Date posted: January 30, 2008

When To Buy a New Digital Camera?

Imperfect Knowledge Economics Part 3

A product’s price is determined by supply and demand. The equilibrium price is the price at which supply and demand are in equilibrium and the market is said to clear. At each given price individuals try to maximize their utility by allocating their income to a good and possible alternatives. Or so the theory goes.

Consumers base their buying decisions not just on current prices, but also on forecasts of future prices and, in case of technological products, forecasts of future models.

A quick look at the discussions forums at dpreview.com, one of the most popular digital camera review sites, shows just how uncertain people are as to when to buy which camera.

When a new model is introduced the price of the older model drops. Some manufacturers offer rebates on existing models a few months before the introduction of new models so as to clear any remaining stock. Rebates therefore announce the imminence of new models.

Consumers have to decide whether to wait for a new model, which may or may not be a major advance over the existing models, to buy an existing model with a rebate, or to buy a discontinued model once a new model has been introduced at an even lower price point.

From 31 January until 2 February the PMA, the biggest annual photography convention and trade show, will take place in Las Vegas. Many people will eagerly check all the product announcements. Will Canon introduce a follow-up to the 5D? I myself look forward to the introduction of the Sigma DP1, the first compact camera with a sensor approximately the size of the sensors in most DSLRs.

In their seminal book “Imperfect Knowledge Economics. Exchange Rates and Risk” Roman Frydman and Michael D. Goldberg offer a first step towards a more realistic representation of individual demand. Their model does not predetermine how consumers adjust their demand for a good as prices change. Instead it allows for a range of demand paths.

For example, to capture the above, we would have to assume a normal demand function for all prices above a certain level P, and a demand function after rebate, following which an individual may change his forecast of future prices (a further drop) and may decide to either buy now or postpone a buying decision, depending on the time until a trade show (PMA, Photokina, Macworld).

Since manufacturers base their manufacturing and marketing decisions on their understanding of consumer behavior, these kind of exercises are not without merit. To prevent consumers from postponing their buying decisions because of expected new product announcements in the run up to a trade show, Apple now also updates product lines in-between the Mac events that used to be the showcase for new products.

MacRumors Buyers Guide. "The intent [of this page] is to provide our best recommendations regarding current product cycles, and to provide a summary of currently available rumors for each model."