iPhone 6 | Black Market Example graph

Do you know that a black market example would be the new launches of iPhone 6s in China

As Apple is still waiting necessary approval from China before the official launch of iPhone 6 in China, many PRCs have already begun smuggling iPhone 6s launched in Hong Kong / United States back to China, “flipping” the new iPhones immediately upon purchase at double or triple the retail price?

Essentially, the black market in China is not caused by a “Price Ceiling” but has a similar effect to it. If iPhone 6 is left to free market, the price and quantity transacted will be at P0 and Q0, with the respective consumer surplus and producer surplus at (A + F + B) and (C + D + E).

However due to regulation in China, the new Supply curve of iPhone is marked in red. Some smugglers (especially those that are not so smart) are willing to supply up to Qss at Pnormal, which causes a shortage as at Pnormal, Qdd > Qss. However beyond Qss, the Supply curve is perfectly inelastic as there is a limit how much smugglers can bring into China.

At such, with the new intersection of red Supply curve and the original demand curve of iPhones, the smugglers are able to extract the maximum willingness to pay from the consumers at PBM.

The smugglers benefited in the form of higher producer surplus. Although they are not able to sell more like in a free market at Q0 (C as dead weight loss), they are able to charge a higher price to the consumers.

The clear losers are definitely the consumers. Under the black market of iPhone 6s, they have lost their welfare F to the smugglers and B to the society as dead weight loss.

The Hong Kong Police have been tightening the custom regulations to deter the smuggling of iPhones into China. “Under Hong Kong regulations, it’s illegal to export cargo that has not been properly declared. The maximum penalty is a $2 million fine, and seven years in prison.”

Further reports have also mentioned due to the huge influx of smuggled iPhone 6s into China, “ the gray market for the iPhones has already dried up. The New York Times also estimates that tens of thousands devices were smuggled in from the United States, Australia, Hong Kong, and Singapore. This means that the black market in China is saturated with Apple’s new smartphones.”

“Because of this, one black market seller actually had to cut the street price of the phone from between $1,960 and $2,450 to between $1,060 and $1,436. The phones actually netted wholesalers $163 per phone, but now since the phones are available, the demand is lower. This may mean that those in the black market will lose money on their iPhone 6 stock.”

So does it necessary pays off to be a smuggler?