How do you think about the iPhone 3GS after the iPhone 4 is out? I have a hypothesis that it’s not what it seems.

The standard logic is that the 3GS (which I will call the n-1 where n is the current phone version) is a lower-priced leftover that covers a lower price point and expands the market.

I think it’s designed to give the illusion that the iPhone 4 is actually more desirable steering more potential buyers to the new (nth) phone.

To illustrate I’m going to call upon the wonderful example given by behavioral economist Dan Ariely at the TED talks.

Imagine I give you a choice: Do you want

- (a) “a weekend to Rome, all expenses paid” or
- (b) “a weekend in Paris, all expenses paid”?

They are different but compelling choices. Perhaps a survey would find these two choices equally popular.

Now imagine I added a third option to these two that nobody wanted:

- (c) having your car stolen.

It seems a strange choice, because how could having your car stolen in this set influence anything? Obviously (a) or (b) would be the only compelling options. But what if the option for having your car stolen was not exactly like this. What if the third option was

- (a-) “a trip to Rome, all expenses paid but no free coffee with breakfast.”

Given that you can have Rome with coffee, why would you want Rome without coffee? It’s an inferior option just like having your car stolen.

But, the moment you add Rome without coffee as an option, Rome *with* coffee becomes more popular and people choose it much more often. **Having Rome without coffee makes Rome with coffee seem superior, not just to Rome without coffee but even to Paris**.

Adding (a-) to the set of choices (a) vs. (b) makes choosing (a) much more likely.

He goes on to describe a subscription offer from The Economist which, by inclusion of an inferior option, steered people to choose a more expensive option.

My point here is that I hypothesize that the iPhone n-1 (Rome without coffee) is an inferior option to the iPhone n (Rome with coffee) and that it steers more people to choose iPhone n not just over iPhone n-1 but over the competition (Paris). Of course the inferiority of iPhone n-1 is offset by its lower price, but I put it that the difference of $100 is not that great in the eye of most users when they see the difference with the new model. The price difference does not make the iPhone n-1 look all that great. It’s still Rome without coffee.

We don’t have precise stats to prove that iPhone n-1 is ignored as an option, but the ASP numbers never seem to drop. They seem to indicate that the overwhelming number of iPhones sold are the top of the line. Therefore the presence of an inferior option does not dilute the average selling price, but, in fact, increases overall volumes of the top product.