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I've wondered what the effect our modern digital economy has had on consumer price inflation. Normally, an increase in money supply would cause consumer goods

I've wondered what the effect our modern digital economy has had on consumer price inflation. Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them and there is a limit on how much of any particular physical good is available. This isn't the case, however, for digital goods. If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. It would be easy to see that inflation would be essentially zero if ALL goods people wanted to buy were digital ones... no amount of demand can eat up the supply, since supply is practically infinite. Of course, in the real world, some goods are digital and some are physical. If you gave everyone $5000, some of that would go to Netflix subscriptions, which wouldn't effect consumer prices, and some would go to buying TVs to play Netflix on, which WOULD cause inflation. I am curious how much of our current "low inflation even with an increasing money supply" is caused by our increasing spending on non-exclusionary goods.

vmception 6y ago
These organizations would be expected to have some marginal cost increases from running data centers and physical hardware cost increases and they would calculate passing these on to consumers. Or as an excuse to. But I guess that is covered by your example and understanding that their physical costs being non-digital goods. So, fun thought exercise.
- cortesoft 6y ago
  Yeah, that is why I intentionally said "practically zero" instead of actually zero, because there are some marginal costs. They are just orders of magnitude less than what they are for physical goods. But yeah, I am just curious how that math all works out on a macro scale.
  - itslennysfault 6y ago
    This is a good point, and there is also no finite limit which is what typically makes the supply and demand machine go brrrrrrrr. Netflix pays some % of their monthly subscription fee for servers. The amount really doesn't matter, and they can add the entire planet as subscribers before running out of servers so the supply is infinite for all practical purposes.
lupire 6y ago
Businesses charge what customers are willing to pay. If they have more money, they are willing to pay more. Competitiuis the countervailing force, but Netflix has exclusives and serials and network effects (fandoms and friends)
- cortesoft 6y ago
  Sure, but that doesn't say anything about inflation. The standard formula for profit is (units sold * price per unit) - (fixed costs + marginal costs * units sold).... Netflix, like every other company, wants to maximize that profit. For most non-digital companies, the marginal cost is significant, and follows a u-shaped curve... at first, marginal costs decrease as you sell more units, since you can get intermediate goods for cheaper prices as you buy in bulk. At a certain point, however, the marginal price starts increasing again as you start to hit various bottlenecks and intermediate goods start becoming more expensive as you consume all the easy to produce supply. In other words, you can't scale linearly. Digital goods have a much flatter uptick on that marginal cost graph, and I am very curious what that means at the macro economic level.
  - alex_smart 6y ago
    It means that in your formula, the (units sold * price per unit) term dominates the profit formula. So, the price is mostly determined by the consumer's willing to pay.
    - throwawayboise 6y ago
      And by your competitors willingness to take a lower per-unit profit in exchange for more sales.
- ClumsyPilot 6y ago
  "If they have more money, they are willing to pay more." That's like totally wrong. Goods provide some value to the customer, and that determines what they are willing to pay for it. If I wake up a millionaire tomorrow, that doesn't mean I am suddenly willing to spend $500 the same haircut that was $50 yesterday.
bob33212 6y ago
We are entering a Post Scarcity Economy. A lot of fiction books write about how this plays out. Regardless of what happens a lot of economic theory becomes less relevant. https://en.wikipedia.org/wiki/Post-scarcity_economy#:~:text=Post%2Dscarcity%20is%20a%20theoretical,very%20cheaply%20or%20even%20freely https://en.wikipedia.org/wiki/Post-scarcity_economy#:~:text=....
- spaetzleesser 6y ago
  Post scarcity only for certain things. Things like living space are becoming scarcer and more expensive.
  - klipt 6y ago
    Living space in rural areas is cheap. Living space near good jobs is what's scarce.
    - mensetmanusman 6y ago
      In comes a pandemic induced remote work experiment and global satellite internet thanks to SpaceX. An unforeseen black swan of a decade.
    - midasuni 6y ago
      Not in the U.K. average house prices in rural areas are far higher than in towns, as they are more desirable.
      - globular-toast 6y ago
        That's true, but they are also bigger and better. A block of flats in the middle of nowhere would be worth way less than one in a city.
  - david_dan 6y ago
    'Living Space' is also an illusion. In a near perfect VR world, (which we will achieve during singularity), everyone will have infinite 'living' space
tomrod 6y ago
We still have to pay for food, shelter, transportation, clothing, and other physical things. Our inner world is richer, and we consume non-decreasing goods. But everything is tied to something in the physical world, even if it's the hardware and energy running it.
- cortesoft 6y ago
  Right, which is why the "100% digital" world was just a thought experiment.... we don't live in that world, but we do live in a world where an increasing percentage of our money is spent on non-exclusionary goods.... that has to have an effect on inflation.
- david_dan 6y ago
  Nope. Every Physical atom in the universe is nothing but Energy. The universe itself has infinite energy. So, in a Singularity World (where Robots produce everything, including other Robots), the marginal cost for everything (like Netflix videos) will collapse to $0.
pessimizer 6y ago
> If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. No, it would go up because they would make more profits with fewer subscribers and a higher margin.
- dntrkv 6y ago
  Economies of scale dictate the opposite. Fixed costs stay the same no matter the subscriber count, this would allow Netflix to lower the price, while maintaining the same profits. In reality, they would likely keep the price the same and increase their margins without charging more.
  - tharkun__ 6y ago
    What's the ratios of fixed to variable cost for Netflix and how many subscribers does it need for the economies of scale to go beyond a few cents?
gruez 6y ago
>I am curious how much of our current "low inflation even with an increasing money supply" is caused by our increasing spending on non-exclusionary goods. Not much? Based on the CPI weights given by the BLS[1] at least 82.238% of the CPI is from non digital goods. This is based on summing up the top level categories which are definitely not digital, ie. Food and beverages, Housing, Apparel, Transportation, Medical care. If you drill down into the remaining categories (Education and communication, Recreation, Other goods and services) and eliminate non-digital goods from there you can probably get that percentage even higher. [1] https://www.bls.gov/cpi/tables/relative-importance/2020.htm https://www.bls.gov/cpi/tables/relative-importance/2020.htm
- cortesoft 6y ago
  Yeah, that doesn't say how much of actual consumer spending goes into the goods that are included in the CPI. Even if the CPI were based 100% on non-digital goods, the percentage of purchases that go towards CPI goods could be falling.
  - gruez 6y ago
    Perhaps, but how much of a difference can that make? It's hard to imagine many people spending $100+ on new SaaS/digital goods because of the pandemic.
    - cortesoft 6y ago
      That is exactly my question! How much are people spending on digital goods, and what percentage of extra income would go towards digital goods.
alex_smart 6y ago
>The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. Yeah, I don't think that that argument works at all. The price does not increase due to "shortage", it increases due to an increase in consumers' willingness to pay. Going by the Netflix example, if Netflix realizes that not too many people will cancel their subscriptions if they were to increase the price by, say, 1 dollar, they would certainly increase the price. Consumers' WTP is the reason why digital goods are priced differently in different markets. Many digital goods are sold for much cheaper in India compared to developed countries because the Indian market is much more price sensitive. For instance, Netflix costs only about half as much in India as it does in America.
- dr_zoidberg 6y ago
  It's also debatable that there are no costs associated with digital goods. If suddenly Netflix had a surge in subscribers and they doubled them over a short period of time, they'd have to invest in infrastructure to support the extra demand. That would cost them in hardware and human resoursces to handle the extra demand. But yeah, digital services have a better situation at meeting demand than physical goods of which, after the produced amount sells out, you have to wait for more to be manufactured, delivered, etc.
  - aisengard 6y ago
    But the surge in revenue from doubling subscribers would (way) more than cover any costs in infrastructure spending. This would not drive any increase in subscription cost, which is purely governed by the competition and content acquisition costs, paired with whatever magic number the major investors/board decides is an acceptable profit margin.
    - toast0 6y ago
      A doubling in subscribers might need a trippling in customer service agents (especially if the new customers are not as good at tech and need more help, which goes along with being a late adopter or if the service quality drops because of the presumed doubled usage, and there's more service requests as a result). If the doubled subscribers requires doubling the number of Netflix OpenConnect CDN boxes, that would mean current capex, and while the additional revenue might eventually pay for it, there might need to be borrowing costs to get the equipment sooner rather than later. Also, right now is a tricky time to get lots more hardware, so a 2021 node might cost more than a 2020 node, even if they have the same capacity. All that said, without looking at their investor reports, I suspect they have some margin and cash on hand to make things work and mostly profit. They probably also have a target for spare CDN node capacity, because there's some pretty high variability of peak load on new releases and ISP install lead time can be super long. Also, they do a lot of efficiency work to make sure they can push as much traffic as possible from their nodes.
base698 6y ago
Cantillion effect: > Cantillion wrote: > “The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.” > Inflation is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary benefit to some who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings for example. This is the Cantillion effect.
barnesto 6y ago
Digital goods prices won't increase due to demand necessarily. Those prices will rise because electricity, rent, and all the other overhead line items increase. Those increases get passed to the customer, who is going to be hit with increased prices for the necessities of life - food, water, housing. Digital goods do nothing to support human life - food, water, housing. Sure you can buy things online, but you can buy those things at brick and mortar stores. In turn, gas prices will rise to the point where delivery services become unviable. Inflation touches the entire chain whether the product is digital or otherwise.
paulpauper 6y ago
>Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them and there is a limit on how much of any particular physical good is available. Computers and other electronics are cheaper than ever on a real and absolute basis despite increased demand and increased money supply
- midasuni 6y ago
  Top model iPhones have increased price about 15% per year since launch
  - MontyCarloHall 6y ago
    Yes, and they’ve also improved by orders of magnitude in terms of processing power, camera quality, etc. Today’s top-end iPhone probably would have cost upwards of $10,000 in 2015, if it were even possible to manufacture. As an aside, someone did a back-of-the-envelope calculation and found that the equivalent computing power of a 2014 iPhone would have cost $32 million in 1991: https://www.aei.org/technology-and-innovation/how-much-would-an-iphone-have-cost-in-1991/ https://www.aei.org/technology-and-innovation/how-much-would...
    - matthewdgreen 6y ago
      Yes, but so what? My current iPhone now devotes trillions of potentially-useful cycles to NOPs or processor sleep cycles. Does this mean that $32m of actual value is being created for me?
      - midasuni 6y ago
        That’s key, people are spending more on mobile phones now than they were a decade ago. The benefit they get is difficult to quantify on an individual basis, certainly the difference between a phone from 5 years ago have very little difference than one from today, better camera perhaps, but how many people who bought a separate camera in 2016 don’t bother now.
LudwigNagasena 6y ago
> The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. Digital goods aren’t priced at marginal cost. By your logic not only an increase in money supply would have no effect on the price of digital goods, but the price of digital goods should be 0 before and after the increase.
Black101 6y ago
They don't price things based on cost, they price them based on what you are willing to pay.
z3t4 6y ago
Also the marginal cost for Macdonals to serve one more hamburger is also very low. And anything that is automated has very small marginal cost, which is most stuff now a day. If you want to measure inflation, check how much it cost to hire a plumber. And craftsman likes to charge even numbers, so they will jump from $100/hour to $200/hour (rather then from 100 to 110)
- XorNot 6y ago
  The better way to think about this is how much a CPU costs. To build a modern CPU takes a factory and supply chain that costs multiple billions of dollars. It is a piece of cutting edge technology, sitting at the pinnacle of human engineering achievement. No matter how you rich you get individually, it's not actually possible to through individual effort to buy a CPU which is substantially better then the same thing any consumer can buy. ...so as a result, we sell them to everyone for less then cost of a few weeks groceries.
forgithubs 6y ago
Inflation is not always in relation directly to the price. For example, if Netflix is able to get 10,000,000 new subscribers. It receives $100,000,000. It can now spend $50,000,000 on new infrastructure, which will make the price rise. Netflix can also hire for $50,000,000, which creates jobs that otherwise wouldn't exist. Those new employees, working for that new currency will spend their salaries, rising the prices.
- chii 6y ago
  but those $50 million of subscription revenue means there's $50 million less spent on something else. And those $50 million paid to employees are for producing value for netflix (presumably, more than $50 millions worth). So no, this will not increase inflation. The goods produced matches the money spent, so demand and supply continue to match up. Inflation would occur if production ceases, but demand continues to remain the same (or higher).
  - forgithubs 6y ago
    I forgot to specify that the 100 million is entirely printed money. Whatever the way you see it, that 100 million of buying power should not exist and eventually ends up lifting the prices of normal goods just with the economic activity it generates.
    - chii 6y ago
      i mean, if you claim that $100 million was printed, then regardless of whether it's netflix or something else, it may increase inflation. But the thing is, there hasn't been that much money printed by the FEDs or the US gov't. The stimulus cheques are not money printing, but money borrowing - a major difference. Borrowed money needs to be paid back, and so there may be temporary inflation caused by said stimulus, but it's clawed back in the future when the stimulus' effect has worked!
      - forgithubs 6y ago
        You might want to find out to whom the debt is owed. The US government owes money to the US government. The trend is an uptrend. The only thing stopping this stratagem is currency devaluation on the free global market.
victor106 6y ago
> This isn't the case, however, for digital goods. If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. Good point but you have to think that if there’s lot of demand for Netflix which means Netflix has lot of hit shows. Say their hit percentage is 10% (which is very high). Which means they have to make more and more shows to provide that number of hits to sustain so much demand. Which means more expenses, which puts pressure on them to increase the price of subscription. Which also means actors, story writers etc can charge more (as they are only a finite number of good actors etc)
- chii 6y ago
  > Which means they have to make more and more shows to provide that number of hits to sustain so much demand That's a fixed overhead, because the hit shows costs the same if there is 10 million subscribers, or 100 million subscribers. Netflix doesn't not need to have 10x the number of hit shows to serve 10x the number of subscribers!
atq2119 6y ago
> Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them This isn't actually true, though it's a widespread belief (quite a number of pundits kept making incorrect predictions after the global financial crisis). Where the logic goes wrong is that an increase in money supply doesn't automatically translate into higher disposable incomes. (And higher disposable incomes don't automatically translate to higher effective demand, though in practice they usually do if you the increase in income isn't extremely unequally distributed.)
- harry8 6y ago
  >if you the increase in income isn't extremely unequally distributed How is your family's net worth percentage change looking compared to Bezos? How is your salary percentage change looking compared to that? Sorry for laboring your point. It should be labored. Repetatedly & with emphasis.
- cortesoft 6y ago
  You are right, not all money supply increases are equal. However, I have thought about this more in the context of proposals around UBI or other wealth redistribution ideas. The common complaint about them is around just what you talk about, that distributing wealth to poor people will increase disposable income and cause inflation from not being able to keep up with increased demand. I wonder how much of that is true in our modern economy. Between our incredible latent productive capacity and the sizable chunk of our economy that consists of non-rivalrous goods, I wonder how much of the increased demand we could absorb without causing inflation to rise substantially. For example, how much would food prices go up if poor people had more money? We can produce a lot of food, and the demand for additional food is not limitless. Some of that money would go towards digital goods like Netflix and video games and other digital goods, which are non-rivalrous. Of course it would have an effect on inflation, but I am just wondering how much.
  - atq2119 6y ago
    FWIW I agree with your thought process here. Proclamations of certainty around UBI are common, but the only intellectually honest position is that we simply do not have enough empirical data to tell with a useful level of confidence how a UBI would affect inflation. Also, I believe that the only way to collect that empirical data is to implement a UBI at a sufficiently large scale and see what happens.
habibur 6y ago
Inflation means consumer's purchasing power remains the same, regardless of money supply. Therefore in an inflated economy people won't have the extra money now to subscribe to Netflix as they still are struggling to make ends meet even with the extra money, as everything else has increased in price proportional to his income increase.
coldtea 6y ago
>Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them Not if the increase in money supply goes from the banks to the already wealthy (as cheap loans), which don't use the extra money to consume, but to invest, buy land, and fund small-competition-crushing rent-seeking endeavours. Then the money supply increases, consumer goods remain more or less the same price, but some stuff like rent goes up.
- throwawayboise 6y ago
  We saw what happened in 2008 when the loans went to unsophisticated, underqualified borrowers.
  - cerved 6y ago
    problem were the lenders not borrowers
  - midasuni 6y ago
    > unsophisticated, underqualified Like Lehman Brothers
  - coldtea 6y ago
    2008 (or rather, the lead-in to 2008) was a different case. In that case the lenders were the ones who were the problem, and the borrowers were indeed using the money as disposable income (well, at least, to buy a home and other consumer goods on credit). Whereas today the money goes from the printers to the rich people - not the common folk.
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throwawayboise 6y ago
Worth noting that digital goods, almost all that I can think of, are entirely nonessential. They will be the first things cut if a household budget gets tight.
closeparen 6y ago
A Netflix subscription buys actors, directors, writers, editors, cameras, microphones, lights, clipboards, trucks, sound stages, hair & makeup, trailers, set decoration, tape, clapper boards, generators, radios, VFX render hours, insurance premiums, producers’ risk, and all the other accoutrements of film and TV production. There’s a lot of accounting and financial engineering and temporal shifting going on under the hood but ultimately you are paying for real things.
- cortesoft 6y ago
  Right, but I was talking about the MARGINAL cost per subscriber... those costs you mentioned are fixed costs, and they are the same whether Netflix has one subscriber or a billion. The marginal cost per additional subscriber is basically bandwidth, which is pennies.
  - closeparen 6y ago
    The system incurs those fixed costs based on how it anticipates they will pay off. With more money chasing content, the system will find it profitable to green-light more scripts at higher production values. But ultimately everybody’s favorite sound mixer has only two ears.
    - midasuni 6y ago
      You can see this in football. In the U.K. satelite TV massively increased the market - no longer were people spending £30 a game to watch at a stadium with a capacity of 30k, they were spending £10 a game to watch on tv with a capacity of millions. This extra cash poured into the salaries of the footballers in the top division, salary’s doubling every 4 or so years for a sustained period. The money didn’t trickle down to lower divisions or youth training or on site staff.
eloff 6y ago
I spend fifty times more on real goods each month than digital goods. So while it's fascinating to think about, and it makes quite a lot of sense, it's a rounding error still.
teitoklien 6y ago
The digital version of goods indirectly does cause inflation. When you have a surge of users and you got more servers in aws, EC2 prices increase for the on-demand instances , aws buys more servers , the more customers it gets , which means more metal excavation , more semiconductors , more minerals , more trucks to move these things , more fuel to move the trucks , it goes on and on. Also money gets turned into profit , which is then paid to employees , executives , founders. Who then go on to pay into other items that are non digital (houses , cars , premium cereals lol), which then do cause inflation. Until all goods are digital , every digital product still indirectly causes inflation using its non digital items , because all of em are transactions between humans. And all goods can never be digital , because you still need non digital items to run the digital goods on. So inflation continues.
chupchap 6y ago
> The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. This is true in a vacuum. With a bigger customer base a company will need to invest more in support. Also, in the case of Netflix, they need to invest more in sourcing content to cater to the now increasingly varied demands of their customers or else they'll lose them to competition who might also be offering their products at the same rate.
anovikov 6y ago
Got to add that almost all physical goods are part software these days. In a way, everything becomes software. And fixed costs to create something and put it into the market are huge and tend to grow, but manufacturing unit costs are low and tend to fall.... So this observation applies to most physical goods just as it does to digital ones!
fedreserved 6y ago
The expense that matters most to Netflix is cost of content. They are trying to hedge this by creating their own, to fight against the rising cost of purchasing from middle men but they will still need to license content from others . As their subscribers increase, next contracts negotiations are going to be that much more contentious

vmception 6y ago

These organizations would be expected to have some marginal cost increases from running data centers and physical hardware cost increases and they would calculate passing these on to consumers. Or as an excuse to. But I guess that is covered by your example and understanding that their physical costs being non-digital goods. So, fun thought exercise.

cortesoft 6y ago
Yeah, that is why I intentionally said "practically zero" instead of actually zero, because there are some marginal costs. They are just orders of magnitude less than what they are for physical goods. But yeah, I am just curious how that math all works out on a macro scale.
- itslennysfault 6y ago
  This is a good point, and there is also no finite limit which is what typically makes the supply and demand machine go brrrrrrrr. Netflix pays some % of their monthly subscription fee for servers. The amount really doesn't matter, and they can add the entire planet as subscribers before running out of servers so the supply is infinite for all practical purposes.

lupire 6y ago

Businesses charge what customers are willing to pay. If they have more money, they are willing to pay more. Competitiuis the countervailing force, but Netflix has exclusives and serials and network effects (fandoms and friends)

cortesoft 6y ago
Sure, but that doesn't say anything about inflation. The standard formula for profit is (units sold * price per unit) - (fixed costs + marginal costs * units sold).... Netflix, like every other company, wants to maximize that profit. For most non-digital companies, the marginal cost is significant, and follows a u-shaped curve... at first, marginal costs decrease as you sell more units, since you can get intermediate goods for cheaper prices as you buy in bulk. At a certain point, however, the marginal price starts increasing again as you start to hit various bottlenecks and intermediate goods start becoming more expensive as you consume all the easy to produce supply. In other words, you can't scale linearly. Digital goods have a much flatter uptick on that marginal cost graph, and I am very curious what that means at the macro economic level.
- alex_smart 6y ago
  It means that in your formula, the (units sold * price per unit) term dominates the profit formula. So, the price is mostly determined by the consumer's willing to pay.
  - throwawayboise 6y ago
    And by your competitors willingness to take a lower per-unit profit in exchange for more sales.
ClumsyPilot 6y ago
"If they have more money, they are willing to pay more." That's like totally wrong. Goods provide some value to the customer, and that determines what they are willing to pay for it. If I wake up a millionaire tomorrow, that doesn't mean I am suddenly willing to spend $500 the same haircut that was $50 yesterday.

bob33212 6y ago

We are entering a Post Scarcity Economy. A lot of fiction books write about how this plays out. Regardless of what happens a lot of economic theory becomes less relevant. https://en.wikipedia.org/wiki/Post-scarcity_economy#:~:text=Post%2Dscarcity%20is%20a%20theoretical,very%20cheaply%20or%20even%20freely https://en.wikipedia.org/wiki/Post-scarcity_economy#:~:text=....

spaetzleesser 6y ago
Post scarcity only for certain things. Things like living space are becoming scarcer and more expensive.
- klipt 6y ago
  Living space in rural areas is cheap. Living space near good jobs is what's scarce.
  - mensetmanusman 6y ago
    In comes a pandemic induced remote work experiment and global satellite internet thanks to SpaceX. An unforeseen black swan of a decade.
  - midasuni 6y ago
    Not in the U.K. average house prices in rural areas are far higher than in towns, as they are more desirable.
    - globular-toast 6y ago
      That's true, but they are also bigger and better. A block of flats in the middle of nowhere would be worth way less than one in a city.
- david_dan 6y ago
  'Living Space' is also an illusion. In a near perfect VR world, (which we will achieve during singularity), everyone will have infinite 'living' space

tomrod 6y ago

We still have to pay for food, shelter, transportation, clothing, and other physical things. Our inner world is richer, and we consume non-decreasing goods. But everything is tied to something in the physical world, even if it's the hardware and energy running it.

cortesoft 6y ago
Right, which is why the "100% digital" world was just a thought experiment.... we don't live in that world, but we do live in a world where an increasing percentage of our money is spent on non-exclusionary goods.... that has to have an effect on inflation.
david_dan 6y ago
Nope. Every Physical atom in the universe is nothing but Energy. The universe itself has infinite energy. So, in a Singularity World (where Robots produce everything, including other Robots), the marginal cost for everything (like Netflix videos) will collapse to $0.

pessimizer 6y ago

> If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. No, it would go up because they would make more profits with fewer subscribers and a higher margin.

dntrkv 6y ago
Economies of scale dictate the opposite. Fixed costs stay the same no matter the subscriber count, this would allow Netflix to lower the price, while maintaining the same profits. In reality, they would likely keep the price the same and increase their margins without charging more.
- tharkun__ 6y ago
  What's the ratios of fixed to variable cost for Netflix and how many subscribers does it need for the economies of scale to go beyond a few cents?

gruez 6y ago

>I am curious how much of our current "low inflation even with an increasing money supply" is caused by our increasing spending on non-exclusionary goods. Not much? Based on the CPI weights given by the BLS[1] at least 82.238% of the CPI is from non digital goods. This is based on summing up the top level categories which are definitely not digital, ie. Food and beverages, Housing, Apparel, Transportation, Medical care. If you drill down into the remaining categories (Education and communication, Recreation, Other goods and services) and eliminate non-digital goods from there you can probably get that percentage even higher. [1] https://www.bls.gov/cpi/tables/relative-importance/2020.htm https://www.bls.gov/cpi/tables/relative-importance/2020.htm

cortesoft 6y ago
Yeah, that doesn't say how much of actual consumer spending goes into the goods that are included in the CPI. Even if the CPI were based 100% on non-digital goods, the percentage of purchases that go towards CPI goods could be falling.
- gruez 6y ago
  Perhaps, but how much of a difference can that make? It's hard to imagine many people spending $100+ on new SaaS/digital goods because of the pandemic.
  - cortesoft 6y ago
    That is exactly my question! How much are people spending on digital goods, and what percentage of extra income would go towards digital goods.

alex_smart 6y ago

>The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. Yeah, I don't think that that argument works at all. The price does not increase due to "shortage", it increases due to an increase in consumers' willingness to pay. Going by the Netflix example, if Netflix realizes that not too many people will cancel their subscriptions if they were to increase the price by, say, 1 dollar, they would certainly increase the price. Consumers' WTP is the reason why digital goods are priced differently in different markets. Many digital goods are sold for much cheaper in India compared to developed countries because the Indian market is much more price sensitive. For instance, Netflix costs only about half as much in India as it does in America.

dr_zoidberg 6y ago
It's also debatable that there are no costs associated with digital goods. If suddenly Netflix had a surge in subscribers and they doubled them over a short period of time, they'd have to invest in infrastructure to support the extra demand. That would cost them in hardware and human resoursces to handle the extra demand. But yeah, digital services have a better situation at meeting demand than physical goods of which, after the produced amount sells out, you have to wait for more to be manufactured, delivered, etc.
- aisengard 6y ago
  But the surge in revenue from doubling subscribers would (way) more than cover any costs in infrastructure spending. This would not drive any increase in subscription cost, which is purely governed by the competition and content acquisition costs, paired with whatever magic number the major investors/board decides is an acceptable profit margin.
  - toast0 6y ago
    A doubling in subscribers might need a trippling in customer service agents (especially if the new customers are not as good at tech and need more help, which goes along with being a late adopter or if the service quality drops because of the presumed doubled usage, and there's more service requests as a result). If the doubled subscribers requires doubling the number of Netflix OpenConnect CDN boxes, that would mean current capex, and while the additional revenue might eventually pay for it, there might need to be borrowing costs to get the equipment sooner rather than later. Also, right now is a tricky time to get lots more hardware, so a 2021 node might cost more than a 2020 node, even if they have the same capacity. All that said, without looking at their investor reports, I suspect they have some margin and cash on hand to make things work and mostly profit. They probably also have a target for spare CDN node capacity, because there's some pretty high variability of peak load on new releases and ISP install lead time can be super long. Also, they do a lot of efficiency work to make sure they can push as much traffic as possible from their nodes.

base698 6y ago

Cantillion effect: > Cantillion wrote: > “The river, which runs and winds about in its bed, will not flow with double the speed when the amount of water is doubled.” > Inflation is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary benefit to some who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings for example. This is the Cantillion effect.

barnesto 6y ago

Digital goods prices won't increase due to demand necessarily. Those prices will rise because electricity, rent, and all the other overhead line items increase. Those increases get passed to the customer, who is going to be hit with increased prices for the necessities of life - food, water, housing. Digital goods do nothing to support human life - food, water, housing. Sure you can buy things online, but you can buy those things at brick and mortar stores. In turn, gas prices will rise to the point where delivery services become unviable. Inflation touches the entire chain whether the product is digital or otherwise.

paulpauper 6y ago

>Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them and there is a limit on how much of any particular physical good is available. Computers and other electronics are cheaper than ever on a real and absolute basis despite increased demand and increased money supply

midasuni 6y ago
Top model iPhones have increased price about 15% per year since launch
- MontyCarloHall 6y ago
  Yes, and they’ve also improved by orders of magnitude in terms of processing power, camera quality, etc. Today’s top-end iPhone probably would have cost upwards of $10,000 in 2015, if it were even possible to manufacture. As an aside, someone did a back-of-the-envelope calculation and found that the equivalent computing power of a 2014 iPhone would have cost $32 million in 1991: https://www.aei.org/technology-and-innovation/how-much-would-an-iphone-have-cost-in-1991/ https://www.aei.org/technology-and-innovation/how-much-would...
  - matthewdgreen 6y ago
    Yes, but so what? My current iPhone now devotes trillions of potentially-useful cycles to NOPs or processor sleep cycles. Does this mean that $32m of actual value is being created for me?
    - midasuni 6y ago
      That’s key, people are spending more on mobile phones now than they were a decade ago. The benefit they get is difficult to quantify on an individual basis, certainly the difference between a phone from 5 years ago have very little difference than one from today, better camera perhaps, but how many people who bought a separate camera in 2016 don’t bother now.

LudwigNagasena 6y ago

> The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. Digital goods aren’t priced at marginal cost. By your logic not only an increase in money supply would have no effect on the price of digital goods, but the price of digital goods should be 0 before and after the increase.

Black101 6y ago

They don't price things based on cost, they price them based on what you are willing to pay.

z3t4 6y ago

Also the marginal cost for Macdonals to serve one more hamburger is also very low. And anything that is automated has very small marginal cost, which is most stuff now a day. If you want to measure inflation, check how much it cost to hire a plumber. And craftsman likes to charge even numbers, so they will jump from $100/hour to $200/hour (rather then from 100 to 110)

XorNot 6y ago
The better way to think about this is how much a CPU costs. To build a modern CPU takes a factory and supply chain that costs multiple billions of dollars. It is a piece of cutting edge technology, sitting at the pinnacle of human engineering achievement. No matter how you rich you get individually, it's not actually possible to through individual effort to buy a CPU which is substantially better then the same thing any consumer can buy. ...so as a result, we sell them to everyone for less then cost of a few weeks groceries.

forgithubs 6y ago

Inflation is not always in relation directly to the price. For example, if Netflix is able to get 10,000,000 new subscribers. It receives $100,000,000. It can now spend $50,000,000 on new infrastructure, which will make the price rise. Netflix can also hire for $50,000,000, which creates jobs that otherwise wouldn't exist. Those new employees, working for that new currency will spend their salaries, rising the prices.

chii 6y ago
but those $50 million of subscription revenue means there's $50 million less spent on something else. And those $50 million paid to employees are for producing value for netflix (presumably, more than $50 millions worth). So no, this will not increase inflation. The goods produced matches the money spent, so demand and supply continue to match up. Inflation would occur if production ceases, but demand continues to remain the same (or higher).
- forgithubs 6y ago
  I forgot to specify that the 100 million is entirely printed money. Whatever the way you see it, that 100 million of buying power should not exist and eventually ends up lifting the prices of normal goods just with the economic activity it generates.
  - chii 6y ago
    i mean, if you claim that $100 million was printed, then regardless of whether it's netflix or something else, it may increase inflation. But the thing is, there hasn't been that much money printed by the FEDs or the US gov't. The stimulus cheques are not money printing, but money borrowing - a major difference. Borrowed money needs to be paid back, and so there may be temporary inflation caused by said stimulus, but it's clawed back in the future when the stimulus' effect has worked!
    - forgithubs 6y ago
      You might want to find out to whom the debt is owed. The US government owes money to the US government. The trend is an uptrend. The only thing stopping this stratagem is currency devaluation on the free global market.

victor106 6y ago

> This isn't the case, however, for digital goods. If there are suddenly 100 million new people who want to buy a Netflix subscription, it isn't like we are going to see the price of a Netflix subscription go up because there isn't enough Netflix to go around. Good point but you have to think that if there’s lot of demand for Netflix which means Netflix has lot of hit shows. Say their hit percentage is 10% (which is very high). Which means they have to make more and more shows to provide that number of hits to sustain so much demand. Which means more expenses, which puts pressure on them to increase the price of subscription. Which also means actors, story writers etc can charge more (as they are only a finite number of good actors etc)

chii 6y ago
> Which means they have to make more and more shows to provide that number of hits to sustain so much demand That's a fixed overhead, because the hit shows costs the same if there is 10 million subscribers, or 100 million subscribers. Netflix doesn't not need to have 10x the number of hit shows to serve 10x the number of subscribers!

atq2119 6y ago

> Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them This isn't actually true, though it's a widespread belief (quite a number of pundits kept making incorrect predictions after the global financial crisis). Where the logic goes wrong is that an increase in money supply doesn't automatically translate into higher disposable incomes. (And higher disposable incomes don't automatically translate to higher effective demand, though in practice they usually do if you the increase in income isn't extremely unequally distributed.)

harry8 6y ago
>if you the increase in income isn't extremely unequally distributed How is your family's net worth percentage change looking compared to Bezos? How is your salary percentage change looking compared to that? Sorry for laboring your point. It should be labored. Repetatedly & with emphasis.
cortesoft 6y ago
You are right, not all money supply increases are equal. However, I have thought about this more in the context of proposals around UBI or other wealth redistribution ideas. The common complaint about them is around just what you talk about, that distributing wealth to poor people will increase disposable income and cause inflation from not being able to keep up with increased demand. I wonder how much of that is true in our modern economy. Between our incredible latent productive capacity and the sizable chunk of our economy that consists of non-rivalrous goods, I wonder how much of the increased demand we could absorb without causing inflation to rise substantially. For example, how much would food prices go up if poor people had more money? We can produce a lot of food, and the demand for additional food is not limitless. Some of that money would go towards digital goods like Netflix and video games and other digital goods, which are non-rivalrous. Of course it would have an effect on inflation, but I am just wondering how much.
- atq2119 6y ago
  FWIW I agree with your thought process here. Proclamations of certainty around UBI are common, but the only intellectually honest position is that we simply do not have enough empirical data to tell with a useful level of confidence how a UBI would affect inflation. Also, I believe that the only way to collect that empirical data is to implement a UBI at a sufficiently large scale and see what happens.

habibur 6y ago

Inflation means consumer's purchasing power remains the same, regardless of money supply. Therefore in an inflated economy people won't have the extra money now to subscribe to Netflix as they still are struggling to make ends meet even with the extra money, as everything else has increased in price proportional to his income increase.

coldtea 6y ago

>Normally, an increase in money supply would cause consumer goods to increase in price, since more people are able to buy them Not if the increase in money supply goes from the banks to the already wealthy (as cheap loans), which don't use the extra money to consume, but to invest, buy land, and fund small-competition-crushing rent-seeking endeavours. Then the money supply increases, consumer goods remain more or less the same price, but some stuff like rent goes up.

throwawayboise 6y ago
We saw what happened in 2008 when the loans went to unsophisticated, underqualified borrowers.
- cerved 6y ago
  problem were the lenders not borrowers
- midasuni 6y ago
  > unsophisticated, underqualified Like Lehman Brothers
- coldtea 6y ago
  2008 (or rather, the lead-in to 2008) was a different case. In that case the lenders were the ones who were the problem, and the borrowers were indeed using the money as disposable income (well, at least, to buy a home and other consumer goods on credit). Whereas today the money goes from the printers to the rich people - not the common folk.

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throwawayboise 6y ago

Worth noting that digital goods, almost all that I can think of, are entirely nonessential. They will be the first things cut if a household budget gets tight.

closeparen 6y ago

A Netflix subscription buys actors, directors, writers, editors, cameras, microphones, lights, clipboards, trucks, sound stages, hair & makeup, trailers, set decoration, tape, clapper boards, generators, radios, VFX render hours, insurance premiums, producers’ risk, and all the other accoutrements of film and TV production. There’s a lot of accounting and financial engineering and temporal shifting going on under the hood but ultimately you are paying for real things.

cortesoft 6y ago
Right, but I was talking about the MARGINAL cost per subscriber... those costs you mentioned are fixed costs, and they are the same whether Netflix has one subscriber or a billion. The marginal cost per additional subscriber is basically bandwidth, which is pennies.
- closeparen 6y ago
  The system incurs those fixed costs based on how it anticipates they will pay off. With more money chasing content, the system will find it profitable to green-light more scripts at higher production values. But ultimately everybody’s favorite sound mixer has only two ears.
  - midasuni 6y ago
    You can see this in football. In the U.K. satelite TV massively increased the market - no longer were people spending £30 a game to watch at a stadium with a capacity of 30k, they were spending £10 a game to watch on tv with a capacity of millions. This extra cash poured into the salaries of the footballers in the top division, salary’s doubling every 4 or so years for a sustained period. The money didn’t trickle down to lower divisions or youth training or on site staff.

eloff 6y ago

I spend fifty times more on real goods each month than digital goods. So while it's fascinating to think about, and it makes quite a lot of sense, it's a rounding error still.

teitoklien 6y ago

The digital version of goods indirectly does cause inflation. When you have a surge of users and you got more servers in aws, EC2 prices increase for the on-demand instances , aws buys more servers , the more customers it gets , which means more metal excavation , more semiconductors , more minerals , more trucks to move these things , more fuel to move the trucks , it goes on and on. Also money gets turned into profit , which is then paid to employees , executives , founders. Who then go on to pay into other items that are non digital (houses , cars , premium cereals lol), which then do cause inflation. Until all goods are digital , every digital product still indirectly causes inflation using its non digital items , because all of em are transactions between humans. And all goods can never be digital , because you still need non digital items to run the digital goods on. So inflation continues.

chupchap 6y ago

> The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage. This is true in a vacuum. With a bigger customer base a company will need to invest more in support. Also, in the case of Netflix, they need to invest more in sourcing content to cater to the now increasingly varied demands of their customers or else they'll lose them to competition who might also be offering their products at the same rate.

anovikov 6y ago

Got to add that almost all physical goods are part software these days. In a way, everything becomes software. And fixed costs to create something and put it into the market are huge and tend to grow, but manufacturing unit costs are low and tend to fall.... So this observation applies to most physical goods just as it does to digital ones!

fedreserved 6y ago

The expense that matters most to Netflix is cost of content. They are trying to hedge this by creating their own, to fight against the rising cost of purchasing from middle men but they will still need to license content from others . As their subscribers increase, next contracts negotiations are going to be that much more contentious