Paul, re your message of 9/26:
"Since a Pentium MMX costs $200 to $500 ... If Intel gave the Pentium away for FREE, the price would only drop by the cost of the Pentium, ($500 maximum)."
Sorry, Paul, Petz got the drop on you this time.
There is a "multiplier" between the manufacturer's cost of a part and the impact of that cost on the retail price. For PC's, I think that it is probably about 300%; so, if the processor cost dropped by $500, it is a certainty that the selling price would drop by MUCH more than $500, and quite possibly by $1,500 or more.
In a cost-based model, what matters is the relationship of the cost of the component in question to the TOTAL cost of the product. A $500 drop in the cost of a CPU MIGHT represent a drop of one-third in the total cost of the product, and might, in a cost based model, result in a corresponding one-third drop in the selling price.
That said, I would add that pricing is usually market-based, not cost based. Sometimes, manufacturers "make a killing", when they have a hot product and little competition (Visioneer, Snappy and Iomega, for example, before the competition caught up). Other times, manufacturers have to sell at a loss, just to get rid of inventory (too many examples to even mention). In general, you sell for what the market will bear, or for what maximizes your gross margin. What that number is depends on demand and competition. Sometimes there is much demand and no competition. Other times, the existing supply from all vendors is greater than the total size of the market, so the market has to be increased by cutting the price, cutting it even below the cost of the item to the manufacturer in some cases. |
