4 ms·

A trade occurs at a price both parties believe is beneficial to them. Otherwise there's no trade.

by RhysU 10y ago

danbruc 10y ago
That is certainly true but my argument aimed at a different point. Assume something used to cost $100 and people were willing to pay $100 for it. If you manage to produce the same thing for $10, you should pass this increased efficiency on to the customer so that the society is better of, not capture the difference making only you rich. But I may have made a mistake in my reasoning and am currently rethinking the argument.
- ericd 10y ago
  I think you're ignoring the fact that many times when you do something like that, you'll make much less than you put in. In order to make it desirable to do something risky, there has to be some payoff, otherwise you might as well just get a job with a guaranteed salary (this is oversimplifying, there are other benefits to starting your own thing, but I don't agree that economic benefit shouldn't be one of them if you want people to keep starting companies)
- webmaven 10y ago
  Well, selling for $10 (plus a 10-20% markup, you do need to make some profit), would have the effect of putting many of your competitors out of business, and at the same time increase the volume of your orders far beyond your ability to fulfil (and far beyond your ability to expand capacity as well), leading to a long waiting list of back-orders. Quality would likely fall as well as you scramble to meet demand. Some second-order effects of the scarcity would be hoarding, scalping, etc. OTOH, selling for $90 (at first) pushes your competitors to cut their own profit margins to match your price (or else gradually abandon the lower end of the market, a classic Christensen disruption) and lets you pocket a lot more money which you can invest aggressively in capacity as you gradually continue to lower your price (always keeping it just below the 2nd lowest price) and increase demand (growing the market) and your market share. In fact, the increase in market size under those circumstances will lull your competitors into ignoring your increased market share for a while as the pie gets bigger and bigger. BTW, the latter is exactly what Amazon is doing with AWS pricing. Imagine how that would have played out if they had launched in 2007 with prices 80% lower (their rumored profit margin) than anyone else.

A trade occurs at a price both parties believe is beneficial to them. Otherwise there's no trade.

by RhysU 10y ago

A trade occurs at a price both parties believe is beneficial to them. Otherwise there's no trade.

That is certainly true but my argument aimed at a different point. Assume something used to cost $100 and people were willing to pay $100 for it. If you manage to produce the same thing for $10, you should pass this increased efficiency on to the customer so that the society is better of, not capture the difference making only you rich. But I may have made a mistake in my reasoning and am currently rethinking the argument.

ericd 10y ago
I think you're ignoring the fact that many times when you do something like that, you'll make much less than you put in. In order to make it desirable to do something risky, there has to be some payoff, otherwise you might as well just get a job with a guaranteed salary (this is oversimplifying, there are other benefits to starting your own thing, but I don't agree that economic benefit shouldn't be one of them if you want people to keep starting companies)
webmaven 10y ago
Well, selling for $10 (plus a 10-20% markup, you do need to make some profit), would have the effect of putting many of your competitors out of business, and at the same time increase the volume of your orders far beyond your ability to fulfil (and far beyond your ability to expand capacity as well), leading to a long waiting list of back-orders. Quality would likely fall as well as you scramble to meet demand. Some second-order effects of the scarcity would be hoarding, scalping, etc. OTOH, selling for $90 (at first) pushes your competitors to cut their own profit margins to match your price (or else gradually abandon the lower end of the market, a classic Christensen disruption) and lets you pocket a lot more money which you can invest aggressively in capacity as you gradually continue to lower your price (always keeping it just below the 2nd lowest price) and increase demand (growing the market) and your market share. In fact, the increase in market size under those circumstances will lull your competitors into ignoring your increased market share for a while as the pie gets bigger and bigger. BTW, the latter is exactly what Amazon is doing with AWS pricing. Imagine how that would have played out if they had launched in 2007 with prices 80% lower (their rumored profit margin) than anyone else.