This Black Friday, I had the occasion to ponder why it is that Apple offers free engraving on iPods and iPads (hereafter, iP*ds). A small part of the reason is surely that it adds value for some of its customers. But assuming that the cost of engraving is not zero, this is not much of a reason to offer it for free. At best, it is a justification for offering the service at marginal cost. Indeed, Apple used to charge for iPod engraving.
If the kind of people who value engraving are also likely to place lower value on iP*ds, then it could be a method of statistical price discrimination. But this does not really seem plausible, does it?
The real reason Apple offers free engraving is to weaken the secondary market. iP*ds are durable goods. Apple has a monopoly on iP*ds, but it still has to compete with the products of its former self. If people get tired of their iP*ds or decide they want to upgrade to a newer model, they can sell their devices to other consumers, who in turn are not giving their money to Apple. By offering free engraving, Apple makes these used devices less valuable to other consumers. Who wants a weird engraving chosen by the previous owner on his iP*d? The more iP*ds are engraved, the smaller (or at least less valuable) the secondary market is, and the more profitable it is to be the durable-goods monopolist, Apple.
Jeremy Bulow wrote the classic article on how the secondary market affects durable goods monopolists, but as I recall he doesn’t consider personalization as a strategy. Instead, he focuses on how firms can rent instead of selling their products (effectively taking durability out of the equation), credibly promise not to lower prices in the future, or simply make their product less durable. Has anyone considered product personalization as a way to mitigate the durable goods problem? Are there other examples of firms doing this?
For those brand new to the durable goods problem, be sure to read Coase’s short 1972 paper before you tackle Bulow.
Update 11/29: I reply to a few objections here.