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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 theoriz

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 3mo 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 3mo ago
  I think basically economists aren't that interested in looking at real world, messy data.
grumbelbart2 3mo 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 3mo 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 3mo 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 3mo 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 3mo ago
      Some of the papers are linked. These papers, decades old, helpfully even show cases where the result does not hold.
    - deleted 3mo ago
      [deleted]
  - deleted 3mo ago
    [deleted]
  - danaris 3mo ago
    The problem is, the entire right-wing/neoliberal subfields of economics have been utterly refusing to actually compare to reality and make adjustments since Reagan. They just repeat their dogma (like trickle-down economics), and when you point out that it's not working, they claim you're just not doing it hard enough.
- zwaps 3mo ago
  Yes, the logic applies to all sorts of bargaining situations - that's what later papers mentioned in the article is about
myrmidon 3mo 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 3mo ago
  But this conjecture predicts that Steam prices will drop immediately to their final low price. So Steam is actually also a counterexample.
  - 0zer0 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo ago
  This is exactly the explanation I was looking for. Thanks!
_alternator_ 3mo 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 3mo ago
[deleted]
ahartmetz 3mo 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 3mo 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 3mo 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 3mo 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.

zaphar 3mo 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 3mo ago
I think basically economists aren't that interested in looking at real world, messy data.

grumbelbart2 3mo 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 3mo 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 3mo 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 3mo 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 3mo ago
    Some of the papers are linked. These papers, decades old, helpfully even show cases where the result does not hold.
  - deleted 3mo ago
    [deleted]
- deleted 3mo ago
  [deleted]
- danaris 3mo ago
  The problem is, the entire right-wing/neoliberal subfields of economics have been utterly refusing to actually compare to reality and make adjustments since Reagan. They just repeat their dogma (like trickle-down economics), and when you point out that it's not working, they claim you're just not doing it hard enough.
zwaps 3mo ago
Yes, the logic applies to all sorts of bargaining situations - that's what later papers mentioned in the article is about

myrmidon 3mo 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 3mo ago
But this conjecture predicts that Steam prices will drop immediately to their final low price. So Steam is actually also a counterexample.
- 0zer0 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo 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 3mo ago
This is exactly the explanation I was looking for. Thanks!

_alternator_ 3mo 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 3mo ago

[deleted]

ahartmetz 3mo 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 3mo 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 3mo 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 3mo 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.