Mike Hoelke Jay Newberry 4/28/05. Hard Drive Consumers: No Longer Infra-Marginal? ECON 4311

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1 Mike Hoelke Jay Newberry 4/28/05 Hard Drive Consumers: No Longer Infra-Marginal? ECON 4311

2 Over the last 10 years or so, the pre-bundled personal computer package has become the primary manner to purchase a computer. After someone has purchased their personal computer from a distributor such as Dell, Gateway, etc, they usually can not upgrade several aspects of their machine. Though, adding additional storage capacity, such as a hard drive, is almost always still an option. The consumer usually has the option to purchase a hard drive from the same company that sold them the whole package; however, frequently the consumer will either go to a local retailer or an internet store. If this approach is taken, the consumer will have to make a decision on which brand and what specifications that they want on their hard drive. In addition, there are still plenty of small businesses and individuals who will purchase their computer components separately and then assemble them on their own. They will naturally be in the same situation as the consumers mentioned above when purchasing their additional storage capacity. Eight to ten years ago, hard drives were significantly more heterogeneous in nature and failure was more rampant. These days, they have become more homogeneous and considerably more stable. The market for non-server, non-scsi (scsi is an additional type of interface which is rarely used by the average consumer) hard drives is controlled primarily by 8 firms. There are plenty of other firms in the market but they control a very small portion. Several questions and interesting observations can be made about this segment of the computer industry. Primarily we were interested in seeing how infra-marginal the consumers have become while also looking at the search habits of the consumer. We are

3 going to try to prove that the average consumer, in the segment of the hard drive market that we are analyzing, is almost a true marginal consumer but that perhaps they used to be an infra-marginal consumer. The theory and concepts tied directly to our hypothesis include consumer search patterns with reservation prices, risk aversion and the concept of being an infra-marginal consumer. By gathering data through a series of questions on a poll, the concepts just mentioned can be applied to the data and help us come to a conclusion with our hypothesis. The consumer search rule tells the consumer to continue searching for a lower price at alternate firms if Firm X is charging the consumer a price higher than the consumer s reservation price. The reservation price is the price that is set by an individual consumer (individual person or firm) where the consumer is equally content by purchasing at the reservation price or by searching for a lower price. Prices at firms that are higher than the reservation price should be ignored and the consumer should continue their search. We are theorizing that our test subjects in the hard drive market used to spend significantly more time searching for better prices in the past and researching the hard drives that they were considering purchasing. Thus, we are going to try and prove that they had a higher reservation price and felt that that the expected benefits of research and price searching were much higher than they are now. Tied into the reasons of having a higher reservation price and the perception of a higher level of expected benefits is the concept of risk aversion. The concept of risk aversion is fairly simple. Simply put, a risk-averse consumer is a one who would rather spend more resources on what they feel is a product with a higher expected value. The

4 higher expected value would be the ability to derive the theoretical benefits of the product without failure or to do so with less than expected results. Thus, we are going to try and show that our test subjects were much more risk-averse consumers in the past than they are now and prove that they now feel that the hard drives are much more reliable and homogenous in nature than they used to be. Thus, that the overall risky-ness of purchasing a hard drive has dropped considerably. Lastly, the concept of the infra-marginal consumer is at the core of our project s analysis. A true marginal consumer will purchase the alternate cheaper brand assuming that all things are equal between the two different products. Whereas, an infra-marginal consumer will have an attachment to the product that they normally consume, thus they will be willing to expend more resources to continue purchasing their product, at least up to a certain point. Then once they have reached their threshold on price, they will switch over to a rival s product with a lower price. In our hypothesis, we have theorized that the test subjects will respond to the survey with data that would reflect a considerably higher level of infra-marginal consumption in the past as compared to a more marginal consumption level in the present. All of the above concepts and theories can only be tested with a decent amount of data. Our data collection process involved designing a poll that would include a series of questions which could theoretically give us enough information to make decent conclusions. We felt that we would need a fairly large number of poll participants in order to create a population that would be able to represent the area of the hard drive market that we were analyzing. The poll was not used on UTA students, staff or faculty. Some of my friends run an online forum which is where we temporarily placed the poll.

5 On top of being an easy route in which to poll a good number of people, the people who are registered on the site are the type of people we were interested in polling. In addition, the poll was administered to several of our friends workplaces. We checked with all of the work establishment s management to make sure that they were comfortable with the poll being administered during work hours. The poll that we used is at the end of the project. While interpreting the results pertaining to search times from our poll, we noticed a couple of developing trends in the data. First and foremost, we wanted to make sure that the places offering the hard drives were at least somewhat competitive. We found an average standard deviation of This data shows us that the market is competitive but searching for price will still yield some savings. This leads us to our poll. Of the 78 people, 48% did not even bother to search more than one place for a hard drive. This leads us to believe that either their expected benefits are next to nothing or they have some preconceived notion that searching will lead to no benefits whatsoever. Another interesting trend that seems to have developed is with the people that did bother to search for a better price. The average number of places that were searched from the remaining half of people was In the following question, which asked if they spent more time now searching than in the past, it seems that people are spending less time. We found this slightly odd because we as consumers are more empowered these days with information. It takes only a few minutes to search multiple web sites for the price of a hard drive. Yet the people polled are just visiting an average of 3.23 web sites and stores. At first, this data seems to contradict itself but when tied into the infra-marginality and degree of riskaversion that consumers have developed, it makes more sense.

6 After analyzing the data from the questions on the poll related to risk, we were fairly pleased when it came to the results on this aspect. Based on the answers received on question 8, the fact that 88.46% of the participants felt that if they randomly were given one of the hard drive brands they would not worry about it not living up to their expectations. Whereas, 69.23% of them felt that they would worry if the same situation was presented to them six to ten years ago. The disparity is quite large between the two questions, thus lending a decent amount of support to our hypothesis. In addition, as mentioned before, the higher amount of search time that they used to spend six to ten years ago also lends credibility to the notion that they are not as worried about risk anymore. When it came to looking at the data for a change in the marginal consumption of the participants, it was actually surprising how much it had changed. The average amount that the participants were willing to spend to keep their preferred brand despite cheaper alternatives was Not that much brand loyalty can be assumed from a number as low as this. However, the average amount that they were willing to spend six to ten years ago for the same situation was That is a 50.97% drop in additional spending that they were willing to do. Albeit, these are small numbers that we are dealing with here, but the difference is fairly steep. Considering the large decrease in risk and search time, it certainly looked to us like our hypothesis turned out to be true. Overall, customers appeared to be much more marginal in consumption, much less risk averse and using a lot less search time. In administering the poll, we were hoping to find that people spent more time searching and researching the hard drive purchases in the past than they do now. In

7 addition, we were also hoping to find that they were more risk averse and infra-marginal in consumption in the past than they are now. The majority of the responses vindicated our hypothesis. Overall, none of the results were skewed drastically in any direction, however, as mentioned above, some of the individual points that we trying to make were strongly proven to be true. As far as what we would have done differently, we found that data collection proved to be the most difficult of all aspects of this project. A couple of our questions were too vague and could have withstood further clarification before being administered to the participants. In addition, we were not able to glean any data at all from one of our questions. Whether the question itself was inherently flawed or whether we were unable to use the data successfully remains to be seen. In general, as mentioned above, we felt that our project was fairly successful. We feel that many class concepts were utilized in our project. We now know that a single determinant can not be used to make a conclusion. One must tie in several determinants and analyze their relationships to make an educated analysis of their hypothesis. In addition, we feel that as a market matures infra-marginality and the degree of riskaverseness decline. This is due to the fact of products becoming more homogenous in nature and production factors becoming more efficient. Lastly, we also realize that a significantly more in depth analysis of our question would be required to obtain more meaningful results.

8 The following tables pertain to the brands used in our project. Below are the specifications and some price searching on the exact models compared to each other at some of the major stores and sites for purchasing hard drives. Hard Drive Models and Specifications Seek Brand Model RPM Time Interface Cache Warranty Capacity Western Digital WD800JB ms 100 8mb 3yr. 80GB Samsung SP0802N ms 100 2mb 3yr. 80GB Hitachi HDS722525VLAT ms 100 8mb 3yr. 80GB Seagate ST380013AS ms 100 2mb 5hr. 80GB Maxtor 6Y200P ms 133 8mb 3yr. 80GB Fujistu MHT2080AH ms 100 8mb n/a 80GB Hard Drive Prices Brand Model # Bestbuy newegg.com Harddrive.com cdw.com buy.com outpost.com Compusa WD WD800JB na Samsung SP0802N na Hitachi HDS72280 na Seagate ST380013AS Maxtor 6Y080L0 na Fujistu ft2080bh na na na na na na na na na na na na na na na

9 Here is the poll that we used to gather our data. On the following page are the results to the poll. ECON 4311 Project Poll Mike Hoelke Jay Newberry 4/10/05 Below are a series of short questions pertaining to the purchasing of hard drives for personal computers. This poll has been designed to help gather data for an economics project. Thank you for your time. 1.) Have you ever purchased or would consider purchasing a Hard Drive for a personal computer? (Y/N) If no, you do not need to answer the remaining questions. Thank you for your time. 2.) Assuming all things equal (price, warranty, speed, size, etc) please circle the brand that you would purchase. Fujitsu Hitachi IBM Maxtor Samsung Seagate Western Digital Other Brand No Preference 3.) How much more would you be willing to spend to get the above brand (still assuming all things are equal)? X > ) Please rank the following hard drive characteristics (in ascending order from 1-5) in order of importance for determining which hard drive to purchase (assume that you have already chosen the size of your drive). Characteristic Buffer Size Interface (ATA 100/133, SATA) RPM Seek Time Warranty Rank 5.) Do you check prices at more than one store/website when purchasing a hard drive? (Y/N) If no, you do not need to answer question 6. Thank you for your time. 6.) If you answered yes to question 5, how many different places on average would you say that you check when/if you are purchasing a hard drive? 2 Stores/Sites 3 4 Stores/Sites 5 6 Stores/Sites More than 6

10 7.) Did you ever purchase or consider purchasing a hard drive 6-10 years ago? (Y/N). If you answered no, please do not answer the remaining questions. If you purchased hard drives or at least considered purchasing hard drives 6-10 years ago, would you say that you spent more or less time researching them and price searching than now? Please circle the answer that best fits your response. Much Less Less About the Same More Much More 8.) If you were randomly given a hard drive from one of the above 8 companies would you be worried that it would not live up to the brand that you would normally would have chosen? (Y/N) 9.) If you had been asked question years ago, would you have been worried then? (Y/N) 10.) 6-10 years ago, how much would you be willing to spend to get your brand of choice (still assuming all things are equal) listed in number 3? X > We appreciate your time in taking this poll. Your data will prove to be quite useful in our analysis.

11 Total Polled: 96 Question 1 Yes No 81.25% 18.75% No Question 2 Fujitsu Hitachi IBM Maxtor Samsung Seagate WD Other Pref. 1% 4% 0% 23% 5% 12% 21% 1% 33% Question 3 The Average Amount that they were willing to spend: 4.46 Question 4 The Data from this question ended up having no bearing on our analysis. Question 5 Yes No 52.56% 47.44% Question 6 Average Number of Stores/Sites that People Used: 3.23 Question 7A Yes No 66.67% 33.33% Question 7B Having assigned variables (1-5) to the values, the average was Where Less was 2 and Same was 3 Question 8 Yes No 11.54% 88.46% Question 9 Yes No 69.23% 30.77% Question 10 The Average Amount that they were willing to spend: 8.75