Re: Mind Bombs for Y2K

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From: Mike Masnick (
Date: Mon Aug 28 2000 - 13:35:44 PDT

At 12:11 PM 8/28/00 -0700, Koen Holtman wrote:
>On Mon, 28 Aug 2000, Mike Masnick wrote:

>> See, arguments like these confuse me. Maybe I'm crazy, but I actually do
>> believe in basic economics, and can see how most markets work. Here's a
>> situation where the market has told you how much the software is worth, and
>> you tell people they're being cheap. They're not. They're being efficient
>> and telling you how much they're willing to pay for the software.
>> If you don't want to produce the software for the price they're willing to
>> pay, then fine, don't produce the software. But, to call your users cheap
>> for telling you they won't pay more than they think it's worth seems a bit
>> counter productive. If making money is that important to you then figure
>> out a way to create offerings (products or services) that your users will
>> pay the required price for. Blaming the customers for being cheap suggests
>> that you personally believe you can set a more efficient price than the
>> market.
>I have no comment on outliners, but, um, you are a bit unclear on how
>markets work.

I don't think so, actually.

>A bunch of people wanting X for $Y does not make a market. You need both
>supply and demand.

Okay, so I simplified stuff, but that doesn't make my argument wrong. My
point was just to show that complaining about what the consumer is willing
to pay is not likely to convince them that they're wrong. In the end it is
the consumer's perception of value that will set the price. If demand and
supply meet at a point well below the price the supplier set, then a market
is not made (which was evidently the case). The consumer has the option of
re-evaluating how much he/she values the product, but that doesn't often
change. The producer, however, can change the price (though this is often
dependent on cost) or perhaps determine other ways (additional services,
changing the product, influencing demand) to make the market work.

>If they actually find somebody who _sells_ X to them for $Y, _then_
>the market has ruled that $Y is a good price for X. If they can't find
>somebody to sell for that price, then the market has determined that the
>true value of X is larger than $Y.

I just wrote a paragraph where I agreed with this and modified my original
point, but now I don't. The fact is the value the consumer sets is going
to be the market value of the item. If you can't sell it at the price you
set then you need to figure out a different business to be in. Your
argument suggests that the "demand" side is always stupid and the supply
side always has perfect information. I find that hard to believe as well.
Sure, there are times when the consumers will not have the information they
need (and perhaps that is the case with these outliners - I have no idea).
In such a case, then, it is the job of the suppliers to provide that
information to the consumers or convince them that they misevaluated in
some way. Telling them they're "cheap" is one way of doing this (though, I
doubt it's particularly effective).

I will agree that you need both a consumer and a supplier to make a market.
 However, the price is set between the two of them. The true "value" of an
item (which can certainly fluctuate) is what the market is willing to pay
for it, plain and simple. If no producer is willing to produce the good
and sell it at the price consumers are willing to pay, then the producer
has misread the market. I'm not in any way suggesting that the producer is
stupid. They can certainly produce a product that think is good, and only
be willing to sell it above the cost (or, more correctly the marginal cost)
it took to produce that item. However, if that price is above the maximum
price of consumers, then the supplier is in the wrong business.

Here's an example. I could go out into my garage today and build a car.
It might be a very nice car, but it would cost me a lot in terms of parts
and labor and whatnot. So, I build this very nice car at a cost to me of
$50,000. Now I want to sell it to my neighbor at small markup of $60,000
so I can make some profit. Now, my neighbor likes my car, but decides that
the Honda Accord at the dealership down the street is just as nice and only
$20,000. He's not going to buy my car. Should I be pissed at him, because
he doesn't realize the true value of my car? No, I simply shouldn't be in
the car business or I should figure out a way to (1) make my cars more
efficiently so I can lower the price (2) offer additional services that
customers find valuable enough to pay the price I've set for the car (3)
figure out a way to make my car so much better at little expense to myself
that customers are willing to buy my car at my price or (4) convince my
customers that my car really is worth $60,000. If I can't do those things,
then I'm not in business.

There's nothing wrong with being a supplier and offering a product at the
price you feel equals its value. However, the burden is on that supplier
to convince the marketplace. The consumers vote with their money. To call
consumers stupid for not recognizing the "true value" of a product makes no
sense to me. If you really believe the consumer has misread the true
value, then it's the producer's job to educate.

I have a lot of trouble with businesses that seem to insist it is the
consumers' job to figure out how they, as producers, should make money.
That's the job of the business.

>[The case of X=music and Y=0 is left as an exercise for the reader]

Actually, this one is a pretty simple argument as well... When X is any
sort of digital good (software, music, whatever), an argument can be made
that the marginal cost of production of one new unit is $0 (or close to $0,
though some people will add in things like time and bandwidth and other
stuff). Your very basic economics (and, yes, there's more to it than this,
but I'm not writing a textbook) suggests you should set price = marginal
cost. Thus, the price of music that is in a digital format should be (in a
competitive market) driven down to $0. Apparently Napster and the like are
simply very efficient, competitive markets...


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