Is the New Foldable iPhone Just a Smokescreen?

This week’s unveiling of the $1,999 foldable iPhone Duo can be seen not only as a technological innovation but also as a strategic pricing move by Apple. At the same time, the company raised the prices of the iPhone 18 Pro and Pro Max by $100, apparently in part because of rising memory chip costs.

From an economic perspective, the effect of the $1,999 price tag on how consumers perceive other iPhones may be more significant than the foldable phone itself. Apple has created a new, exceptionally expensive price tier above the Pro Max.

Different Versions at Different Prices

The term “price ladder” is used to describe a similar structure. Rather than offering a single product at a single price, companies offer several progressively more expensive variants, allowing consumers to choose according to their budget and preferences.

This principle is firmly rooted in the economics of product lines. Hal R. Varian of the University of California, Berkeley, has described how “versioning” – offering different versions of the same product – allows a producer to use varying levels of quality and pricing so that customers segment themselves according to their willingness to pay.

Customers prepared to spend more choose the more expensive version, while others opt for the cheaper one. Modern literature on product line design suggests that a firm can simultaneously optimize the number of variants, their quality and their prices to maximize profits across the entire line, rather than necessarily maximizing the profit of each individual model.

The Anchoring Effect

This is why the main purpose of the iPhone Duo may not be to sell the model in huge volumes. It can play an important role simply by shifting the upper end of the price range from roughly $1,300 to $2,000.

Here, another well-known mechanism of behavioral economics comes into play: the anchoring effect, or price anchoring. People do not judge prices solely in absolute terms, but also in relation to other prices they are shown.

A study in the Journal of Consumer Research found that price anchors can significantly influence consumers’ willingness to pay, particularly when there is uncertainty about a product’s value.

For Apple, the implication is simple. As long as the iPhone Pro Max was the most expensive phone in the lineup, its $1,299 price tag represented the upper limit. Placed alongside the $1,999 iPhone Duo, however, the same Pro Max can appear to be a considerably more affordable option.

More specifically, this is known as the compromise effect. Under certain conditions, consumers tend to choose an option that lies between two extremes. Research published in the Journal of Economic Behavior & Organization found, using real-world data from a restaurant, that when a particular item became the middle option following a change to the menu, it gained approximately five percentage points of market share on average.

Moreover, this tendency was stronger when a more expensive option was added at the top end of the menu. Other experimental studies have found that the compromise effect also applies to more expensive durable goods. This is where the Duo could be particularly valuable to Apple. A $1,999 phone can transform the $1,299 Pro Max from the most expensive iPhone into a reasonably priced middle option within the premium segment of the lineup.

A Shift in Product Structure

The launch of the Duo may, in fact, be a way to protect profit margins. If a company’s production costs are rising, it does not have to raise the price of a single product across the board. Instead, it can reshape its product lineup and pricing, encouraging more customers to choose higher-end models while making higher prices seem more acceptable. Rising costs for memory and state-of-the-art chips, driven in part by massive investment in artificial intelligence data centers, are putting pressure on production costs.

Apple has a strong incentive to protect the high profitability of its most important product. Cause and effect could therefore be partly reversed. The tech giant may not have launched an expensive foldable phone only to discover afterward that it had created a new price tier.

Rather, two factors may have aligned: a foldable phone that had been in development for several years and the need to shift the iPhone’s pricing structure upward amid rising costs. The result is a potentially highly effective pricing strategy.

Instead of the headline “Apple has raised the price of its most expensive iPhone again”, the story becomes “Apple has introduced a brand-new foldable iPhone for $1,999”. The $1,299 Pro Max will then appear – despite its noticeable price increase – to be a significantly cheaper device, effectively positioned somewhere in the middle in terms of price.