3 ms·

It is the efficient market hypothesis. If it really were 100% efficient why would anybody start a company? In reality there are pockets of inefficiency, and the

It is the efficient market hypothesis. If it really were 100% efficient why would anybody start a company? In reality there are pockets of inefficiency, and they are still working markets. You can see how this interpretation clashes with another dogma of economics: that the price of sth is the price that someone is willing to pay for it. I read your message as saying that this software should be cheaper (arguing working markets but I think it is really a moral argument). This seems like the opposite of markets determining its worth. Another argument against 90% being a market failure is that this will inspire competition of copycats with lower margin over time. Corrections and competition are not instant.

danbruc 3y ago
The efficient market hypothesis is something different, that one just says that prices reflect all available information. I was talking about competition which should ensure that there are no profits, i.e. that consumers do not pay more than the costs of production, including risk adjustment and development costs and so on, but that are mostly uneccesary details for this discussion. You can see how this interpretation clashes with another dogma of economics: that the price of sth is the price that someone is willing to pay for it. There is no conflict here. On the one hand the price can be as high as what customers are willing to pay, but on the other hand competitors should show up in order to take some of your profits by offering a lower price. I read your message as saying that this software should be cheaper (arguing working markets but I think it is really a moral argument). Sure, there is also a moral aspect to this, overcharging your customers in order to be able to relax on the beach is not the most ethical thing, but the economy cares relatively little about ethics. So the best one can do is to hope that market forces will correct this. Another argument against 90% being a market failure is that this will inspire competition of copycats with lower margin over time. Corrections and competition are not instant. Yes, I did not spell this out precisely enough, it is of course only a market failure if it persist. But given that many of those projects seem relatively simple, how long should one wait before declaring a market failure? Maybe there are already cheaper alternatives but people do not know about them? That is itself a market failure.
- dogibacsi 3y ago
  Seems like the disconnect stems from the definition of market failure. In your interpretation, persistence of profits is what makes a market failure. Economic theory is a bit more nuanced than that: market failure means inefficient allocations of goods and services on free markets. Inefficient means that there exists another conceivable outcome where an individual may be made better off without making someone else worse off. If we accept the notion that whether a market efficient vs inefficient depends on whether there is another conceivable outcome that is not zero sum, we can summarize your argument to this: there are no profits in efficient, free markets, therefore the existence of profits can be deemed market failures. so, what other reasons can there be to the existence of profits while achieving maximum efficiency on a market? inelastic demand comes to mind for one which in itself has nothing to do with market failures. there are others, like high barriers to entry or innovation advantages or economies of scale. none of them are indicators of market failure HOWEVER they do suggest further analysis into the market conditions and more importantly the behavior of the players as some companies might be more exposed to act in a way that leads to market failure if these parameters persist. however we would need to assess whether markets with persistent high profit margins are more prone to failure than markets with persistent low or mid margins. which captures my argument: the persistence of 90%+ profit margins in itself are not a good indicator of market failure. while this is true, we can see that market failure can be present in software markets but that has to do with the market structure due to the behavior of the players not the size of the profit margins. this is why I think your argument while sounds sensational and a great catchphrase for a political rally, it lacks substance and cannot adequately capture reality.
- hnfong 3y ago
  > including risk adjustment Right. Are you sure you haven't switched definitions in the discussion? Did the original 90% profit margin you quoted include costs of risk (assuming it can be quantified)? > but that are mostly uneccesary (sic) details for this discussion. LOL

danbruc 3y ago

The efficient market hypothesis is something different, that one just says that prices reflect all available information. I was talking about competition which should ensure that there are no profits, i.e. that consumers do not pay more than the costs of production, including risk adjustment and development costs and so on, but that are mostly uneccesary details for this discussion. You can see how this interpretation clashes with another dogma of economics: that the price of sth is the price that someone is willing to pay for it. There is no conflict here. On the one hand the price can be as high as what customers are willing to pay, but on the other hand competitors should show up in order to take some of your profits by offering a lower price. I read your message as saying that this software should be cheaper (arguing working markets but I think it is really a moral argument). Sure, there is also a moral aspect to this, overcharging your customers in order to be able to relax on the beach is not the most ethical thing, but the economy cares relatively little about ethics. So the best one can do is to hope that market forces will correct this. Another argument against 90% being a market failure is that this will inspire competition of copycats with lower margin over time. Corrections and competition are not instant. Yes, I did not spell this out precisely enough, it is of course only a market failure if it persist. But given that many of those projects seem relatively simple, how long should one wait before declaring a market failure? Maybe there are already cheaper alternatives but people do not know about them? That is itself a market failure.

dogibacsi 3y ago
Seems like the disconnect stems from the definition of market failure. In your interpretation, persistence of profits is what makes a market failure. Economic theory is a bit more nuanced than that: market failure means inefficient allocations of goods and services on free markets. Inefficient means that there exists another conceivable outcome where an individual may be made better off without making someone else worse off. If we accept the notion that whether a market efficient vs inefficient depends on whether there is another conceivable outcome that is not zero sum, we can summarize your argument to this: there are no profits in efficient, free markets, therefore the existence of profits can be deemed market failures. so, what other reasons can there be to the existence of profits while achieving maximum efficiency on a market? inelastic demand comes to mind for one which in itself has nothing to do with market failures. there are others, like high barriers to entry or innovation advantages or economies of scale. none of them are indicators of market failure HOWEVER they do suggest further analysis into the market conditions and more importantly the behavior of the players as some companies might be more exposed to act in a way that leads to market failure if these parameters persist. however we would need to assess whether markets with persistent high profit margins are more prone to failure than markets with persistent low or mid margins. which captures my argument: the persistence of 90%+ profit margins in itself are not a good indicator of market failure. while this is true, we can see that market failure can be present in software markets but that has to do with the market structure due to the behavior of the players not the size of the profit margins. this is why I think your argument while sounds sensational and a great catchphrase for a political rally, it lacks substance and cannot adequately capture reality.
hnfong 3y ago
> including risk adjustment Right. Are you sure you haven't switched definitions in the discussion? Did the original 90% profit margin you quoted include costs of risk (assuming it can be quantified)? > but that are mostly uneccesary (sic) details for this discussion. LOL