Why is printer ink so expensive? Printers depend on this everyday commodity that costs almost twice as much as human blood. This forces consumers who own printers to purchase this product, no doubt at great profit to the company producing the ink. This write-up will investigate the reason for this apparent price inflation.
In order to narrow the focus of this project, I will focus on one company, Seiko Epson Corp. (commonly known for their Epson brand of printers), and one product, the Epson Stylus NX420, for in-depth analysis. This particular printer offers printing, scanning, and copying, and retails for $69.98 after a $30.00 coupon discount at office supply store Staples. Neglecting the full economic price of coupon utilization, as affected by the opportunity cost of time, the final price of the printer itself is $69.98. This printer requires black, yellow, cyan, and magenta ink cartridges in order to function. The most cost-effective way to purchase these cartridges is by purchasing the black ink separately, and the rest in a pack. The cost of the black ink is $15.99 and the color pack of ink is $35.99. Using the International Organization for Standardization’s ISO/IEC 24712:2007 methodology to determine the page yield, Epson claims that the black cartridges print about 255 pages, and the color cartridges print about 395 pages. To simplify the number of ink cartridges used over the lifetime of the printer, we will assume that for every two color ink cartridges purchased, a consumer will purchase three black ink cartridges.
The most obvious consumer to analyze would be a college student. In the 2008-2009 school year, Princeton University students printed 11,040,632 pages. This was the only college for which I could find this information. This is based on information from their cluster printers, but I believe it to be closely representative of the total number of pages printed. The Common Data Set report for Princeton for 2009 listed 7,592 students and 917 faculty; this means that the average pages per person (student or faculty) is 1,298 pages. This would require five black ink cartridges per year and 7.5 color cartridges, on average. Assuming that the average printer functions for three years, this is a total cost of the printer, ink included, of $1,119.61. Obviously, this is an incredible cost. The cost of printer ink becomes greater than the cost of the printer at the second purchase of both black and color ink, and the cost of the ink accounts for more than 93% of the total cost of the printer.
Why is this? Firstly, we must consider the target demographic for cheap printers. These are marketed mostly to families or young people who want to be able to print on demand. These people could not possibly be reasonably expected to pay approximately $1000 for a printer. Accounting for the interest gained by not paying for the printer and ink all at once, the Net Present Cost of the printer is as follows:
So, by deferring the cost of purchasing the ink, the consumer saves:
However, these savings represent only 11.7% of the cost of the printer. So, regardless of the manner in which the ink is purchased, the cost is still approximately $1000. In order to appeal to consumers in the target demographic who cannot afford the full price of the printer, Epson has decided to reduce up-front costs associated with printer ownership by absorbing the costs involved in making the printer, and profiting more off the cost of the ink.
To understand the profits involved, note that in the 2010 April-June quarter the printer sales division of Seiko Epson Corp. reported a revenue of $2 billion and a profit of $220.7 million. Therefore:
Profit margins will be discussed in more detail later. Below is a graph depicting the printer market. This graph will be discussed and explained in the following section. All graphs in this report are interactive: hover on a data point for more information, or use the slider at the bottom to zoom in on a specific section of the data.
In order to generate this graph, some assumptions had to be made. First of all, I assumed the equilibrium price for this market to be the $69.98 that Epson charges for the Stylus CX420. However, it should be noted that the printer market is far from a competitive market. In fact, there are only a handful of brands (Hewlett-Packard, Epson, Lexmark, Canon, Kodak, and Brother) with almost complete control of the market. Entry into the market is limited by the vast knowledge and specialized factories necessary to make a printer, and exit is limited somewhat by the need for businesses in this industry to maintain a profit stream from an extensive investment into printer technology. However, there are many buyers of printers, and these buyers are interested in a variety of products, ranging from the inferior good of desktop printers to the normal good of all-inclusive office-sized printers capable of handling multiple print jobs from a server, and performing functions such as collating and stapling.
In this assumed model, I neglected all printer types except for small, low-cost desktop printers. It was assumed that the current price of $69.98 reflects market equilibrium price; I was unable to find printer sales numbers of any sort, so I assumed that at this price two million printers were sold. I assumed that at a price of $0, the supply of printers is at zero, and that at a price of $200 the demand for printers (again, strictly the low-cost models) was zero. From these assumptions, I created the following inverse demand and supply functions:
These equations allowed me to create a model of the market for printers. In this model, lower prices result in a higher quantity sold, and it is this nature of the market that companies like Epson wish to profit from.
Say that Epson sold printers at a price of $150 apiece. This increases the willingness of the company to supply the product; however it significantly reduces the quantity sold from 2 million to 1.428 million. Below is the inverse demand function for this new supply curve, shown above as Supply’.
However, what my model does not properly account for is the elasticity of demand. In the discount printer market there exist a significant enough number of substitutes (any price-comparable printer made by a competitor to Epson) that an increase in Epson’s printer price would have a more dramatic effect on sales. Therefore, since a small change in price could have a large effect on sales, we would say that this market is very elastic.
Given this market characteristic, it is unlikely that Epson would want to increase their printer price. Doing so would drastically reduce their sales, and lower their total revenue. One other way to increase revenue would be to increase the price of the ink itself. If two million printers are now in the hands of the consumer, and these consumers use ink at the rate discussed above, then the market for ink looks something like the graph below.
This market is wholly owned by Epson, as they are the sole creators of ink cartridges for their product. It should be noted that there are alternatives to Epson’s ink cartridges, such as refilled used cartridges, but I will be assuming that these products are a somewhat inadequate replacement. Since two million printers are on the market, given the earlier numbers on ink consumption there are 10 million black ink cartridges and 15 million of each color cartridge sold annually, for a total of 25 million ink cartridges sold every year. In this condition, Epson acts more or less like a monopoly. In the assumed model, if Epson offered the cartridges for only $5.99, they would sell only 2.8 million more, as consumers printed more and used ink at a higher rate. However, by raising the prices to the $15.99 mark currently employed (shown as Supply’), they sell their 25 million ink cartridges and make the following total revenue:
Assuming that the printer sales make up a significant portion of Epson’s Information Equipment division, we can determine their percentage profit margin in the real world:
The total revenue from printer sales, in the earlier model, is:
Comparing the two, we can quickly see that the total revenue from ink cartridge sales is nearly three times that from printer sales. While these are assumed numbers, if the ratio of ink to printers is similar in the real market, then it would make sense for Epson to use low-cost printers to get consumers into the ink market. With a profit margin of 0% on printer sales, a small profit margin on ink will keep the overall profit margin at 11%.
Therefore, with only a 14.85% profit margin on ink, Epson does not need to make any money on printer sales to stay at an overall profit margin of 11%. Keep in mind that the 11% profit margin comes in the midst of a global economic downturn, and that it may not represent a typical profit margin for this company. Furthermore, there is no reason to think that this case could not be carried even further; Epson could sell printers at a loss, and have a higher profit margin on the ink, and still make money over the lifetime of the printer. A profit margin of only 14.85% on ink seems small, especially when some vendors claim that making ink cartridges is “cheap”.
In summary, the printer and ink markets are inexorably linked together, with the printer market being partially competitive and the ink market for any individual printer being almost entirely a monopoly. In this situation, low-cost printers offer a high incentive for consumers to purchase them, but the lack of any real competition in the ink market makes producers price-choosers, and they have chosen to maximize their profits for these two products by raising the price on ink. Given the example case of an Epson Stylus NX420, the deceptively low price of $69.98 quickly balloons to $988.18 when considering ink purchases and the time value of money. This is an increase over the original price of over 1,400%. Since there are currently few alternatives to consumers seeking to own a desktop printer to the current model of a low entry price and high total price, for the time being the average consumer will have to weigh the positives and negatives of printer ownership.
The True Price of Cheap Printers by Steve Richey is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.
This post was originally submitted for a class on Managerial Economics.