3 ms·

In a competitive industry with high fixed costs and low _marginal_ costs, a race to the bottom often leads to pricing less than _average_ costs and a reduction

by sib 6y ago

In a competitive industry with high fixed costs and low _marginal_ costs, a race to the bottom often leads to pricing less than _average_ costs and a reduction in service quality (or inability for providers to replace infrastructure consumed in providing service.

remarkEon 6y ago
I keep having to make this point to both my liberal and conservative friends, but ... just because microecon 101 (or macroecon 101 in some cases) is conserved doesn’t mean it’s an optimal solution. If your high fixed cost infrastructure suddenly becomes critical for society to function perhaps it’s time for a much different conversation.
refurb 6y ago
But that argument completely ignores the consequences to prices less than average. If you drop your fees so low your customers get pissed, well then, you'll loose customers. Or if you can't afford to maintain infrastructure, then you'll lose customers due to your unreliability. A race to the bottom is the reason we have 60" flat screen TVs that are better quality and cost a fraction of what a similar TV cost 10 years ago. It's a good thing. The race to the bottom in the airline industry was entirely driven by consumers who were willing to put up with crappy seat just to save $10. They got exactly what they wanted. That said, we are seeing a shift toward premium economy. Basically some airline said "I'll bet there are some customers will to pay more to get more" and they were right. HN likes to talk about the "race to the bottom" as some failing of capitalism, when it's actually working exactly as it should. "The market" doesn't get it right every time - plenty of companies make the wrong trade off - but the consumer is the ultimate decision maker if the tradeoff is worth it.
- tweetle_beetle 6y ago
  An idealised race to the bottom which just eats into excessive profits would be great. But typically companies want to maintain their margins, so it's the staff that get squeezed, or the service, or the ethics, or all of the above. And it often ends up warping the market so that choice is removed, a premium economy does not always spring up. To take your TV example, modern mainstream TVs now bundle spyware/malware/adware. Yes the hardware is better than it was, but it is being invisibly subsidised by the reduction in ethical standards. And now none of the major players can now afford not to do it if they want to compete. Is this exactly what people wanted? The market no longer offers allows them to choose and they aren't being fully informed about the implications. It's really a failing of marketing - being unable to continue to justify the price of a product (whether it was warranted or not).
  - Super_Jambo 6y ago
    We could fix it with better regulation of product information though. No one seriously argues against weights and measures legislation. We've supposedly had an information revolution but I still can't really trust any source of product information online.
    - refurb 6y ago
      This is a fair comment. The free market can certainly be made "better" (however one might define it) by certain interventions. Your example of weights and measures is a good one - the market benefits from an increase in knowledge of both parties in a transaction. Another good example is FDIC insurance. We could have little to no banking regulations, but that would also introduce a lot of uncertainty and result in wild swings when the economic situation changes. Tell depositers that the gov't will back their savings helps stabilize the banking system which actually benefits the market (the same way a stable and predictable government/legal system benefits the market).
      - mandelbrotwurst 6y ago
        This is somewhat tangential, but why refer to a regulated market as a "free" market? I hear this often and it seems like a contradiction.
- ayewo 6y ago
  I agree with everything in your comment save for a small quip about terminology. When you wrote "as some failing of capitalism", I believe the economic concept of "market forces" would have conveyed the same message better, compared to the larger concept of capitalism, which is essentially a political ideology that can trigger disagreement from people who have benefited from competing political ideologies like socialism. Essentially, what I'm getting at is that a race to the bottom can happen as long as there are market forces at play, even if the society itself is not running a pure capitalist system like China (which IMHO is a cross between capitalism + communism vs. capitalism + democracy). For instance, Uber China was forced to quit in 2016. They sold to rival Didi Chuxing because they couldn't keep up with the race to the bottom by them.
- sib 6y ago
  That ('we have 60" flat screen TVs that are better quality and cost a fraction of what a similar TV cost 10 years ago') is not the standard / typical meaning of a race to the bottom. TVs don't have effectively zero marginal cost. A race to the bottom is specifically about a reduction in quality that forces effectively all providers to follow or be unable to compete. In the case of airlines, customers thought they (only) wanted the lowest price, so airlines (helped by non-transparent UIs at ticket comparison sites like Expedia, Kayak, etc) actually reduced the quality of the product by removing features (pillows, blankets, food, drinks, seat size, seat selection, changeability, eligibility for upgrades, etc). Premium Economy in most cases is just charging customers for what they used to get in Economy.
  - jdeibele 6y ago
    TVs now come with smart apps that can report what you're watching for advertising. There are very few brands (Sceptre being one) that don't do this. So now TV manufacturers are supposed to sell the razor at or near cost and make it up on the blades of user surveillance. Would people pay another $50 or $100 to turn it off? It's not clear that they'll ever get the chance.

by sib 6y ago

remarkEon 6y ago

I keep having to make this point to both my liberal and conservative friends, but ... just because microecon 101 (or macroecon 101 in some cases) is conserved doesn’t mean it’s an optimal solution. If your high fixed cost infrastructure suddenly becomes critical for society to function perhaps it’s time for a much different conversation.

refurb 6y ago

But that argument completely ignores the consequences to prices less than average. If you drop your fees so low your customers get pissed, well then, you'll loose customers. Or if you can't afford to maintain infrastructure, then you'll lose customers due to your unreliability. A race to the bottom is the reason we have 60" flat screen TVs that are better quality and cost a fraction of what a similar TV cost 10 years ago. It's a good thing. The race to the bottom in the airline industry was entirely driven by consumers who were willing to put up with crappy seat just to save $10. They got exactly what they wanted. That said, we are seeing a shift toward premium economy. Basically some airline said "I'll bet there are some customers will to pay more to get more" and they were right. HN likes to talk about the "race to the bottom" as some failing of capitalism, when it's actually working exactly as it should. "The market" doesn't get it right every time - plenty of companies make the wrong trade off - but the consumer is the ultimate decision maker if the tradeoff is worth it.

tweetle_beetle 6y ago
An idealised race to the bottom which just eats into excessive profits would be great. But typically companies want to maintain their margins, so it's the staff that get squeezed, or the service, or the ethics, or all of the above. And it often ends up warping the market so that choice is removed, a premium economy does not always spring up. To take your TV example, modern mainstream TVs now bundle spyware/malware/adware. Yes the hardware is better than it was, but it is being invisibly subsidised by the reduction in ethical standards. And now none of the major players can now afford not to do it if they want to compete. Is this exactly what people wanted? The market no longer offers allows them to choose and they aren't being fully informed about the implications. It's really a failing of marketing - being unable to continue to justify the price of a product (whether it was warranted or not).
- Super_Jambo 6y ago
  We could fix it with better regulation of product information though. No one seriously argues against weights and measures legislation. We've supposedly had an information revolution but I still can't really trust any source of product information online.
  - refurb 6y ago
    This is a fair comment. The free market can certainly be made "better" (however one might define it) by certain interventions. Your example of weights and measures is a good one - the market benefits from an increase in knowledge of both parties in a transaction. Another good example is FDIC insurance. We could have little to no banking regulations, but that would also introduce a lot of uncertainty and result in wild swings when the economic situation changes. Tell depositers that the gov't will back their savings helps stabilize the banking system which actually benefits the market (the same way a stable and predictable government/legal system benefits the market).
    - mandelbrotwurst 6y ago
      This is somewhat tangential, but why refer to a regulated market as a "free" market? I hear this often and it seems like a contradiction.
ayewo 6y ago
I agree with everything in your comment save for a small quip about terminology. When you wrote "as some failing of capitalism", I believe the economic concept of "market forces" would have conveyed the same message better, compared to the larger concept of capitalism, which is essentially a political ideology that can trigger disagreement from people who have benefited from competing political ideologies like socialism. Essentially, what I'm getting at is that a race to the bottom can happen as long as there are market forces at play, even if the society itself is not running a pure capitalist system like China (which IMHO is a cross between capitalism + communism vs. capitalism + democracy). For instance, Uber China was forced to quit in 2016. They sold to rival Didi Chuxing because they couldn't keep up with the race to the bottom by them.
sib 6y ago
That ('we have 60" flat screen TVs that are better quality and cost a fraction of what a similar TV cost 10 years ago') is not the standard / typical meaning of a race to the bottom. TVs don't have effectively zero marginal cost. A race to the bottom is specifically about a reduction in quality that forces effectively all providers to follow or be unable to compete. In the case of airlines, customers thought they (only) wanted the lowest price, so airlines (helped by non-transparent UIs at ticket comparison sites like Expedia, Kayak, etc) actually reduced the quality of the product by removing features (pillows, blankets, food, drinks, seat size, seat selection, changeability, eligibility for upgrades, etc). Premium Economy in most cases is just charging customers for what they used to get in Economy.
- jdeibele 6y ago
  TVs now come with smart apps that can report what you're watching for advertising. There are very few brands (Sceptre being one) that don't do this. So now TV manufacturers are supposed to sell the razor at or near cost and make it up on the blades of user surveillance. Would people pay another $50 or $100 to turn it off? It's not clear that they'll ever get the chance.