if consumers are aware of the price of blades, when considering the purchase of a razor, they have the information necessary to make an informed judgment about total, system costs over time in the context of their individual budgets and usage patterns.
With full price information about both products available at the time of purchase of the durable razor, consumers can also compare razor prices, blade prices and long term system prices across brands. So informed, consumers can seek out products that suit both their needs and budget constraints. Clearly, the ability to do this kind of comparison shopping requires readily available information for both products. In the absence of information, consumers can make poor decisions that will not maximize their welfare. Also, the lack of information reduces market rivalry and lessens price competition in markets for ink. Consumers are better able to shop, compare prices and make purchases that best suit their needs when information about products and services are symmetric in the sense that buyers and sellers have access to the same product and price information.
Consumers may be disadvantaged by imperfect or asymmetric information when sellers have more and better information than buyers. Unlike consumers in the textbook models of competition, consumers generally have an incomplete or inaccurate understanding of facts material to a particular choice. At the time of purchase, consumers may not be fully informed about the full costs of using durable assets – including the costs of repair, depreciation and maintenance, and, in particular, the costs of complementary products or services needed to use the asset. The costs of acquiring pertinent information –search costs– are often substantial. Rather than bearing search costs, the outcome of which is not predictable, consumers often buy products about which they are poorly informed.
Vendors’ Views of Printer and Ink Pricing. Producers and consumers see pricing practices from different perspectives. It is useful to consider the producers’ view as a first step toward understanding consumer welfare aspects of current practices.
The business objective for the integrated producer is to maximize profits from the combined sales of printers and ink. Depending on conditions of demand and supply, this need not require making a profit on both. Rather market conditions may allow for producers to stimulate the demand for printers and ink through below-cost pricing leading to economic losses for printers, which losses are more than recovered by exercising market power by raising the price of ink.
While this section explores and summarizes the printer/ink business model, Appendix I includes more detail and a graphical analysis. In essence integrated producers can and do increase the demand for ink, the downstream complementary product, by stimulating the demand for printers. The printer is the durable good and ink is the consumable. They are linked by the lack of full operability between printers and different cartridge brands. Printer demand may be stimulated through product variation and advertising, as well as by way of various forms of price discounting. Successful promotion means higher printer sales which increase demand for the downstream product, ink. This increase in demand for ink in turn permits firms to raise price and increase ink profits. Higher profits are attributable to one or both of the following conditions: a) barriers to entry into the sale of ink, b) imperfect consumer information about lifetime (printer plus ink) costs at the time of printer sale. It is possible to profit overall, even if printers are given away.
It is useful to defer for now the consumers’ problem – that is, figuring out how best to maximize their welfare given: a) the pricing practices described above and b) available information about price, quality and other attributes of printers and printing ink. We continue next to explore the economics of the supply side of the market, before returning in Section E to analysis of the implications for consumer welfare.
D. Structure, Conduct and Performance in Markets for Printers and Ink
Previous sections have discussed razor-and-blade pricing principles in general and more specifically how and why they might be applied in markets for printers and ink, where consumers are not fully aware of the life-time cost implications of their choices. The analysis suggests that consumers may be harmed by razor-and-blade pricing practices, particularly if the industry shows signs of market power and imperfect information is available to consumers. If the market is not fully competitive and subject to barriers to entry, uninformed consumers may be unprotected.
This section will present and discuss selected industry data within the broad structure, conduct and performance framework long used as a descriptive tool by industrial organization analysts. The section begins by considering conditions of entry and concentration in the market, then turns to various aspects of market conduct and performance in dimensions related to product design, prices, quantities sold currently and in the future. It concludes with a review of the level and structure of profits harvested by incumbents.
Conditions of Entry – Printers and Cartridges. Incumbent vendors enjoy a first mover advantage derived from the facts: a) that printers are durable and b) that consumers are not inclined to scrap a printer before the end of its useful life, even if a superior alternative is introduced. The true consumer cost of buying a new printer must reflect both the price of the new printer and a share of the price of the old printer which is to be scrapped while it has useful life. The newer the installed printer the higher are costs of switching and therefore the greater the disincentive to buy a newer, cheaper or better one. In this context selling printers at below cost creates a larger installed base and hence a larger barrier to new entry into printers and printing products.
Entry barriers into the printer manufacturing business are moderate by the standards of medium to large scale manufacturing enterprise in the United States. State of the art printer technology is well known and essential aspects of it are in the public domain. Economies of scale are modest relative to the size of the market, so that a large number of firms can achieve minimum efficient scale. There are no insurmountable or even substantial, sunk cost barriers to a potential entrant. High ratios of fixed to variable costs that pose entry barriers in other industries do not do so here.
Brand, access to distribution channels, and related first-mover advantages appear to be the basis for cost advantages of incumbents over potential entrants. But, these would most likely be surmountable, albeit with some cost disadvantage to incumbents, if the long term value proposition and short term margins in the sector were attractive. By all accounts neither is the case and for reasons related to market strategies of incumbent suppliers (to be discussed further below).
The second barrier to entry – into the market for the secondary good — occasioned by the sale of a durable primary good is, however, the source of more concern and potential adverse impact on consumer welfare. The sale of a primary product tends to link consumers to the secondary product of the same manufacturer, since printers and cartridges made by different manufacturers are not fully interoperable and many consumers are not aware of the limited opportunities to use third-party ink refillers. The strength of that link, and the cost of overcoming it by potential entrants, is an indication of entry barriers into the secondary market.
Barriers to entry into markets for printer cartridges are, therefore, quite another matter. Current pricing practices, operating margins and the long term value proposition in the printer ink market (both discussed in detail below in sections on market conduct and market performance) are by all indications attractive to entrants. And, their source and persistence over time appear to pose significant entry barriers into the printer ink market. Such barriers include patent protection of certain kinds/types/variations of ink; lack of interoperability of different ink platforms with the installed base of printers and additions thereto; and current marketing practices of incumbents related to potential distribution outlets for third-party cartridges. As detailed further below, current margins are attributable to these practices, and it also appears that the same practices result in raising entry barriers to new firms attracted by those margins.
The lack of interoperability between a particular printer and cartridges produced by others creates a tying or locking-in effect between the two products for an integrated producer. Tying or locking-in is not uncommon and there is nothing illegal per se about the practice. Depending on the context and details, the practice may increase or reduce consumer welfare. The practice does create entry barriers and conveys market power in the sale of secondary, complementary products on the seller of the primary product.
Suppose, as the razor-and-blade model implies, that the primary product involves some significant one-time outlay (call it a consumer investment) for a durable good that will last for some considerable period of time. The lifetime utility to the consumer of the investment in a durable good, like a printer, depends in the first instance on its price, but also its expected lifetime, other product qualities, and very importantly on the price of the secondary or complementary good needed to utilize it. Entry barriers in this example are created in markets for both the primary and secondary good. Having purchased a durable good, consumers are not inclined to scrap it and buy another right away inasmuch as doing so means writing off and sustaining losses from the initial outlay. Thus, the initial seller has acquired a first mover advantage that is a barrier to others selling to the consumer a competitive primary product during the useful life of the initial product. That of course is an artifact of the sale of any durable good. The extent to which it harms consumers depends on particular market circumstances.
In summary, the market can be characterized as one with moderate barriers to entry with important economic consequences for consumers.
High Seller Concentration. The inkjet printing market is highly concentrated, which tends to confirm the presence of economies of scale or other barriers to entry. High concentration may also pose substantial risks for consumers. At various times over the years, HP has reported itself as the dominant player in the inkjet market. Consistent with those claims, the chart below provides more current market share figures (in terms of units sold) for the inkjet market and indicates that HP is still the dominant provider and far above its nearest rival.
Since HP enjoys higher average revenue per printer unit shipped than its rivals, estimates based on inkjet revenues would likely show an even greater market share for HP and likely in the neighborhood of 60%. Its share is also growing, as indicated by USB managing Director, Ben Reitzes, who recently wrote: “HP has expanded inkjet share with gains from competitors …”
The Federal Trade Commission and U.S. Department of Justice estimate market concentration by calculating an index called the Herfindahl-Hirschman Index (HHI). The HHI is calculated by squaring the market shares for each competitor and summing them to derive a total. According to these federal agencies, if a market’s total HHI value is greater than 1,800 it is considered to be concentrated. The table below shows the HHI for the inkjet market:
Inkjet Printer HHI
Company % Share HHI
Using the federal government’s benchmark measure and criteria, the inkjet printer market may be regarded as highly concentrated solely on HP’s contribution to the HHI index, but is clearly so when shares of other firms are included. The industry clearly has one very dominant firm and is disciplined in the marketplace by a few other, much smaller firms. Concentration may be the result of large economies of scale relative to the size of the market. If so, it should produce, if it is very competitive, lower unit costs and lower consumer prices. That said, the presence of high concentration can pose risks for consumers in the form of market power unchecked by a few, smaller rivals. An important question is whether concentration leads to lower consumer prices by way of scale economies or higher consumer prices by way of market power.
High Ink Cartridge Prices. Inkjet cartridges are expensive and have attracted entry in the form of do-it-yourself refill kits, as well as online and retail cartridge refilling services. Taken together these comprise about 22% of the ink cartridge market. Printer manufacturers have taken steps to discourage competition from discount cartridges, presumably as a way to relieve pressure on high ink cartridge prices. For instance, Staples, once one of the biggest retail refillers in the market, has stopped refilling Epson and HP cartridges, reportedly at the urging of incumbent printer and ink manufacturers. HP has also sponsored and publicized a study that found refilled cartridges have higher failure rates than its cartridges.
However, refilled cartridges are substantially cheaper, suggesting that OEM cartridge prices may be inflated. A comparison of ink cartridge prices (table below) shows wide disparity in manufacturers’ after-market prices (at Amazon and Best Buy) versus rebuilt (remanufactured) cartridge prices (at Ink4ever.com and InkjetSuperstor.com). These differences suggest that ink prices charged by manufacturers are substantially above those charged by sellers of remanufactured or refilled cartridges. The Wall Street Journal reported that consumers have saved up to 50% by using mom-and-pop refillers. That figure was confirmed by the New York Times in a subsequent report. The important point here is that printer manufacturers charge much higher prices for ink than others do.
Ink Cartridge Price Comparison
Canon Pixma MP500
Epson Stylus CX6600*
HP OfficeJet 7410
*High capacity black ink cartridge
Several technology writers shared their view on the high price of ink and how annual ink costs can quickly add up and nearly equal the cost of the printer itself:
“No matter how you cut it, ink is expensive. Consider a personal example: Last year, I spent approximately $160 on inkjet replacement cartridges for my Epson CX6600. The printer itself only cost $200, making it hard to not feel ripped off on a yearly basis.”
“The [razor-and-blade] marketing strategy is most obvious with inexpensive inkjets. With printers that sell for less than $100 (which some companies give away with computers) and ink cartridges that cost $30 or $40 a pop, you don’t have to buy many cartridges before you’ve spent more for the ink than for the printer.”
Another way to judge if the price of ink is high is to compare it to goods that are commonly regarded as luxurious or costly. The table below compares a popular multicolor and black inkjet cartridge to a leading perfume, to Dom Perignon Champagne, and to gasoline. The price of multicolor inkjet cartridge is $17.99 and contains 3.5 milliliters (ML) of ink, making the cost per ML about $5.14. Similarly, the cost
Comparison of Luxury or Costly Liquids
Price per Milliliter
Multicolor Inkjet Cartridge
Black Inkjet Cartridge
Prada Atomizer Parfum
Dom Perignon Champagne (1998)
of black inkjet cartridge cost can be estimated to be $3.33 per ML ($14.99 divided by 4.5 ML). These figures are compared to Prada Atomizer Parfum, which costs approximately $95 for 2.7 ounces, according to Macy’s website, or about $1.19 per ML. Dom Perignon (1998) costs roughly $130 for 750 ML, or $0.17 per ML. Finally, gasoline, which has risen to record prices at the pump, costs less than a penny per ML. Clearly, by this anecdotal comparison, ink is quite expensive.
Considering the high level of concentration in the inkjet market, if the market were still competitive, the benefits of economies of scale should result in lower per unit production costs and, ultimately, lower prices for consumers. However, a review of anecdotal evidence suggests that inkjet ink is very expensive. In light of the industry’s high market concentration, this may suggest that the market is not fully competitive or that high ink prices are the result of market power.
Rising Prices. Over the years, retail refillers and online re-manufacturers have captured a 22% share of aftermarket sales for printer’s cartridges. That is a clear sign of both high margins and attraction to increased competition. Increased competition might reasonably be expected to keep inkjet cartridge price increases in check. This proposition can be tested by considering a number of popular printers and their corresponding cartridge prices. Doing so should provide insight into the whether cartridge prices are increasing faster than inflation.
There is a perception in some quarters that inkjet prices are steady and may be declining. For example, consider three popular inkjet printers introduced into the market in the 1995 to 1999 time period. According to a popular retail office supply website, the retail prices of their corresponding inkjet black and color cartridges range from $30 to $35. Comparing the price of these cartridges to newer models released during the last three years suggests that inkjet cartridge prices are declining. For example, HP sells many of its cartridges for its new printers in the $15 to $22 price range, which is indeed lower than the price of cartridges sold a decade earlier. Similarly, other manufacturers have introduced lower cost cartridges. These results and others, coupled with competition from refillers, have led some to conclude that ink prices are becoming more competitive and prices are declining.
However, these comparisons are flawed and tell only part of the story. As the chart below shows, looking at a sample of popular inkjet cartridges shows that these cartridges are not being filled to their capacity. The amount of ink in a cartridge has declined steadily. The chart shows that in 1999 a popular black inkjet cartridge contained as much as 42 ML of ink, while today a black inkjet cartridge contains as little as 4.5 ML. This means that consumers are paying less for cartridges, but they are also getting less ink per cartridge.
The correct way to judge whether inkjet ink prices are declining is to adjust them and express them on a per ML basis. Using the same sample set of popular printers that show declining price per cartridge, as well as declining ML per cartridge, the chart below compares these cartridges over time. It shows that the sample cartridge prices, when adjusted for cartridge fill and expressed on a per ML basis, have increased roughly 360% from 1999 to 2007.
To put this price increase in perspective, consider that the over all level of prices, as measured by the Bureau of Labor Statistics’ U.S. Consumer Price Index for urban consumers (all items), increased by 21.9% from mid-1999 to mid-2007. This means that inkjet ink prices have increased much faster than the prices of other consumer goods and services. Interestingly, during the same period, the average prices of all types of ink increased by 12.7%, as measured by the producer price index. This means that inkjet ink prices are increasing much faster than the price of other inks as well as the general price index.
High and rising ink prices go hand-in-hand with suppressed demand and suggest that consumer welfare is being adversely affected. There are clear indications that consumers are concerned about the high cost of ink cartridges and are revising buying patterns accordingly. For example, one survey of consumers found that one in three wanted to buy a new printer because their existing printers ink cartridges were too expensive. Another report found that 8 of 10 consumers conserve printer ink and half of all consumers would print more if ink prices were less. The Wall Street Journal reported that 70% of families ration use of home printers as means to conserve on printing ink cost. High prices are clearly suppressing consumer demand to print.
It is fair to conclude that ink cartridge prices are higher than normal market forces might suggest and are rising faster than can be explained by cost changes and inflation alone. This confirms our earlier conclusion that industry concentration is not yielding lower consumer prices. It also suggests that consumer welfare can be improved by having more competition, which in turn would reduce market power, lower consumer prices and stimulate suppressed demand – all to the benefit of consumers. This conclusion can be further tested by considering the profit performance of incumbents.
Profitability. Excessive profits would be a telltale sign that high prices are feeding the industry’s bottom line. If that is in fact the case, it is likely that a combination of high industry concentration, entry barriers and imperfect consumer information has given the industry power over price that is being exercised to the detriment of consumers. Given the standard razor-and-blade strategy, ink cartridges are expected to be somewhat more profitable in order to offset lower priced printers. If markets are working effectively, the combined profits from sales of printers and ink cartridges should balance out to some reasonable, normal level of profitability. However, public documents suggest that combined printer/ink sales generate substantially greater margins and earn greater returns than other lines of business within these companies. For example, HP has several discrete lines of business, but its printer and print supply business, which accounts for only 29% of net revenues, provides 49% of its earnings. HP’s ratio of earnings to net revenues in this segment are 14.9% for 2006, while its other business segments average 6.3%. This point is made by others as follows:
Hewlett-Packard, the biggest maker of printers, derived $918 million, or 76 percent, of its operating profit in its most recent quarter from its imaging and printing business, a figure that one industry researcher from IDC called “a ridiculously high number.”
Recent attempts at competitive entry into the market provide another indicator of the presence of power over price and high margins. To the extent entry barriers can be overcome, high profits will encourage competitive entry. The structure of total printing charges has not escaped the attention of potential entrants. Earlier this year, a new competitor launched its bid to enter the market with both new products and a new pricing model. The Wall Street Journal reported the initiative as follows: “In a move that could shake up the $45 billion-a-year ink oligopoly, Eastman Kodak Co. unveiled its long-awaited inkjet printer, with ink cartridges priced far less than its competitors.”
A review of printers shows that the new competitor’s printers are comparable in features, functions and price to inkjet printers of similar quality. This of course is a clear indication that competitors plan to target high ink profits by pricing well below the price of incumbent suppliers. For instance, Computerworld compared the new competitor’s printer with a similar multifunction printer from the leading incumbent and found the printers to be comparable both in features and price. However, the new competitor claims its ink printing costs are nearly two-thirds less. This implies that, for a comparably priced printer, a consumer can save substantially on its ink price and generate for suppliers more nearly normal profit margins.
One new entrant claims that its ink costs are one-third the industry norm. The claim is based on an ink yield study performed by QualityLogic, who does print testing research for the major print manufacturers using industry accepted standards applied to publicly available print cartridge prices. The new entrant used the QualityLogic figures along with publicly available retail cartridge prices to calculate the cost to print a page. It reported that the cost of printing black text, color documents and color photos are 2.3, 6.9 and 10 cents per page, respectively. Looking at similar printers, the entrant estimated that incumbent print costs for black text, color documents and color photos were 6.5, 13.3 and 28 cents per page, respectively. Thus, data provided by the new entrant suggest that switching to the new competitor’s lower priced ink cartridges may save consumers 65% on monotone text print, 48% on color documents (graphics and text), and 64% on 4×6 color photos.
Our review of the ink yield results and cartridge prices supports the entrant’s claim that its inkjet ink prices are substantially below the industry norm. Other analysts have come to the same conclusion. Robert Mitchell of Computerworld compared a leading incumbent’s printer and the new entrant’s printer – both listing at $199 – and found the cost of printing with black ink from the new competitor to be 50% less. From a comparison of color printing costs, Mitchell found the new competitor’s ink prices were 71% lower than the incumbent HP.
Scott Dunn, Associate Editor for Window Secrets Newsletter and Contributing Editor for PC World Magazine checked out the claim of lower competitor prices and did so in great detail. Dunn independently collected ink cartridge prices and used the QualityLogic yield results to produce his own figures. The results came out to be substantially the same – the new competitor’s printer and corresponding ink cartridges produced a saving of 65% on monotone text print, 48% on color documents (graphics and text), and 64% on 4×6 color photos, respectively. The chart below plots these independently derived figures and allows comparison of the prices of the new competitor to the average for incumbents.
Assuming that, on average, consumers print black text 50% of the time, color text and graphics about 40% of the time and photos about 10% of the time, the estimated composite cost per page for the entrant is 4.9 cents versus 12.3 cents per page for incumbent manufacturers. This suggests potential for a 61% reduction in price due to increased inkjet ink competition. The razor-and-blade pricing model cannot alone fully explain the disparity in ink prices. The price disparity suggests, once again, that incumbents are exercising market power in the ink market and that consumers may benefit substantially if they are aware of the savings offered by entrants using different pricing strategies.
It is difficult to overstate the critical importance of consumer information to bringing about lower prices and consumer printing costs. Imperfect, incomplete information leads to flawed consumer choice and limits the extent to which entrants offering different and better options – lower ink prices in particular — can impose market discipline on incumbent pricing strategies. Consumers can be made better off if they are made aware of the differences in total lifetime costs of the two pricing models. Thus, if consumers are given sufficient information to evaluate the trade-offs between immediate costs of the printer and future costs of printer ink, and if they act to minimize total cost, then the entrant’s strategy will succeed and consumers will be made better off. Incumbents would be pressed to follow suit and match the entrant’s lower prices. The increase in price competition will result in benefits to consumers from lower prices and, most likely, greater diversity and product quality.
E. Consumer Welfare Losses from High Inkjet Ink Prices
Previous sections focused on the general market environment and the structure, conduct, and performance of the supply of printers and cartridges. All were intended to provide background necessary to understand the impact of current pricing practices on consumers.
With few exceptions, none of which apply here, consumers are made worse off by product prices that are permanently set higher than their respective costs of production. The market remedy for that is price competition among established firms and, failing that, entry by new firms. For reasons discussed above and relating to entry barriers stemming from imperfect, incomplete and/or asymmetric information, supernormal profits have persisted. The result is a transfer of wealth from consumers to producers. The goal of this section is to use available information to derive estimates of consumer welfare losses from current pricing practices and, concurrently, to estimate consumer welfare gains if market forces lead to correction of current price/cost disparities in markets for printers and cartridges.
The fundamentals are depicted in the graphic below showing the choices facing consumers with differentially structured printer and ink prices.
Printer Cost, Ink Cost and Consumer Choice
The Basic Consumer Choice Model. The diagram above is drawn to illustrate alternatives and implications when consumers are obliged to choose between printers in circumstances in which the initial cost of printers and subsequent costs of companion ink cartridges are different for different suppliers. The diagram compares the total cost to consumers of a printer plus ink for two printers — Printer #1 and Printer #2. As shown, the initial cost of Printer #1 (solid line P1) is less than the initial cost of Printer #2 (broken line P2), but the cost of ink for Printer #2 is shown here to be less per printed page than the cost for Printer #1. That is shown by the steeper slope of solid line P1P1 relative to the dotted line P2P2. If the printers were of equal quality and durability, consumers choosing only on the basis of initial cost would choose Printer #1 because its price (P1) is less than the price (P2) of Printer #2.
The fully informed and parsimonious consumer looking for the best printer value would consider all costs (printer plus ink) of operating it and might make a different choice by choosing Printer #2, the one with the higher initial outlay. We emphasize might, since the rational, least cost choice depends on how much printing the consumer intends to do over the lifetime of the printer. For low levels of expected printing, the lower printer cost dominates the higher cost of ink and consumers are better off paying less for the printer and more for ink. However, the more printing the consumer intends to do, the lower cost of ink comes increasingly to dominate the cost of the printer. Thus, high volume printing consumers might prefer the combination of a higher cost printer with the lower cost ink.
The graphic depicts four different levels of printing as measured by the number of printed pages on the horizontal axis. At the low page printing level Q1 the low cost of the printer dominates the higher ink cost and Printer #1 is preferred. At level Q2 printer costs and ink costs for the two printers balance. There the consumer breaks even and must choose between the printers on other grounds. For all levels of printing greater than level Q2 the lower cost of ink dominates and Printer #2 is preferable. As expected printer volumes increase, so too do the cost savings and consumer welfare benefits conveyed by Printer #2.
The graphic is constructed to call attention to rabc which shows the results of choosing from two different consumer perspectives. The first is the case if a consumer asks: How much printing can I do for a fixed amount of money?” (Here the line labeled Printer Budget). The line segment “ac” measures the distance between the two total cost lines P1P1 and P2P2 and shows by the metric on the horizontal axis how many additional pages the consumer gets by choosing the high cost printer with the low cost ink. The second perspective applies if the consumer asks: “What is the least cost option, if I expect to print a certain number of pages over the printer’s lifetime?” This perspective has the consumer comparing the total lifetime costs of the two printers, assuming a discrete number of pages to be printed, say quantity Q4 in the diagram. In this case the line segment “bc” measures the cost savings accruing to consumers who choose Printer #2 or the penalty to consumers who choose Printer #1. Thus, a consumer looking to get the most printed pages from a fixed budget or one looking to minimize the cost of printing an expected number of pages (Q4) will find cost advantage from Printer #2– the printer with the higher initial cost, but the lower variable printing cost. Whether the consumer is a) trying to get the most pages for a given expenditure, or b) trying to minimize the cost of a given number of pages, the optimal choice is Printer #2 for all printer requirements in excess of the breakeven volume (Q2). For lower printer volume less than Q2, the better choice is Printer #1 with the lower initial cost, but the higher variable ink cost of printing.
In summary, when printer prices and cartridge prices vary in opposite directions for different brands, efficient consumers should choose according to expected lifetime printing costs and according to their expected printing requirements as measured by the number of pages. The graphic above illustrates that the least cost printer and ink system depends on consumers’ expected usage in the context of relative differentials between printer costs and cartridge costs. Higher usage favors low cost ink, while lower usage favors low cost printers. A consumer who intends to print very few pages might do well to minimize the cost of the printer and pay more for ink. On the other hand, higher volume consumers would do well to heed more the cost of ink and be less concerned about the cost of the printer.
The foregoing makes clear that the demand for printers and the demand for ink are both derived demands – demands derived from consumer welfare attributable to consumption of their joint product — the printed page. Consumers value neither printers nor ink on their on merits, but only as, taken together, they enable production of the end goal of consumption—printed pages. As complementary goods, they produce joint value, and, as with the blades on scissors, it is not possible unambiguously to attribute the value created to either standing alone.
Since the printed page is the product “consumed,” consumer welfare depends on the effective cost of each printed page. This cost depends on the price of the base printer and on the price of ink per printed page. It also depends on the useful life of the printer, since each printed page has to bear a share of the lifetime cost of the printer. To convert the price of the printer to a user-cost-per-page-printed requires two additional pieces of information: a) the economic life of the printer and b) usage rates expressed in units per time period over the life of the printer. Similarly, the cost of ink per printed page depends on the price of the cartridge and the page printing capacity of the cartridge.
Printer Lives. The analysis distinguishes between physical life, as measured by the time the printer will function, and its economic life, which is less dependent on the machines’ durability and more on its ability to satisfy evolving user needs viewed in the context of other options appearing over time on the market. Most new printers are replacements for serviceable, working machines that no longer satisfy consumers’ needs as well as newer, more efficient, more functional or otherwise improved models available in the marketplace. In that sense printers are like other durable goods – autos, computers, televisions, clothing, etc. – that are routinely replaced by users well before the end of their usable lives. The rate of innovation and new product introduction accelerates early retirement of useful durable assets. Changing consumer tastes and incomes also influence retirement of usable printers and other durable assets.
There is wide dispersion among consumers in their attitudes toward replacement of useful durable goods like printers. At one extreme are early adopters who are first to buy the newest models available while scrapping older versions. At the other extreme are more thrifty users who squeeze the last bit of utility from obsolescent models. Most users are somewhere between these extremes. Anecdotal evidence available from a survey of opinions indicates that the replacement cycle is between 2 and 5 years. Part of the difference in estimates is due to sampling differences and polling techniques. Online polls tend to attract comments from technology-sensitive early adopters, while more randomly selected surveys include more users on the other end of the spectrum. For convenience, and without doing disservice to the limited data, the analysis that follows assumes the life to be four years. The interested reader can recalculate results on other assumed lives.
Average Printed Page Count. There is wide dispersion among households in average usage per time period. The mean of anecdotal estimates reviewed suggests about 4 pages per day, 28 pages per week or roughly 1,500 pages per year per household and home offices. Given variation about that mean, results for individuals will vary.
Cost per Printer. As explained above, there is significant variation among models, functionalities and qualities among printers, as well as variations in pricing strategies among suppliers of roughly comparable machines. We abstract from all that and posit for purposes of this example printer prices from two different suppliers of approximately the same quality of $180.00 (Printer #1 representing incumbent’s printer) and $200.00 (Printer #2 representing a new entrant’s printer). These printer prices are those published in Mitchell’s comparison of printers between the leading incumbent and the market’s new competitor. Assuming a four year life for each of these, the annualized printer cost is $45.00 for Printer #1 and $50.00 for Printer #2.
Ink Cost per Page. Ink costs per page depend on the type of printer, type of output desired, the kind of ink used, and the identity of the vendor. For purposes of calculating consumer welfare, this analysis uses ink costs for the high cost Printer #1 of 12 cents per page and for the low cost Printer #2 of 5 cents per page. This range is consistent with the estimates published and provided to us by Scott Dunn. The estimate is also consistent with the QualityLogic yield study and the published work by Mitchell.
These data contain some insights as to the relative importance of printer vs. ink costs. At a cost of ink of 12 cents per page for each printer, the prices of the printers are equivalent to the ink costs of 1,500 printed pages ($180.00 ¸$.12) and 1,667 printed pages ($200.00 ¸ $.12), respectively. The $20.00 difference in the prices of the two printers is the equivalent of the ink costs of printing 400 pages using Printer #2’s 5 cents per page and only 167 pages using Printer #1’s 12 cents per page. At 5 cents per page, the prices of the printers are equivalent to the ink costs of 3,600 printed pages for Printer #2 ($180.00 ¸ $.05) and 4,000 printed pages ($200.00 ¸ $.05) for Printer #1. These numbers suggest that the variable cost of ink mounts quickly and comes to equal the fixed cost of the printers at fairly low levels of printing volume. More specifically, for example, at 10 cents per page, the cost of ink equals the cost of a $200.00 printer after 2,000 pages printed or about 16 months for the average household’s printing experience.
Consumer Welfare Model Assumptions. It is of considerable interest and policy relevance to be able to calculate the consumer welfare impacts of the two pricing strategies and structures characterized above as Printer #1 and Printer #2.
This study uses a simple model that permits estimation of total consumer costs of the two printer options under different assumptions. The model is strictly deterministic inasmuch as the results are essentially fixed by the model’s assumed input values. That is both a blessing and a curse. It makes the model simple and understandable, but also makes it dependent on estimates of the real world value of principal determinants of total lifetime printer costs. The impact on consumer welfare of a change in the structure of printer and ink prices depends on several market characteristics which we can only estimate. We abstract from real world diversity in order to focus on key elements of the relations between price structures and consumer welfare.
The analysis begins with a base case, then the assumed inputs are varied to develop a range of feasible values for consumer costs based on different “What if?” scenarios. Listed below are the assumed values for the six variables depicted in the graphic analysis and the ones mainly instrumental in driving consumer costs for different printer and cartridge systems:
To calculate the impact of changes in (or different) prices of printers and ink we start with an expression for the total lifetime cost of printing which reflects the prices of printers, the prices of ink, the lifetime of printers and the number of printed pages. We begin by first calculating the total lifetime cost (TLC) taking account of the fixed cost of Printer #1 and the variable cost of the ink using Printer #1, and then do the same calculation for Printer #2, which has a higher fixed cost reflecting a higher initial cost for the printer, but a lower variable cost of usage reflected by a lower ink cost per printed page. Since both printers require 1,500 sheets of paper, paper costs are not material to the cost comparison and are ignored in what follows.
In the baseline case, using the assumed input values, a consumer who prints 1,500 pages per year saves $400.00 over the lifetime of the printer by choosing Printer #2. The $20.00 higher cost of the printer is quickly recovered in cost savings on lower price ink, so that the consumer saves an average of 100.00 per year ($400.00 ¸ 4 years). The $400.00 cost savings are the equivalent of a 44% discount ($400.00 ¸ $900.00) off the total lifetime cost of Printer #1
Break-Even and Sensitivity Analyses. Printer #2 is preferred at higher page volumes and Printer #1 at lower volumes. This happens because at low printing volumes the initial cost of the printer dominates the cost of ink. At higher volumes the savings on ink dominate differences in printer costs. The printer volume break-even point is the number of printed pages for which the lifetime costs of the two printers is equal and consumers are indifferent between them.
Setting the cost equations equal to each other with pages printed as the unknown and solving yields 71 pages per year as the break-even volume. Based on the assumed base case values, that means consumers who print more than 71 pages per year will save money by buying the higher cost Printer #2. Those printing only occasionally at the rate of a page or so a week, will be better off with the low cost printer using the higher cost ink. Similar arithmetic exercises indicate that a) users of Printer #2 could pay 6 cents more per page of ink cost (11 cents instead of 5 cents) and break even with the life time costs of Printer #1, and b) given the higher ink costs, buyers of Printer #2 would have to be awarded a rebate of $580.00 on the sale of the $180.00 printer to compensate for the higher ink cost and to equal the lifetime costs of Printer #1.
This exercise makes clear, as with all numerical examples and analyses, that the output of the exercise is sensitive to the assumed inputs. Inspection of the cost equations above confirms the earlier graphic (the diagram entitled Printer Cost, Ink Cost and Consumer Choice) to the effect that Printer #1 is favored by a) shorter assumed life or printer replacement cycles, b) smaller differential in ink costs per page and c) smaller printing volumes. This confirms that the major welfare impact differentiators are a) the length of the replacement cycle for different users, b) the volume of printing done between replacements, c) the differences in up-front, fixed printer costs, and differences in variable, recurring ink costs per page.
Ironically, the variable that consumers appear to pay the greatest attention to, the initial cost of the printer, has the least impact on total lifetime costs. Conversely, the variable that consumers appear to know least about – ink cost per page printed — and therefore are least able to factor into their buying decisions turns out to be the major driver of lifetime printing costs. The results are only modestly sensitive to printer replacement cycles, since the impact of printer life is more or less uniform across the two printers and shows up only as a fractional part of the difference in initial printer costs which themselves are insignificant.
Lower-bound Estimate of Consumer Welfare. The foregoing illustration assumes for convenience that the demand for both printers and ink is very price inelastic. That means that the quantity demanded is inconsequentially sensitive and reactive to price reductions. In the numerical illustrations above, we analyzed changes prices of printers and ink without regard to the extent to which doing so stimulates or suppresses demand. This seems to be roughly consistent with market facts. With better data, the estimates could be refined to include market reactions to price changes, but the adjustment would likely change details of the results, but not the basic conclusions.
The price differential of $20.00 is a shade under 10% of the average prices hypothesized for the two printers. There are two possible, additional impacts of interest. The first is a shift in market share between the two printers (movements of and along firm demand curves), and the second is a change in sales for the two firms taken together (movements along the industry demand curve). Such a differential may impact market shares between two printers, but we are not aware of any reason to believe that the change in quantity sold by one or another firm as a result of a price change of that magnitude would be so dramatic as to change the basic thrust of the results.
It is not likely that such small price changes would substantially increase demand for all printers on the industry demand curve. The impact of a price increase or decrease in the price of printers is shown in the examples above to have a modest direct impact on total lifetime printer costs. A change of $20.00 in the price of the printer is $5.00 per year for a printer replacement cycle of four years. That price difference spread over 1,500 pages is negligible. Assuming that the elasticity of demand for printers is at or below one, the change in quantity sold will be less than or equal to 10% as a result of the 10% printer price change. Thus, we are confident that the simplifying assumption about the inelasticity of printer demand does not significantly impact our results; and, certainly does not change their implications.
The secondary impact of changing printer prices will be realized in changes in the demand for ink. Higher printer prices mean fewer new printers, but they do not necessarily or even probably mean fewer printers. Only a small share of printer sales is to first time buyers. Consumers put off by higher prices or encouraged to buy new printers by lower prices will most likely be extending the life of, or replacing, a printer. Thus, changes in ink usage will not be substantial for low printer demand elasticities and if most new sales are for replacement printers.
The demand for ink is a different story. Available anecdotal evidence suggests that consumers are increasingly sensitive to ink cost per printed page and that reductions in ink prices will very likely have a significant impact on quantity demanded. While we have seen no good empirical studies of the price elasticity of demand for ink, we are confident that it is relatively elastic and that price reductions will bring about substantial increases in the average number of pages printed per household per year and, accordingly, the quantity of ink demanded and used. Thus, the basic thrust of our analysis would almost certainly be magnified by inclusion of the true elasticity of ink demand in the calculations. Specifically, reductions in the price of ink that stimulate demand for ink would increase consumer savings from using Printer #2 rather than Printer #1. The greater the elasticity, the greater the stimulation, and the greater the savings associated with Printer #2.
Total Consumer Savings. The analysis thus far has focused on savings accruing to individual consumers or households. We are ultimately interested in total savings accruing to US consumers or households in the aggregate. Scaling up from savings to individual households and consumers to the aggregate for all households and consumers requires some additional assumptions regarding a) the number of inkjet printer households in the US and b) the rate at which these households would convert to the low cost printer/ink option if they were given the opportunity and if consumers were well informed about the economic implications – lifetime costs — of the two choices. A first cut approximation of total savings to consumers of shifting from Printer #l to Printer #2 should be proportional to savings per household estimated above and vary with a) the number of households who switched and b) the annual rate at which they convert to the low cost option.
We estimated above an average saving of $100.00 per year for those who switched, assuming printer replacement every four years. It is not likely that the transformation from today’s pricing model (Printer #1) to a pricing model offering much lower ink prices (Printer #2) would be instantaneous. It would take place incrementally over time. The most efficient consumers and early adapters will lead the conversion, while information generated by these leaders will inform subsequent adapters and so on. Diffusion of technology and new products has been widely studied and general principles adduced. There are numerous models and the precise results are highly circumstantial. Even less is known about the diffusion of pricing innovations of the kind under examination here. It is clear that the rate depends in substantial part on the kind of information available to consumers.
Consider the following scenario. The usual pattern of adoption of new products or practices replacing old ones is a gradual beginning that accelerates over time. In the present case as the new competitor offers dramatically lower prices (the new pricing model), consumers will be attracted by potential savings. Early adopters will be consumers who are the thriftiest, the most inclined to search for information, and those whose current printer is near the end of the replacement cycle. Most likely the early adopters will be high volume printers, since they have the most incentive to search for and acquire lower ink cost printer options. Followers will emulate these early adopters and over time information about the low cost option will spread. Eventually, incumbents threatened by loss of share and profits will have an incentive to react and follow suit by matching and lowering prices in order to retain market share. Over several years, most consumers will replace their printers and gradually realize the full savings of this increased market competition.
For purposes of this analysis, and absent more detailed data to describe actual behavior in similar circumstances, we assume a realistic potential diffusion rate of printer sales stimulated by the new pricing model. Our diffusion rate assumption is consistent with the assumed four year replacement cycle, so that at the end of the fourth year all consumers have replaced the high cost option with the low cost one. For the benchmark model we assume that the new pricing model is adopted according to the following pattern of incremental conversions: 10% of printer households switch in the first year; an additional 25% switch in the second year; an additional 30% switch in the third year; and, the remaining 40% switch in the fourth year.
To get a total cost savings, given the foregoing household adoption rate, we estimate the number of printer households to which we then apply the adoption percentage rates. The number has been variously estimated. We use a recent Business Week estimate based on a home technology study done by Nielsen which estimated that 73.4% of 114 million US homes, or about 84 million homes, have a computer. Not all homes with a PC have a printer. But it is also the case that some homes have more printers than computers. Assuming that one-fourth of these 84 million PC homes do not have a printer, or use instead a laser printer, then we estimate about 63 million US homes have an inkjet printer. Putting this all together, we can summarize the results below in a table showing the diffusion rate applied to the number of households both incrementally and by cumulative number of adopters in each year.
10% = 6 million homes
10% = 6 million homes
20% = 12 million homes
30% = 18 million homes
30% = 18 million homes
60% = 36 million homes
40% = 24 million homes
100% = 60 million homes
The table below expresses the savings in each year. The annual savings are a function of a) the savings per household, b) the number of printers replaced according to the assumed four year replacement cycle, and c) the number of replacement printers likely to be the low cost option according to the assumed diffusion rate.
Year 1 savings = ($100) (.1 X 60M) = $ 600 M
Year 2 savings = ($100) (.3 X 60M) = $ 1,800 M
Year 3 savings = ($100) (.6 X 60M) = $ 3,600M
Year 4 savings = ($100) ( 1.0 X 60M) = $ 6,000 M
Total 4-year consumer savings = $ 12.0 billion
Year 5 savings = ($100)(1.0 X 60M) = $ 6,000 M
Year N savings = ($100)(1.0 X 60M) = $ 6,000 M
We have added Year 5 and Year N consumer savings to show that the lower price printer is a gift that keeps on giving consumers value beyond the assumed four year replacement cycle. However, given the dynamics of the market and the likelihood of subsequent pricing and/or product innovations in subsequent years, we terminate accumulation of value at the end of four years.
In addition to the sensitivities underlying the estimate of $100 savings per annum discussed earlier, these calculations are sensitive to the assumed adoption rate of the new price model. Our support for these is somewhat impressionistic and drawn from our long time observation of how competitive markets work and how they adopt new pricing strategies.
The accumulated savings are linear with respect to the assumed adoption rate. The table and analysis above assumed that all 60 million inkjet printer households will adopt the low cost ink/higher cost printer option within four years. That is probably too aggressive, since it is likely that a) many households will not buy a new printer during this time period and b) those that do may opt for the lower cost printer and the higher cost ink. (Recall that doing so is a rational choice for very low volume page requirements.) To reflect the uncertainty about the adoption rate for the new price scheme and the extent to which it is emulated by incumbents as a competitive response to the new entrant, we include below a very simple contingency table showing consumer gains at different consumer adoption rates for the new pricing scheme. The table shows diminished adoption rates in each year and shows the expected consumer gains for those revisions. The results indicate that consumer benefits range from $4.8 billion if diffusion is 40% of the base case to $9.6 B if diffusion is 80% of the base case rate.
.4 X Base Case diffusion rate yields total four year consumer savings of $ 4.8 B
.5 X Base Case diffusion rate yields total four year consumer savings of $ 6.0 B
.6 X Base Case diffusion rate yields total four year consumer savings of $ 7.2 B
.8 X Base Case diffusion rate yields total four year consumer savings of $ 9.6 B
1 X Base Case diffusion rate yields total four year consumer savings of $ 12.0 B
This range of estimates of potential consumer savings is based on conservative assumptions respecting most of variables that will in the real world determine total savings to consumers. We call particular attention again to a) termination of estimated savings after year 4, b) the conservative estimate of the number of pages printed per year by early adopters (most of whom will be high volume users), and c) the fact that we have factored in no price elasticity in demand for more printed pages and more printing ink.
The effect of lower per page printing costs on the number of pages consumers print merits further consideration. Ignoring it effectively restricts consumer welfare gains to those arising from printing the same number of pages, but at lower price (consumer gain = Q0rP). But, we have hypothesized a reduction in the per page cost of printing from $.12 to $.05 per page. That is a dramatic reduction (greater than 58%) off the current average that will, even with modest consumer response, lead to substantial increases in the average number of pages printed (large rQ).
0 Q1 Q2 Number of Printed Pages
An Increase in Consumer Welfare
Consumer welfare increases with both the lower price for current page levels, but also for added page printing use and the new price (rQ times the new lower price of $.05) That leaves us to estimate how much new volume will be stimulated by the 58% reduction in the ink cost per printed page, which of course depends on the price elasticity of demand for ink.
Without good estimates of price elasticity, we are left to rely on appearances, news reports of the dissatisfaction of users with the current high price, and judgment. One study did find that computer printer market were price elastic for its lowest end products, an indication that some consumers are very sensitive to changes in printing costs. On that basis, we are confident in asserting that demand is relatively price elastic and that the expected percentage increase in the quantity of pages printed will probably be greater than the percentage reduction (-58%) in price that will spur demand. The issue is not so much whether demand is elastic or not, but rather: “Just how elastic is it?”
Supposing conservatively for openers, that the elasticity is unitary and the percentage increase in the quantity of pages printed is the same as the percentage decrease in price. Setting the increase in quantity of pages printed equal to 58% times 1500 yields 870 additional printed pages stimulated by reduced ink prices. Of course, consumers pay for those extra pages, but they do not pay as much as they would have been willing to pay. That is another way of saying that the consumer enjoys a surplus in benefits from a price reduction. This consumer surplus is measured by the difference in the price paid and the price they would have been willing to pay if they had been required to pay an amount reflecting the value to them for each incremental unit. We estimate that value to be .5 times $.07 times 870, which is half the product of the change in price times the change in quantity. This amounts to nearly $ 30.45 (call it $30) per household.
We use the same approach as before and merely add the consumer surplus created by additional consumption of 870 printed pages to the value created by the lower price. Doing so yields a total consumer welfare increase of $100 plus $30 and raises the total value conferred by the price reduction on all households over the four year replacement cycle to $3.78 billion, or nearly $1 billion per year. These revisions are reflected in the table below.
Year 1 savings = ($130) (.1 X 60M) = $ 780 M
Year 2 savings = ($130) (.3 X 60M) = $ 2,340M
Year 3 savings = ($130) (.6 X 60M) = $ 4,680 M
Year 4 savings = ($130) ( 1 X 60M) = $ 7,800 M
Total 4 year consumer savings = $ 15.6 billion
Year 5 savings = ($126) (1.0 X 60M) = $ 7,800 M
Year N savings = ($126) (1.0 X 60M) = $ 7,800 M
The addition of consumer gains from stimulation of printing activity and the number of printed pages as a result of the price reduction bumps the aggressive diffusion scenario (100% diffusion within four years) from $12.0 billion to $15.6 billion. As before this result may be scaled to reflect slower diffusion, as is done so below.
Summary. Using standard consumer welfare estimation techniques, the foregoing exercise has squeezed available data for insight and information. The results are a reasonable baseline estimate of the potential gains to well-informed and efficient consumers of the price regime characterized by the Printer #2 pricing scheme. With more and better data, we could have been more precise. Nevertheless, the estimates above are by no means exaggerated. We have taken great pains to be moderate, and frequently conservative, in our estimates of the principal determinants in the consumer welfare equations. A review of each of these raises questions suggesting reasons why they might be high, or low. We have tried to balance those. In any event, the method is set out in a straightforward way so that interested analysts may tailor their own estimates by plugging in different values for printer costs, ink costs, average usage, replacement cycles, expected diffusion rates, elasticities, etc.
A simple cross-check confirms that our estimates of welfare gains are on the low side. Given the current $10 to $11 billion market for inkjet ink, if increased competition means that inkjet ink prices will eventually fall by nearly 60%, consumers should save approximately $6 billion dollars (60% of $10 billion). This approximation is comparable to the fifth year annualized value of the lower-bound consumer welfare estimate described above. Based on this, we believe that any fair estimate, irrespective of the absolute value of the outcome of the exercise, will support our basic conclusion that the value to be gained from the Printer #2 option is too large to ignore and is otherwise sufficient to warrant affirmative steps to achieve.
To recap, consumers are likely to see sizable future welfare gains, conservatively $6 billion per year (undiscounted), as a result of restructuring printer and ink prices and heightened market competition.
F. Implications: Unlocking the Market and Consumer Information
Consumers now find a large number and rich variety of printer and ink choices available in the market place. Options are not an issue. As observed by Pogo in the cartoon, they may be “overwhelmed by insurmountable opportunity”. Consumers have lots of options, but they are unable to rank them in ways to inform efficient, value maximizing choices. The absence of information useful to comparing options and ranking them according to characteristics valued by consumers creates costly uncertainty, confusion and, in too many instances, poor choices. The discussion above makes clear the critical importance to both consumer welfare and overall economic efficiency of making readily available to consumers accurate information about different printer and ink options and their true cost per printed page.
The key to unlocking and delivering these consumer welfare gains is in devising ways to improve consumers’ information about costs and values of options and assisting them to understand the potential for printer lifetime savings of this order of magnitude. If they do, and if they begin to act on that knowledge, their behavior will send a powerful signal to other vendors in the marketplace. The signal will create the incentive to convert current price structures and to emulate the new, more successful pricing model. Loss of share and earnings to a new idea or product or entrant is a powerful competitive impetus.
New pricing models combined with consumer education campaigns have historically had dramatic impacts. For example, Dell revolutionized the PC retail business with new business models and pricing approaches; wireless phone service providers did the same by marketing “buckets” of minutes for a fixed price; cable television service pricing has evolved from a single rate to differentiated rates for tiered service packages to video on demand; and, MCI revolutionized the long distance telephone business with dramatic, consumer-friendly innovations in pricing. It is notable that the success of each of these depended explicitly on consumers being informed about their options and the economic implications of their choices between new and legacy providers.
On the other hand, incumbent suppliers may not be under significant pressure to match prices of new entrants due to a lack of good consumer information respecting a) the capacity of printer cartridges, b) the extent to which feasible capacity is actually realized by users, c) the price per printed page of different cartridges, and d) related elements of the overall value propositions of different printer systems. If not, price competition will be thwarted and consumer benefits suppressed. Consumers need to have the information necessary to make good decisions, which, in turn, will make the market more price competitive and through that accelerate the rate of diffusion of the new pricing scheme.
Our research addressed, from a consumer perspective, the determinants of the optimal printer/cartridge combination from the perspective of cost per printed page. Taking into account all the market and industry analysis presented in this study, we conclude that most consumers are unlikely to have the time, inclination, and skills necessary to make rational choices in buying a printer that will minimize their printing costs. The problem is compounded since information about basic consumer economics of printing and cartridge options is scarce, not always reliable and costly to obtain. Search costs are now high and most consumers will not search for facts as we have. Unfortunately, some consumer-oriented organizations are not helpful in this regard.
Policy Implications. Imperfect or asymmetric information is one of four market failures that are commonly used to justify some form of government intervention to address the problem. That said, the existence of market failure is not, per se, sufficient to warrant government intervention, which itself is subject to imperfection and failure. Markets can be imperfect, but so are government efforts to offset them through interference with market processes. History is replete with well-meaning government regulations gone awry and imposing greater economic costs than the market imperfections that impelled them. Such regulation is particularly risky where, as here, the prospect for unintended, unanticipated and undesirable impacts are great.
So, we are cautious about suggesting government involvement and specifically do not suggest without further analysis any form of economic regulation. That said, it appears that purely informational activities of government are less likely to cause such costs than are forms of affirmative regulation and constraints on market behavior. Thus, we call attention to the activities of the Federal Trade Commission’s efforts to inform consumers on key choices that are often hindered by misleading, incomplete or otherwise inadequate information. The FTC Bureau of Consumer Protection is charged with assisting consumers in a variety of ways and has chosen in numerous circumstances to take steps to acquire and publish consumer-oriented information and to advise consumers on steps they need to take to get the most value from their scarce budgets and to avoid the hazards of choosing without having on hand information about related outcomes.
Particularly relevant here are the views of the FTC about the hazards of buying a low cost or free personal computer. Thus, the FTC cautions:
If you’re in the market for a personal computer, the Federal Trade Commission wants you to know that “free” doesn’t always mean free. Very often, certain conditions and restrictions found in the fine print of advertisements for “free” or “low cost” PC’s can turn a so-called deal into a big ticket buy.
The FTC’s reasons for cautioning consumers considering the purchase of a computer are spelled out in Appendix II. We merely note here the parallels between the purchase of a durable good like a computer and one like a printer, for which the lifetime usage cost depends on significant other costs reflected in the prices of related, complementary products or services, which costs are unknown at the point of purchase and realized by consumers during subsequent use of the product.
There are market remedies available. These include competitive strategies of other firms focused on winning market share by conveying the missing information to consumers. Competitors offering alterative products and using different pricing strategies of potential benefit to consumers might usefully increase their own sales and market share, as well improve overall consumer welfare by making pertinent information readily available as a part of their marketing approaches. The details of such a marketing scheme are beyond our ken and scope here, but a priori, it seems likely that consumers armed with facts about lifetime printer costs are likely to change their buying patterns and to increase their overall consumer welfare.
We suggest that suppliers of ink be required to post on the box the capacity in terms of pages printed of the cartridge and the cost per page or ML of ink at the MSRP. In this way, consumers can weight the cost of the printer and the cost of the ink in determining the right choice that fits their printing needs. This information will encourage the industry to be competitive on price, lead to lower consumer prices and increased consumer welfare. Failure to do this may allow incumbents to continue to exert market power and keep prices inflated. That would continue the harm now borne by consumers who are locked-in to printers that entail excessive ink costs to operate.
This study find the inkjet market to be highly concentrated and exhibiting signs of market power, including high profits, high prices, restricted consumer output and a lack of price competition. The study estimates the impact on consumers of new entry based on new pricing models and lower ink costs per printed page. These consumer benefits would eventually amount to about $6B per year. Correcting this information problem would encourage price competition and result in dramatically lower, approximately 60% lower ink prices.
Based on this evidence, we recommend consideration of government action tailored to improve information available to consumers about the outcomes of buying different printer systems. The FTC Consumer Protection Bureau should be made aware of the scope of the problem and current estimates of the potential gain to consumers. We have not considered fully the options, but some form of consumer alert, such as those issued by FTC about low cost computer would be a step in the right direction.
At a minimum, government action could require that every inkjet printer and printer box be clearly labeled to show the average operating ink cost per page and cartridge price for all of the print cartridges applicable to the printer. In addition, each print cartridge should be labeled to show the average operating ink cost per page. In both cases, the calculated cost per page should be based upon accepted ISO standards, such as those used by QualityLogic in its printer testing. This would provide consumers with vital product information (like truth-in-labeling requirements) similar to the price per unit labels available on many grocery shelf items. This information would help consumers make simple side-by-side comparisons in determining the printer that best suits their printing needs. This improvement in comparative shopping would, in turn, encourage more intense price competition among manufacturers of printers and cartridges. While the added industry cost of printing this information on its products is likely to be quite small, the net benefits to consumers would be sizable even if they fall short of our conservative estimate of $6 billion per year.
Appendix I: Commercial Views of Ink Pricing
Producers and consumers see current pricing practices from very different perspectives and it is useful to explore those as a first step toward understanding fully the consumer welfare aspects of current practices. The diagram below illustrates the business problem and opportunity faced by a printer manufacturer that is integrated forward into markets for ink (cartridges).
Demand for Ink and Ink Profit at Different Printer Prices
Q0 Q1 Quantity of Ink
Printer prices and profit ä
Ink demand, prices and profit ã
The demand curve for printer ink D0 presupposes a market price and quantity sold for printers, which creates demand schedule D0. Given average (and marginal) cost as shown by the dotted line, the profits maximizing price of ink is P0, which is the price consumers will pay for the output (Q0) at which marginal costs equal marginal revenue. By reducing the price of printers, suppliers thereof may increase the demand for the complementary good ink and shift outward the demand curve to reflect the fact that consumers will buy more ink than before at every price. Profits maximizing price and output increase for higher demand along new demand curve D1. Profits increase from an amount measured by the area of rectangle abdP0 to an amount measured by the area of rectangle aceP1. The rational supplier of the tied products will lower printer prices and raise ink prices until the profit on the last increment of ink sales just compensates for losses on the last increment of printer sales. The arrow pointing up and to the right in the diagram suggests the results of lowering printer prices as they relate to increasing ink demand, prices, quantities sold and profit for the integrated supplier of printers and ink.
The second diagram (below) sets out additional economic aspects of the razor-and-blade pricing strategy as applied to markets for printers and printer ink. It is drawn to illustrate the relationships between printer price(s), ink price(s), and profits. The vertical axis measures profits of various printer/ink price and usage configurations, while the horizontal axis measures the number of printed pages
Printer and Ink Pricing Strategies: Profits and Losses
Printer costs are fixed and incurred as one time consumer outlays. Ink costs are taken to vary continuously according to the number of pages printed. For simplicity we ignore, for now and without loss to the main points to be made, the fact that ink comes in replaceable cartridges and that ink expenditures are “lumpy” and incurred from time to time in discrete amounts.
The solid line sloping upward (labeled “A”) reflects total profit – all attributable to ink, since the printer was sold at cost and yielded zero profit. Profit increases with page count, since ink is priced above cost. Actual profit may not increase linearly, as depicted here, since there are volume discounts reflected in some ink prices. But, it does increase if users buy ink from the manufacturer of the printer.
The horizontal dotted-dashed line (labeled “B”) depicts a situation in which a $100.00 printer is “given away” and leads thereby to a loss or negative profit on the printer alone equal to $100.00 at the time of sale – shown as the point of intersection with the profits axis below zero. For simplicity and ease of exposition, we assume that printer ink is divisible into units required to print a single page and priced relative to cost at a level which generates ink profit per page given by the upward sloping dotted-dashed line. At quantity Q1 profit on ink has just compensated for the loss on the printer, so that total profits are zero. At Q1 the vendor would break even on the sum of printer losses and ink profits. At all printing volumes beyond that, profits are positive and increase with printed page counts.
At quantity Q2 the profit lines cross and indicate that the profit level (Profit 2) is the same under either marketing scenario. However, at all printed page levels beyond Q2, profits for the subsidized, free printer linked with high ink prices exceed those under the other (printer price = printer cost) marketing scheme. Thus, when the printed page quantity equals Q4, the difference in profit is the distance between solid line “A” and dotted-dashed line “B”. And, the greater the number of pages printed, the higher the profits and the greater the profit differential between the two marketing plans.
The essence of the strategy shown here derives from the fact that printer profits depend on printer costs and printer price. Ink profits depend on ink costs and ink prices, but also on the number of compatible printers in place. Thus, firms increase ink profits by increasing the number of printers in place, by discounting them heavily, and thereby increasing the demand for ink. They also raise the price. The result is higher demand and higher prices for cartridges, which of course contribute to the vendors’ bottom line.
Off-brand, Third-Party Ink. To the extent that this strategy is successful, it lowers margins on printers and raises margins on ink, which in turn discourages entry into the printer market and penalizes vendors who might specialize only in the sale of printers. Concurrently, the high margins on ink or cartridge sales invite competitive entry into that supply of ink in various configurations. The market response has been predictable, inasmuch as several firms have targeted the stand alone, replacement cartridge/ink market.
FTC Addresses Information Deficits in Sales of Personal Computers
‘Free’ and ‘Low Cost’ PC Offers. Go Figure!
You’ve probably seen the ads for “low cost” PCs – “PCs for $199” – or even “free” computers. If you’re in the market for a personal computer, the Federal Trade Commission wants you to know that “free” doesn’t always mean free. Very often, certain conditions and restrictions found in the fine print of advertisements for “free” or “low cost” PCs can turn a so-called deal into a big ticket buy.
“Free” or “low-cost” PC offers often require “bundled” Internet service contracts, which may last up to three years. In return for signing up for Internet service, you can get as much as a $400 rebate on the computer purchase. While some of these offers can be good deals, many are not as affordable as they may seem. Frequently, important details about the rebate and Internet service offer are difficult to ferret out because they’re left out of the advertising or buried in the fine print.
To get a “low cost” PC, you may have to pay the full cost of the computer up front – that is, the total price without any rebates. If the PC is advertised for $199 after rebates, you may have to pay $599, plus any sales tax and shipping charges, and then send for the $400 rebate.
Usually, you have to apply for the rebate in writing, mail in documentation of the sale and then wait – sometimes months – until you receive your rebate check. Sometimes “instant” rebates are offered and you can get your deduction immediately. But some offers allow you to spend the rebate only on other merchandise from the manufacturer or retailer, meaning you still have to pay the full price for the computer.
When you buy a “free” or “low cost” computer, you often have to sign up for three years of Internet service at $20-$30 a month – a total cost of up to $1,000 for three years. Technology is changing at a dizzying pace. It’s possible that the three-year Internet service you lock in today could be out of date in six months or a year. And if you’d like to cancel your service, you’ll likely have to pay a substantial penalty.
If you decide to cancel your Internet service for any reason, chances are you’ll have to pay back some or all of the rebate you received; you also may have to pay a cancellation fee of $50 or more.
If you don’t live in a major metropolitan area, you may have to pay long distance telephone charges to access the Internet. Or you also may be able to use a “toll-free” (800, 888 or 877) number supplied by the Internet Service Provider (ISP), but you may be charged five or six dollars an hour to use their “toll-free” number. Whether you choose to use the ISP’s telephone number or pay long-distance charges, your phone calls to access the Internet could add up to more than you’ll save through the rebate.
If the PC offer requires you to sign-up for Internet service, ask the retailer and the ISP for the Internet access phone numbers closest to you. Then check with your local phone company to determine whether you have to pay long distance rates to use those phone numbers. You may want to consider another offer if the “deal” you’re considering requires you to call long distance or pay a fee to access the Internet.
It’s possible that the cost of a monitor or other crucial system components may not be included in the PC offer you’re considering. The advertisements for the offer may not be clear about what’s included. If you have to buy a monitor, for example, plan on spending at least an additional $150.
When considering a “free” or “low cost” PC offer, ask the retailer about up-front costs, rebates, essential components, Internet access costs, long-term commitments, cancellation policies, local or long distance phone access and any other important issues. Details will help you make the deal that’s right for you.
Filing a Complaint
If you think you’ve been misled about a “free” or “low-cost” PC offer, contact the Federal Trade Commission.
The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
Larry F. Darby
Dr. Darby is a board member of the American Consumer Institute Center for Citizen Research and President of Darby Associates, an IT consulting firm. He served for many years as Professorial Lecturer in Telecommunications Finance at the George Washington University Graduate School and is now Adjunct Professor of Law at the New York Law School. Dr. Darby has testified before Congress on wireless spectrum, airline passenger services, telecom markets, trade agreements and postal rate structures. He is Senior Economic Advisor to CompassRose International, Inc. and foreign governments.
Prior to this, he was Vice-President for Lehman Brothers, spent two years on Capitol Hill as the Executive Director of the Motor Carrier Ratemaking Study Commission, served as Chief Economist and Chief of the FCC’s Common Carrier Bureau and served as Senior Economist of Telecommunications Policy in the White House Office. He also taught managerial economics, industrial economics, and the regulation of business for the Graduate School of Business at Temple University.
He earned a doctorate in economics from Indiana University in 1971, specializing in industrial organization, public finance and international economics.
Mr. Pociask is a board member of the American Consumer Institute Center for Citizen Research. He has published numerous economic studies, including three books for the Economic Policy Institute, and policy studies for numerous independent nonprofit organizations. Many of his research studies have focused the consequences of public policies on consumer welfare. His research topics include energy, insurance, consumer products, information technology and healthcare.
He has also written reports for the Small Business Administration’s Office of Advocacy, including one on small businesses’ telecommunications expenditures and use, and one on broadband use in rural America. He has testified before Congress. He has appeared numerous times in the media, including Bloomberg News, CNBC, NBC, Fox, Congressional Quarterly, New York Times, and CNET Radio. He is a public policy associate for the Center for the New West, policy expert for the TeleNomic Research and an Adjunct Scholar for the Competitive Enterprise Institute in Washington, DC.
From 1998 to 2000, Mr. Pociask served as chief economist and executive vice president for Joel Popkin and Co., an economic consulting firm in Washington, DC. He has completed his Ph.D. coursework in economics and has an M.A. in economics from George Mason University.
* This study was conducted by TeleNomic Research and was supported in part by an unrestricted financial grant from Kodak. It was released by the American Consumer Institute Center for Citizen Research, a nonprofit research and education organization. The American Consumer Institute received no funding for the study’s release, publication or representations. The authors wish to recognize and thank Professor Joseph Fuhr for his helpful suggestions.
 David Kiley, “Nielsen: DVDs Pass VCRs in U.S. Households,” Business Week, December 19, 2006.
 IT Strategies annual forecasts are available at http://www.it-strategies.com/freedata/home.html.
 Ibid. Also, see William M. Bulkeley, “Kodak’s Strategy for First Printer – Cheaper Cartridges,” Wall Street Journal, February 6, 2007, p. B1 for a reference to the inkjet market as a “$45 billion a year ink oligopoly.”
 Our interviews with industry representatives indicate general agreement that the inkjet ink market is about one-half the size of the inkjet equipment market, though one report cited Lexmark’s supplies as exceeding 50% of its revenues (See www.rechargermag.com/articles/41750 ).
 Damon Darlin, “New Printer Cartridge or a Refill?” New York Times, February 4, 2006.
 See “Printer Products Review,” PC Magazine, http://www.pcmag.com/category2/0,1874,10,00.asp.
 All-ink.com, an online vendor of printer supplies, lists, in addition to the brands linked to printer makers, the several other manufacturers of printer ink cartridges or supplies: Apollo, Bowes, Citizen, Compaq, CopyStar, Gestetner, IBM, Lanier, Mita-Kyocera, Murata, Okidata, Pitney TEC, Ricoh, Star, Tektronix, Savin, and Verifone—at: http://www.all-ink.com/prod.aspx?MID=-1
 Damon Darlin, “New Printer Cartridge or a Refill?” New York Times, February 4, 2006.
 Gartner Group Inc., “Gartner Says Color Printers Drive Worldwide Page Printer Market to 19 Percent Growth in 2005,” February 23, 2006, at http://www.gartner.com/it/page.jsp?id=492247.
 This is confirmed by a spokesman for a leading printer research firm: “In 2006, the inkjet cartridge market was worth $30 billion worldwide. Industry observers expect that figure to grow for another five years before the market flattens and the price of ink starts to decline, Lyra’s Lippman says.” Quoted in PC World, April 23. 2007 at http://pcworld.about.com/od/Inkjet/HP-Streamlines-Ink-Buying-for.htm. Also, see Damon Darlin, “New Printer Cartridge or a Refill?” New York Times, February 4, 2006, quoting a figure just above $30 billion per year.
 George Jones, “Special Report: The Cartridge Wars,” TechWeb, October 11, 2006, available at http://www.techweb.com/showArticle.jhtml?articleID=161700002.
 Joseph Farrell and Paul Klemperer, “Coordination and Lock-In: Competition with Switching Costs and Network Effects,” May 2006. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=917785
“Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets into early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects.” The antidote to switching costs and lock-in is interoperability or standardization among different primary and complementary products.
 William M. Bulkeley, “Kodak’s Strategy for First Printer—Cheaper Cartridges,” Wall Street Journal Online, February 6, 2007, p. B1.
 According to an article on the website Texyt, “Printer Ink Is about to Get Much Cheaper,” accessed on 01/19/2007. See: http://texyt.com/epson_kodak_cheap_ink_cartridge_prices.
 “PC ink Sales Help HP Beat Wall Street Estimates,” http://www.msnbc.msn.com/id/20298724/.
 The implications of imperfect information informing consumer choices have been intensively studied. An extensive review and summary is beyond our scope here, but we can recommend a handful of studies and the references they cite. See, Joan K. Lewis, Teresa Mauldin, “Returns to Investments in Information: Can Investments Reduce Bad Purchase Experiences of Consumers?” Journal of Consumer Studies and Home Economics, 20 (2), 183–199, 1996. The authors examine the impact of consumer information, information sources, information acquisition costs, and consumer demographics on “bad purchase” experience. The results suggest that age, education, extent of social contacts with relevant information and others were relevant. See also, George B. Sproles, Loren V. Geistfeld, and Suzanne B. Badenhop, “Types and Amounts of Information Used by Efficient Consumers,” Journal of Consumer Affairs, Vol. 14, Issue 1, p. 37, June 1980. The paper examines the efficiency of consumer decision-making as indicated by the types and amounts of informational resources utilized. They classify consumers in three groups ranked by their relative efficiency in making optimal choices in the context of their wants/needs/preferences and the information available about alternatives. Taken together these papers indicate that inadequate consumer information leads to loss of consumer welfare; that information acquisition by consumers is often costly; and, that investing in better information can lead to increased consumer welfare.
 See A. Postlewaite, Asymmetric Information, Allocation, Information, and Markets, (John Eatwell, Murray Milgate, Peter Newman, eds.), The New Palgrave, WW Norton, NY and London, 1989, pp. 35-38.
 The first diagram in Appendix I shows higher ink profits associated with higher printer sales. The second diagram there shows: a) that integrated firms can take losses on printers, but recoup those and more through higher prices and greater sales of ink, and b) that some high volume ink consumers wind up subsidizing low volume ink consumers though the mismatch between costs and prices for the two items.
 Printers usually have longer “usable” lives than their “economic” lives. Usable printers are frequently scrapped, handed down or resold when their owner desires more functionality, quality or other attributes available from another printer on the market. User needs and available attributes change in ways to render economically obsolete printers that are otherwise still serviceable.
 For a discussion of ways incumbent market conduct may raise entry barriers, see T. Krattenmaker and S. Salop, “Anticompetitive Exclusion: Raising Rivals’ Costs to Achieve Power over Price,” 96 Yale Law Journal, 209, 247-48 (1986).
 See note 12, “Coordination and Lock-In: Competition with Switching Costs and Network Effect” and sources cited there. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=917785.
 For example, HP cited IDC figures putting HP U.S. printer market position at 59% (“HP Reports 1st Quarter 2003 Results,” HP news release, February 2003); and HP reported its inkjet all-in-one products to be 68% of the U.S. market (“HP Introduces All-in-one Devises to Increase Efficiency and Productivity in Small Businesses and Home Offices,” HP news release, February 19, 2002).
 “Gartner Says United States Printer and MFP Shipments Declined 4% in Second Quarter of 2006,” Gartner Media Release, September 5, 2006, citing inkjet printer and MFP shipment data from Gartner Dataquest, August 2006.
 Ben Reitzes, “Why HP’s Success in Printing Makes It a Compelling Stock, Still,” USB, presented at the Lyra Symposium in Palm Springs, January 31, 2007.
 The meaning of this critical level of the HHI is indicated by the US Antitrust Merger Guidelines, wherein the agencies note that in the context of a merger between two firms whose post merger shares lead to an HHI of 1,800 or more, the agencies regard “…markets in this region to be highly concentrated.” This implies that a proposed merger topping that figure would raise red flags, even though existing market shares in several industries, including that for printers, are well above that threshold and signal no specific antitrust problem. For more information see the U.S. Department of Justice and Federal Trade Commission’s Horizontal Merger Guidelines or visit http://www.usdoj.gov/atr/public/testimony/hhi.htm .
 This HHI calculation treats all the “other” smaller firms as a single entity, since detailed firm data on small suppliers is not available. The simplification leads to a modest underestimate the true HHI.
 Damon Darlin, “New Printer Cartridge or a Refill?” New York Times, February 4, 2006.
 Loralee Stevens, “Staples Drops Rebuilt Cartridges for Epson and HP,” North Bay Business Journal, April 23, 2007; and “Rivals Say HP is Using Hardball Tactics,” BusinessWeek, February 19, 2007.
 “Cartridge Reliability Study, QualityLogic,” Commissioned by HP, April 2007.
 Pui-Wing Tam, “Entrepreneurs Offer Cheaper Printer Ink,” Wall Street Journal, June 14, 2005.
 Damon Darlin, “New Printer Cartridge or a Refill? Either Way, Ink is Getting Cheaper,” New York Times, Technology Section, February 4, 2006.
 George Jones, “Special Report: The Cartridge Wars,” TechWeb, Oct 11, 2006 09:46 AM. Available at: http://www.techweb.com/article/showArticle.jhtml;jsessionid=R3P0XZMAE31VSQSNDLPSKH0CJUNN2JVN?articleID=161700002.
 M. David Stone, “The True Cost of Printing,” PC Magazine, August, 2003. Available at: http://findarticles.com/p/articles/mi_zdpcm/is_200308/ai_ziff44663/pg_1.
 For this illustration, prices were collected from Staples.com for the basic size black and tricolor HP cartridges used by the HP Photosmart C4280. This is an illustration only. Results could vary by brand, fill size and retail outlet.
 For example, see HP DJ 660C, HP DJ 720C and HP DJ 880C, which require cartridges HP #29, #49, #45 and #23. Prices taken from Staples.com.
 For example, see HP PSC 1315, HP PSC 1410 and HP Photosmart C3180, which require cartridges HP #27, #28, #21, #22, #92 and #93. Prices taken from Staples.com.
 Damon Darlin, “New Printer Cartridge or a Refill? Either Way, Ink is Getting Cheaper,” New York Times, Technology, February 4, 2006.
 The next two charts and corresponding analyses are based on a selection of popular printers that target consumers and home office businesses. This analysis provides more evidence of the nature of inkjet price changes. But, since it represents a small sample of all inkjet cartridges, a more exhaustive analysis is recommended before drawing definitive conclusions about the precise magnitude of industry price changes.
 While cartridges have declined in size, some manufactures have begun to offer cartridges with greater fill rates and multi-packs. Despite these savings prices have still increased for consumers on a cost per ML.
 These figures came from www.bls.gov, downloaded on September 26, 2007, and represent the percent change from June/July 1999 to June/July 2007.
 “US Home Printer Users’ Study,” Lyra Research, Inc., 2004.
 As noted at “High Ink Costs Impact Home Printing,” May 25, 2007, available for download at: http://www.printondemand.com/MT/archives/010988.html,
 Op cit. Buckley, Wall Street Journal.
 HP 2006 Annual Report, segment information, p. 137, fiscal year for 2006. As defined in the annual report net revenue refers to revenue less intracorporate sales and transfers. In the first quarter 2007 SEC 10Q filing, the company highlighted, quite conspicuously, the importance of the disproportionate contribution of printer supplies segment to overall earnings: “Overall gross margins and profitability in any given period are dependent partially on the product, customer and geographic mix reflected in that period’s net revenue. In particular, IPG and certain of its business units such as printer supplies contribute significantly to our gross margin and profitability.” (Emphasis supplied.)
 Wired Magazine, quoting IDC analyst Roger Kay at: http://www.wired.com/techbiz/media/news/2003/06/59256
 William M. Bulkeley, “Kodak’s Strategy for First Printer — Cheaper Cartridges,” Wall Street Journal, February 6, 2007; Page B1.
 Robert L. Mitchell, “Ink Wars: Kodak vs. HP in the Ink-jet Consumables Battle,” Computerworld, July 8, 2007. The article lists both printers at $199. The article notes that HP sometimes offers rebates, a point that will be addressed below.
 “QualityLogic Ink Yield Test Report,” April 2007. For a copy of the report or information about the industry standards, see http://www.qualitylogic.com/News/Kodak/EasyShare5300Summary.html.
 Robert Mitchell, “Ink Wars: Kodak vs. HP in the Ink-jet Consumables Battle,” Computerworld, July 9, 2007.
 Scott Dunn, “Epson’s Claims of Cheaper Ink are Empty,” Windows Secrets Newsletter, July 5, 2007. Available at http://www.windowssecrets.com/2007/07/05/02-Epsons-claims-of-cheaper-ink-are-empty.
 Scott Dunn was gracious enough to share all his figures and calculations.
 Considerations other than printer and ink prices are of course involved in consumer choices of printers. Printers have different features and expected lives, while ink attributes also vary. We recognize, but ignore for simplicity, that these differences may, in the case of a particular consumer, outweigh considerations of printer and ink prices.
 In order to preserve focus here on price issues, we finesse any potential differences in paper costs or in the ambient characteristics of different printers with comparable functionality.
 Not much is known about the distribution of users in these respects and whether it is normal or skewed.
 Robert L. Mitchell, “Ink Wars: Kodak vs. HP in the Ink-jet Consumables Battle,” Computerworld, July 8, 2007. The article lists both printers at $199. The article notes the incumbent’s printer is often available with $20 rebates. For this reason we set the new entrant’s price at $200 and the incumbent’s price at $180, attributing the price difference to be largely due to the razor/blade pricing strategy. We note as well that a recent Wall Street Journal report quoted analysts as follows: “The printers [of the new entrant], primarily intended for home rather than business use, will be priced at $150 to $300, depending on whether they have color displays and slots for camera memory cards. Analysts said the prices are each about $50 more than comparable multifunction devices now on the market.” William M. Bulkeley, “Kodak’s Strategy For First Printer — Cheaper Cartridges,” Wall Street Journal, February 6, 2007, Page B1.
 Scott Dunn, “Epson’s Claims of Cheaper Ink are Empty,” Windows Secrets Newsletter, July 5, 2007. Available at http://www.windowssecrets.com/2007/07/05/02-Epsons-claims-of-cheaper-ink-are-empty. Dunn also provided us his price matrix and details using the QualityLogic data, all of which were used to check Kodak’s claim of lower inkjet ink prices. Upon review, we regard Dunn’s work as acceptably accurate and use his price per printed page in our estimations, given a print-type distribution of 50% monotone text pages, 40% color and 10% photo. This produces a weighted average print price of 4.9 cents per page for the new competitor and 12.3 cents per page for the incumbent. On these assumptions, the analysis indicates that heightened price competition could result in roughly 60% reduction in ink prices.
 Mitchell, 2007.
 We noted above that one expert estimated a $50.00 average price difference between the low cost ink and high cost ink printers. (See Buckeley, Wall Street Journal at note 32 above.) Our baseline Printer #2 cost savings of $400.00 assume a $20.00 printer price differential. If the difference is in fact $50.00, then the savings from Printer #2’s low variable ink costs would be $370.00.
 Rogers, Everett M. (1983, 2003) Diffusion of Innovations, 3rd ed., 5th ed., New York: Free Press.
See also, Fisher, J.C., and R.H. Pry “A Simple Substitution Model for Technological Change,” Technological Forecasting and Social Change, 2, (1971), pp. 75-88.
 David Kiley, “Nielsen: DVDs Pass VCRs in U.S. Households”, Business Week, December 19, 2006. Online at: http://www.businessweek.com/the_thread/brandnewday/archives/2006/12/nielsen_dvrs_pa.html
 It has been estimated that there are 1.2 printers for every personal computer. Online at: http://www.inktons.com/printing_industry/consumer_demand.html However, this includes both business and household PCs, but we suspect that the number of homes with more than one printer per PC exceeds the number with a PC and no printer.
 Since these dollars are not discounted to reflect the time value of money, it is likely the savings in year five and beyond would have significantly lowered present values.
 Oleg Melnikov, “Demand for Differentiated Durable Products: The Cost of the U.S. Computer Printer Market,” Yale University, Department of Economics, November 13, 2000. At page 33, Melnikov writes – “… we find that demand in the lowest price category is the most elastic.”
 The price consumers actually pay for ink will exceed the amount they have to pay. Economists use the notion of “consumer surplus” to measure the difference between what consumers would have been willing to pay and what they actually wind up paying. Our initial measure here does not capture the value of consumer surplus, since it values only the benefit of purchasing 1500 pages at the old price, $.12, but not the value conferred from the opportunity to buy more pages, 870 pages by our assumption, at the new lower price of $.05. This amount may be substantial. The law of downward sloping demand, implying greater quantities purchased at lower prices, dictates that for all except the last page printed consumers would have been willing to pay more than $.05. Thus, the consumer surplus begins at 12 cents (what they were paying and a rough approximation of what they would have been willing to pay for one more page) minus 5 cents (what they paid in fact for ink per page with the new printer) equal to 7 cents, then declines from 7 cents to 6 cents to 5 to 4 to 3 to 2 to 1 to zero as quantity expands from 1500 to 2370 printed pages. The difference between that amount and their willingness to pay is the measure of consumer surplus. The standard, widely used measure for this consumer surplus (CS) from a price reduction and quantity increase is: CS= ½ rPrQ, or half the product of the change in price times the change in quantity. For a fuller explanation of consumer surplus and its measurement see, Larry F. Darby, “Consumer Welfare, Capital Formation and Net Neutrality: Paying for Next Generation Broadband Networks,” The American Consumer Institute, June 6, 2006, pp. 20-23 and references there. Online at: http://www.aci-citizenresearch.org/Net%20Neutrality%20Study.pdf
 For example, in a lengthy review of consumers’ printer options, Consumer Reports had this to say: “High ink-cartridge costs can make a bargain-priced printer a bad deal in the long run. Shop around for the best cartridge prices, but be wary of off-brands.” Such statements are more likely to frighten consumers than to inform their choices. We tried to follow this advice and were frustrated by the dearth of information available from retail sources. Neither information contained with the product itself, nor that from sales staff, was helpful to a consumer inclined to shop around and minimize total printing costs. See: http://www.consumerreports.org/cro/electronics-computers/computers/computer/printers/reports/how-to-choose/index.htm For an equally uninformative review, see also http://www.consumersearch.com/www/computers/inkjet-printers/.
 Some of the policy options are laid out and discussed by Ruth G. Thomas, “Consumer Protection, Education and Information: A Consumer Incentives Perspective,” Review of Policy Research, Volume 2, Issue 3, p. 445-454, February 1983. Thomas analyzes policy alternatives as they impact consumer incentives in the context of different characteristics among consumers, products and market contexts.
 Aidan R. Vining and David L. Weimer, “Information Asymmetry Favoring Sellers: A Policy Framework,” Policy Sciences, 21:4, 1988, p. 281. Vining and Weimer give the following guidance: “Three questions are important: first, under what conditions does the potential for significant inefficiency due to information asymmetry exist? Second, under what conditions are private responses likely to prevent the inefficiency from being realized? And third, what are the different potential, public interventions for reducing any inefficiency that does occur?”
 See Appendix II.
 An alternative to a “per page” estimate would be to require labeling on every printer and cartridge that would estimate a standardized printing cost per year for the average user.
 To avoid clutter in the diagram, the marginal revenue schedules corresponding to the two demand curves are not shown.
 Formally, profits from printers are a function of printer prices, quantities and costs, while profits from ink are a function of ink prices, quantities, costs, and the quantity of printers installed and being sold. The link between the two profit functions is the quantity sold of printers, which appears in the profit equations for both printers and ink. We explore these relations further in the discussion to follow.