6 ms·

A Beautiful Theory Falls to Ugly Data

• skrebbel 4mo ago
  I had to look up “MC” to be able to understand this. It means Marginal Cost. EDIT I still don’t understand it, I think. My read is: someone named Coase theorized that monopolists of durable goods will actually sell their products at marginal cost because of some weird mind game with their customers (the obvious unwritten corollary being that monopolies are fine). This is obviously untrue and we all know plenty of examples (pharma anyone? plenty pills are mega durable). Nevertheless, somehow economists cheered at this theory and called it beautiful, despite how obviously ridiculous it is. But now the authors of this post debunked it with real data to, I hope, nobody’s surprise. That can’t be it, can it?
  • zaphar 4mo ago
    As far as I can tell that is indeed, "it". What is maybe more interesting is that it took this long to find data that shows it wrong given we have so many examples in history of it being in fact wrong.
    • tskj 4mo ago
      I think basically economists aren't that interested in looking at real world, messy data.
  • grumbelbart2 4mo ago
    It's one of those "imagine a frictionless, perfectly spherical pig in a vacuum" theories that don't survive contact with reality. Buyers don't just pop up on timestamp zero and remain unchanged. They anticipate price changes, potential new buyers come in, the market is dynamic. I also don't understand why this only affects monopolies. The same logic should dictate that all products and services fall towards MC?
    • AnimalMuppet 4mo ago
      I am not an economist, but I think that the theory is that prices do go to MC in a competitive market. Coase's theorem was for an uncompetitive market. (In fact, a monopoly - the most uncompetitive market possible.)
    • eru 4mo ago
      > The theorists, most notably Gul, Sonnenschein and Wilson and Fudenberg, Levine and Tirole, formalized Coase’s insight and showed that under quite general conditions the logic goes through. Which is rather surprising, since, as Tim and I point out, Coase’s conjecture implies that many patents and copyrights are essentially worthless — a prediction wildly at variance with the facts. The authors themselves had the same reaction. It's similar to physics: you make small simple models, you investigate what they say, you compare to what you get in reality, and then you make adjustments. The interesting bit is: what kinds of friction or airpressure or shape do you need to add to your pig to recover what parts of reality?
      • 0zer0 4mo ago
        It is a very unrealistic and simple model. The question remains, however, what is meant by the > quite general conditions [under which] the logic goes through. This seems pretty contradictory. There is no hint at which of the constraints is edited to fit better to reality.
        • zwaps 4mo ago
          Some of the papers are linked. These papers, decades old, helpfully even show cases where the result does not hold.
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      • danaris 3mo ago
  • myrmidon 4mo ago
    Some aspects of the conjecture make sense and are observable: Consider e.g. Steam (digital video games): Prices are discounted over time because of "greed" (=> desire to sell the same product to customers that value it less than the first wave). Customers do adapt to this, and expect future discounts (sales) at release date already, and defer their purchase accordingly (despite valueing it higher!). But in reality, customers are not 100% rational, don't have perfect information (on seller strategy), and the product value (to buyers) changes over time too (typically mostly downward), so the base assumptions are difficult to find in reality.
    • tskj 4mo ago
      But this conjecture predicts that Steam prices will drop immediately to their final low price. So Steam is actually also a counterexample.
      • 0zer0 4mo ago
        I disagree. Imho, the problem of this simple model is to find a situation in reality which is close enough to fulfill the constraints. E.g., it is implied that consumers can postpone their purchase longer than the monopolist is willing to realize the profit. Is it the case here? Or is there actually a game so durable that is not losing its appeal over time? And is there a game which can be considered a monopoly (as an activity for spending free time)? All of these points have to be fulfilled, none of them is, i.e., the conjecture simply doesn't apply.
        • tskj 4mo ago
          Yeah I guess it's fine to demand the situation actually conform to the assumptions of the theory, but these assumptions are so extreme they have literally never held for any situation, and they never will.
    • PunchyHamster 4mo ago
      > Consider e.g. Steam (digital video games): Prices are discounted over time because of "greed" (=> desire to sell the same product to customers that value it less than the first wave). Steam doesn't have actual monopoly. Their position is caused wholly by competition consistently shooting themselves in the foot by either offering inferior product or just annoy the customers For example let's take EGS: "We will take lower cut, buy from us!" "Ok, so that means game will be cheaper right ?" "Of course not! Just devs get that. Also we lied in marketing and compared our pre-transaction-fees cut to Steam's post transaction fees cut. Also we didn't mention Steam lowers their cut when games sell well, so the difference is far smaller in reality" "Sigh, I guess I might try it for that reason, how does your service looks like" "Well it has 1% of the features Steam has and about 20% of the features you actually use in Steam are here" "...why the hell I'd buy at you?" "Coz we paid devs of games you like to release exclusively at our platform?" "How about fuck you I'd just get it on Steam". About only competitor that tried was GOG but their "no DRMed games at all" motto meant that they just don't have games people wanted. So, Steam enforces DRM while GOG doesn't? That's an improvement! Actually no, Steam DRM is entirely opt in and devs don't need to use it at all.
  • lrasinen 4mo ago
    The conjecture assumes durable goods, so it doesn't apply to medicine. Also no resale, so that narrows the scope even more. The gist of the conjecture is that if the customers can wait out for price drops and the monopolist wants to sell their thing, then after a few rounds of "he knows that we know that..." the price ends up to be the marginal cost. Now, real world disagrees with the model, so next steps are to examine why this happens and maybe discover some new economic interaction.
    • athrowaway3z 4mo ago
      The elegance of the conjecture seems overstated, and looks like dressed-up ideology. The conjecture requires a theory of time in the form of periods/rounds to reduce price to zero - but wants to ignore time when it comes to information spread and product value. Pinning a variable to any 1 extreme can be very informative, but when the variable has to both exists to justify the presumption, but also be ignored in the model - you're not going to find an elegant basis for a grand-theory-structure to add corrective terms onto. Instead, you'll just get a mess of variables from over-fitted data.
      • zwaps 4mo ago
        Not really. Game Theory (in this iteration at least) is about identifying equilibria, not about the process of reaching them. This is one of several "deviations" of Game Theory from "reality". The fact that equilibria are fixed-points and can be explained in some sort of bargaining process doesn't really mean that's how we should actually imagine them. If we do so, we both overstate the theory (claiming some sort of actual behavioral process) and understate it being a (possibly quite general) fixed point to many possible market and non-market processes. If you want to make Game Theory collide with reality, the actual convergence to an equilibrium is only one of many venues where there is a large divide. Other assumptions of these models - from rational behavior to uniform prior assumptions - are equally problematic. Game Theory models are nevertheless very helpful because they require you to actually lay out your assumptions or - when you observe something else - reason about "what else is going on" in any of these areas. As it turns out (as another person has said), it is also immensely helpful when designing mechanism (i.e. games) like a Steam store or an ad auction, which is why tech companies hire quite a few Game Theorists.
  • 0zer0 4mo ago
    Kind of. The whole setup is pretty improbable. There is durable good which means that consumers will only buy once (pharma doesn't seem to fit here). And there is the monopolist. So there shouldn't be any outside options, as the last paragraph claims in the OP. And the marginal costs seem to be constant. Which is only the case for things like data or software. For most goods, however, one needs to invest in production facilities to increase output for a bigger number of goods. In this case the marginal costs will increase as well and so it would make sense to first sell a lower number of goods for a higher price. Somehow, it doesn't quite add up for me, but I can't quite put my finger on what it is. It reminds me of the unexpected hanging paradox.
  • zwaps 4mo ago
    Somewhat that is it. The issue if, of course, that marginal revolution overstates the contribution of a single empirical study here. Of course everyone is aware that the original model doesn't hold in reality. The contribution of showing this in the ebook market is... not zero, but certainly not the implied "We killed the theory!!!!" Instead, there are decades of papers poking holes in the Coase model and producing ideas as to why the conjecture doesn't hold. In my mind, these are the more interesting contributions. The authors mention two, but I think far more tangible are time preferences, time horizon limits, pertubations, non-uniform prior assumptions and bounded rationality.
    • skrebbel 4mo ago
      This is exactly the explanation I was looking for. Thanks!
  • _alternator_ 4mo ago
    My read was that MC = "market clearing price" not "marginal cost". Being a bit more humble, perhaps the lesson is that the difference between the theory and reality highlights externalities that always exist in the real world that make the theoretical model miss a crucial piece of the real world. It's logically correct in some sense, but incomplete.
  • deleted 4mo ago
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  • ahartmetz 4mo ago
    You're not the first person with... an opinion on economic "science". Paul Krugman: https://www.princeton.edu/~pkrugman/interstellar.pdf https://www.princeton.edu/~pkrugman/interstellar.pdf "This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics."
  • budsniffer952 4mo ago
    "I don't know who any of these people are, or what the theory is, but it's obviously wrong." - Classic HN commentor
    • skrebbel 4mo ago
      I honestly asked what I misunderstood. Come on. At least do me the courtesy of explaining where I’m wrong. Sure, my tone was dismissive but that’s because what I understood the article to mean was clearly, obviously ridiculous and I tried to make that clear. I also clearly introduced myself as someone not knowing anything about economics, having to google “MC”.
  • user____name 4mo ago
    A common misunderstanding, this. Economists in theory don’t focus on starting with the right set of assumptions, like any gentleman they instead focus on starting with the right set of conclusions. They then, in theory, argue passive-aggressively over why their model is The Right One using increasingly obtuse game theoretic models, usually with a drawing of two lines intersecting. The rest of the world? We simply shrug and ignore them. Much like the the people ignored the idiot savants tucked away in medieval monasteries. At some point they become useful, like when the king needs to know what the nature of God is, who It approves and why it’s him and not the other guy. Now that we've traded our warrior nobility for economic nobility, the neurodivergent and mildly touched ones are tucked away in academia instead. Pleasantly seperated from their subject of study. To figure out the nature of "The Market", and why it is, in theory, as Rational and Self Organizing as a medieval Thomist Universe. And we are like the medieval peasantry who cannot understand an iota of what they're scribbling in their intimidating books. But we can see they're still fighting over It, just like they fought over resolving the philosophic contradictions of the faith. It makes one wonder: what shape and mission will They have next? Will it be in explaining the actions of some sentient supercomputer, which both feeds and spanks us? Or which irradiated plants will take us beyond the Seventh Sphere, in theory? More at eight.
• dudinax 4mo ago
  How is this theory taken seriously when people have other motivators to buy durable goods early even when they know for certain the price will go down but not when?
  • fsckboy 4mo ago
    the theory is about the asking prices charged by the producer, not the purchases made by consumers. After the people you are talking about buy, for whatever reason, what does the price do in the following months.
• gregw2 4mo ago
  There are a limited number of bitcoins and Satoshi started out as a monopolist of them... so Coase expects them to get sold at the marginal cost? There are a limited number of iPhones....? Do either of those examples shed light on where Coase went wrong that agree or disagree with the authors?
  • fsckboy 4mo ago
    bitcoins are sold at marginal cost, that's how much miners are willing to spend to mine them.
• gregw2 4mo ago
  What seems intuitively wrong as a layperson new to this about Coase's theory, is that the "surprising" collapse in prices to marginal cost "in period 1" assumes that consumers have no marginal utility, and thus no price sensitivity, of consuming the good sooner rather than later. If that fails. Coase's argument fails. No?
  • efavdb 4mo ago
    Indeed, having a hard time thinking of anything I desire that I wouldn’t want sooner rather than later. Maybe a grave yard plot — hopefully won’t need that anytime soon.
  • foolswisdom 4mo ago
    Yeah, that's what bothered me when I read it, too.
• preetham_rangu 4mo ago
  The history of science is basically a graveyard of elegant theories that met inconvenient measurements.
• jdw64 4mo ago
  I read it. So it seems like this is a counterexample showing that the Coase conjecture doesn't hold in the ebook market. I mean, with any theoretical modeling, you have to assume that the market actually fits the theory's requirements, right? From what I can gather just reading about it, the market the Coase conjecture model requires is one with a fixed set of consumers, a homogeneous durable good, and a monopolistic seller. But the real ebook market has a constant influx of new consumers, substitute content, complex contract structures, and, crucially, promotional events and coupons. So in the end, I think we have to understand it as something that only holds under very specific conditions, not something that maps neatly onto real world cases. That said, I'm curious. If you were to model the ebook market in general, what would the high impact variables be, and which ones would have relatively little influence? But what I don't get is, are there even that many markets where the Coase conjecture actually holds? I'm not so sure. I mean, you take reality and you turn it into a theoretical model. So my question is, are there really that many markets out there that fit the Coase conjecture in the first place? Sometimes when I read stuff about economics, it feels like people slice up the variable modeling to only look at what they want to see, and only in the regions they want to see, and then they claim it's universal. Of course, counterexamples keep popping up. And that's why it always feels so shaky.
• ludicrousdispla 4mo ago
  I would argue that books are not a durable good as their value depends in part on the author's reputation. So lowering the cost of an e-book has some additional cost to the author or publisher beyond the production cost.
• crote 4mo ago
  But do the consumers know that ebooks are durable goods and that the publisher has a monopoly on them? In practice a lot of reader will just be looking for a hit for their dark academia vampire romantasy addiction. The book is essentially read once, and the buyer is perfectly fine with a different title. It's durable in the same way that a newspaper is, and the publisher has a monopoly in the same way that a used car salesman has a monopoly on the car with VIN f6d45280. Similarly, the reader's perceived value isn't constant. A newly-released "part 1 of 7" of an unknown author (who knows if it'll ever even get a part 2) is less interesting than the debut novel of a well-established author. Likewise, demand can significantly increase due to the release of a spinoff TV series, or significantly decrease when the author is disgraced in some scandal. There's only a true monopoly on things like college books, and there the demand has basically zero elasticity: either accept paying $200 for the book now, or fail your $2000 course. And those aren't exactly durable either!
• tskj 4mo ago
  Idk the obvious answer seems to be that buying now vs buying later isn't the same? Seems like a preposterous assumption; or rather an assumption that obviously never holds for any market ever so this theory is unfalsifiable by empirical data (and also irrelevant to the real world).
  • zwaps 4mo ago
    Obviously the theory is decades old. I think nowadays a Game Theorist would not go and claim that the fixed-point convergence is an actual market process with consumers and monopolists trying to outsmart each other in some kind of bizarro bazar game. An equilibrium for a given game is - depending on the equilibrium concept (bummer, even more conditions) - is a stable outcome of some sort with usually no claims as to how it would actually be reached. By that, you can already see that this is not really an actual theory of an empiric situation, but rather a mathematical model of a certain solution structure. If you were to write this paper today as an economist and your goal was to claim that is actually, really holds in reality, then you'd not only have to produce the theory but you'd also have to build some sort of empirical model that you can estimate with somewhat plausible identification conditions and structure, or be able to show it in a (pseudo-)experiment setup that is believable enough. Suffice to say that there are very few such claims made on reality in modern microeconomics (that is to say, Game Theory by and large) As it turns out, these sort of mathematical models have quite a bit of value in a normative setup, say if you go and design a market or an auction. Less so as a theory to explain all of reality. I think in Coase's time, it was easier to write a 6 page paper from your bathtub and claim something about the world. Wasn't there an xkcd comic like this?
  • 0zer0 4mo ago
    This. The full set of constraints (monopoly, durability, constant MC, timelessness) can hardly ever be fulfilled. So it is not falsifiable by empirical data. But nobody has questioned the logic conjecture itself here, even the article doesn't try. It seems pretty plausible, doesn't it?
    • tskj 4mo ago
      I agree it does seem pretty plausible as some kind of iterated / timeless theory divorced from reality, but especially the assumption that time is irrelevant to the buyer seems completely fanciful. I am usually all for theories that make idealized assumptions and think there's merit to approximations, but this is so egregious--there will never be any market or situation that is anywhere close; and the theory completely breaks down if the assumptions aren't utterly fulfilled. That makes it not even of academic interest, it's completely useless even as a theory.
• taeric 4mo ago
  This feels apples to oranges. There has to be a "cost of inventory" consideration that applies to non digital goods far far stronger than to digital ones. To the point that expecting electronic book sales to give any insight to durable goods feels farcical. Similarly, the marginal cost of a new release has to include all of the creative production of it to that point. Authoring and editing. Not just the marginal cost of replication of a completed work. That is, the marginal cost of a new release is creating the new release's content! Which is very very different from the marginal cost of just making a copy of it months later.
• thelaxiankey 4mo ago
  Anyone more econ literate know why Coase isn't trivially answered by accounting for corporate time-discounting? Maybe I'm missing something, but this always confused me.
  • fsckboy 4mo ago
    the durable goods in question are not produced in advance, they are sold as they are produced, possibly manufactured in limited quantities to create artificial shortages; so there is nothing to discount. The question is, what pricing pattern is in the seller's interest going forward. Generally, the assumption is that everybody in the market is aware of what's going on, and can adjust their spending accordingly. Unless you mean discounted future cashflows of purchases, but that would imply by charging a low enough price all future purchases would move to the present. I'd consider the case of laundry machines. People buy them every so often and then don't need a new one for awhile. Since they didn't buy them all at the same time in the past, one should not expect they will buy them all at once in the future. It seems profit maximizing to behave like traditional monopoly theory, to keep the price high. Is there an economic pressure that would push a monopolist's prices down?
• francisofascii 4mo ago
  The conjecture seems to assume the monopolist won't be patient enough, and will be "tempted" to drop the price to "mop up" extra customers. Yet it also assumes the consumers will be the patient ones, and will wait for the price to drop before buying. It seems like in reality, the opposite it true.
• urbsgpw 4mo ago
  In other words, theory does not conform to reality, i.e. ugly data. Being an academically trained economist, not surprised.
• christina97 4mo ago
  It seems stupid to model books as a durable good. Reading this summer’s bestseller next summer sounds at its face like you should gain the same utility. But that is clearly not the case for the population buying books after a bit of thinking. Also books without copyright are obviously cheaper beyond pricing than those with copyright. There is a rights holder there somewhere making a cut.
• legitster 4mo ago
  I think E-Books are a bad test subject. Theoretically they are a durable good, but realistically the demand for a single public domain eBook is not a large market and easily satisficed. If you look at real world examples like wheelbarrows (something like 80% of all wheelbarrows sold in the US come from one company) - sure they use a bunch of tricks to charge more for some customers - but the cheapest, basic wheelbarrow is being sold for something close to marginal cost.
  • malshe 4mo ago
    But who has the monopoly on wheelbarrows?
    • legitster 4mo ago
      Ames True Temper. Nearly every brand of wheelbarrow you see at hardware stores is just a white-labelled Ames product. (With the exception of Gorilla Cart and a few niche players).
• r0ze-at-hn 4mo ago
  Coase’s math assumes that the intervals between price changes approach zero, but every state change (such as the ebook price updates) is an informational bit erasure or write event. In a real market there is a cost that is > 0 for any price change (landauer floor). One can not assume that there is "free" energy in the system to find the optimal price. Anyone writing books (or a "firm in coses math) needs to persist, aka they need to keep things like consumers understanding of their quality and pricing. If they drop prices to nothing they have consumers learn that. Consumers that try to wait forever in an "idle" state make no purchases and are not part of the ecosystem. Only consumer that don't wait forever matter. aka if they are looking at your ebook and don't buy they will rapidly buy a different ebook because they cannot wait for infinite time. aka if you teach your customers to wait they wont actually wait for you, but will simply switch to something else. This is a control-and-feedback problem. Coase Conjecture fails because it assumes that you can have a system that persists without a governor. The two real world explanations correspond to the two ways you can introduce a governor.
• scotty79 4mo ago
  "The Coase conjecture predicts that a monopolist selling a durable good will be forced to lower prices quickly because consumers anticipate future price drops, undermining the monopolist’s ability to maintain high prices." That reads absolutely like a wishful thinking of people that desperately want you to believe that monopolies have any saving grace. The best strategy is to delay the sale as much as possible, if your potential customers get more affluent on average (more than safe return on capital). Keep price high and steady, gradually capturing more and more customers at this price. The only thing that could force you to lower prices would be looming effective competition (which means you are about to lose your monopolist status) or your customer base shrinking due to general increase in poverty.