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The hypothesis that you would have excess supply is not very well thought out. Take the train example that he mentioned. He is effectively suggesting that high

by lsiq 10y ago

The hypothesis that you would have excess supply is not very well thought out. Take the train example that he mentioned. He is effectively suggesting that higher margin 2nd class tickets subsidize 3rd class tickets. Companies may be afraid to improve 3rd class, thinking it would eat into their 2nd class and lower profits. But they would very likely just sell more tickets, as their 3rd class was now the best in the business. And provided there were an actual differentiated service in 2nd class, those tickets would still sell. And if the was no difference, they could eliminate 3rd class altogether and sell second class only for greater volume and slightly lower price (or make 2nd class improvements). Cannibalization is no problemo for business. Some folks at Apple were afraid the iphone would cannibalize ipod sales. Imagine if they actually went with that thinking and sold iphones that didn't play music. And iPods still sell to this day. Unless the sector has high barrier to entry (e.g. Intel), such practices are very often short sighted. You don't see IBM selling printers anymore.

smallnamespace 10y ago
> But they would very likely just sell more tickets, as their 3rd class was now the best in the business. IMO, you're simply begging the question by presuming that 2nd class won't be cannibalized. We're also forgetting that one can't simply increase ticket supply, because trains and airlines are capital constrained once you run out of seats. At best, you can hope to charge more for 3rd-class tickets, at the expense of having cheaper, or empty, or fewer 2nd-class seats. Even if a company manages to raise price of 3rd-class tickets, they face both a 1) lower effective subsidy from 2nd class and 2) the cost of providing 3rd-class amenities. Which effect dominates very well depends on the relative preferences of 2nd and 3rd-class buyers. The sweet spot is to find an inconvenience that only affects 3rd-class ticket-holders a little bit, but annoys 2nd-class ticket-holders a lot. The Eurostar is a good example of that -- most people aren't inconvenienced too much by being told their flight time 2 days in advance (so depresses economy ticket prices only slightly), but deep-pocketed business travelers find it completely unacceptable (which shifts effective demand to the business seats).
- makomk 10y ago
  If the trains run out of seats in 3rd class, this helps prevent 2nd class from being cannibalized - customers who want a guaranteed seat or less overcrowding then have to buy a 2nd class ticket.
  - smallnamespace 10y ago
    That shouldn't happen -- your excess 3rd-class customers would go with your competitor instead of buying expensive 2nd-class tickets. Best choice is to raise the price of 3rd-class seats, which brings us back to whether the increased ticket revenue there offsets cannibalization.
gwbas1c 10y ago
I wonder if the printer example is the right example. Perhaps IBM was merely test-marketing and planned to use cheaper parts if the printer was a hit? (I don't know much about IBM printers.) In the semiconductor industry, often cheaper chips are the same chip is the expensive chip, but because it didn't test as well, features are disabled or the chip is intentionally sold at a lower clock speed. IMO, I would call intentionally crippling a product a win-win-win situation if it's basically test-marketing that leads to lower manufacturing costs. (This only works if people don't catch on and hack the product to re-enable the disabled features.)
- Animats 10y ago
  That's an old IBM thing which dates back to the mechanical tabulator era. There were "Series 50" machines, geared to run at half speed.[1] [1] http://archive.computerhistory.org/resources/text/IBM/IBM.Series_50.1958.102646313.pdf http://archive.computerhistory.org/resources/text/IBM/IBM.Se...

by lsiq 10y ago

smallnamespace 10y ago

> But they would very likely just sell more tickets, as their 3rd class was now the best in the business. IMO, you're simply begging the question by presuming that 2nd class won't be cannibalized. We're also forgetting that one can't simply increase ticket supply, because trains and airlines are capital constrained once you run out of seats. At best, you can hope to charge more for 3rd-class tickets, at the expense of having cheaper, or empty, or fewer 2nd-class seats. Even if a company manages to raise price of 3rd-class tickets, they face both a 1) lower effective subsidy from 2nd class and 2) the cost of providing 3rd-class amenities. Which effect dominates very well depends on the relative preferences of 2nd and 3rd-class buyers. The sweet spot is to find an inconvenience that only affects 3rd-class ticket-holders a little bit, but annoys 2nd-class ticket-holders a lot. The Eurostar is a good example of that -- most people aren't inconvenienced too much by being told their flight time 2 days in advance (so depresses economy ticket prices only slightly), but deep-pocketed business travelers find it completely unacceptable (which shifts effective demand to the business seats).

makomk 10y ago
If the trains run out of seats in 3rd class, this helps prevent 2nd class from being cannibalized - customers who want a guaranteed seat or less overcrowding then have to buy a 2nd class ticket.
- smallnamespace 10y ago
  That shouldn't happen -- your excess 3rd-class customers would go with your competitor instead of buying expensive 2nd-class tickets. Best choice is to raise the price of 3rd-class seats, which brings us back to whether the increased ticket revenue there offsets cannibalization.

gwbas1c 10y ago

I wonder if the printer example is the right example. Perhaps IBM was merely test-marketing and planned to use cheaper parts if the printer was a hit? (I don't know much about IBM printers.) In the semiconductor industry, often cheaper chips are the same chip is the expensive chip, but because it didn't test as well, features are disabled or the chip is intentionally sold at a lower clock speed. IMO, I would call intentionally crippling a product a win-win-win situation if it's basically test-marketing that leads to lower manufacturing costs. (This only works if people don't catch on and hack the product to re-enable the disabled features.)

Animats 10y ago
That's an old IBM thing which dates back to the mechanical tabulator era. There were "Series 50" machines, geared to run at half speed.[1] [1] http://archive.computerhistory.org/resources/text/IBM/IBM.Series_50.1958.102646313.pdf http://archive.computerhistory.org/resources/text/IBM/IBM.Se...