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It's just a situation where capitalism doesn't lead to the most economically efficient solution. The company and the consumers are rational, yet for no additio

It's just a situation where capitalism doesn't lead to the most economically efficient solution. The company and the consumers are rational, yet for no additional cost, everyone could be benefiting from better hardware. Unfortunately I don't have a better system to propose :)

stdbrouw 14y ago
I think nobody would call nerfing high-end chips for people with higher price sensitivity an optimal solution, but something gotta give. Either there's a lot of consumer surplus (cheaper prices for better products), or there's a lot of producer surplus through market segmentation (bigger R&D budgets, better products in the long term). You can't have both. This problem is more obvious with software, by the way: higher-end SaaS plans may cost marginally more (storage, support) but they're really mostly about price discrimination: getting people who can pay more to pay more even if you could provide all your customers with the top-tier experience.
martincmartin 14y ago
Why is that? The major cost is the one-time cost of designing the chip, not producing it. Software is even more extreme: the distribution costs are essentially zero. That doesn't mean the most economically efficient solution is for the software to sell for nothing.
- Peaker 14y ago
  Say you have 2 audiences: Gamers and professionals. For gamers, a low performance value yields a value of $10, and a high performance value yields a value of $12. For professionals, a low performance value yields a value of $5, and a high performance value yields a value of $20. If nVidia sold a single design to all of them, with a high performance value, then gamers would be willing to pay less than $12, and professionals would pay less than $20. If they want to sell to the entire market, they have to price it less than $12, and lose around $8 from each professional buyer. However, if they sell 2 designs (e.g: one a cripple of the other), they can derive around $10 of value from each gamer, and $20 from each professional. The reason this is inefficient, is because for each gamer buying the crippled design, there is a loss of $2 of real value. This loss is a real value loss that could be avoided if there was some other way to extract the actual value for gamers and professionals without crippling the product. In short, the inefficiency is not that the price is not near the production cost, but that the intentional crippling of the product (necessary to extract maximal value via market segmentation) is causing an actual value loss in the economy.
  - Sumaso 14y ago
    However in your latter scenario, the net loss is only 2$ versus your original scenario where the net loss is 8$. (lose 8$ per card to the perfessional, versus gamer losing 2$ of performance) So its socially optimum to continue to do what Nvidia is doing ;).
    - bjustin 14y ago
      If they sell at a >4:1 ratio in favor of the gamer version, it is still suboptimal. If I had to guess, I would say their gamer card prices are by and large good approximations of the value they provide. No idea about professional card prices.
    - Peaker 14y ago
      In the original scenario, there is no economic value loss, there is only monetary loss for nVidia. i.e: the surplass 8$ value are captured by the professionals rather than nVidia.
- Retric 14y ago
  That's not really true, for small runs design time is a significant cost, but at scale it's mostly a question of manufacturing and capital costs. Consider, Intel produces a wide range of CPU designs specifically because production capacity is what is most expensive. Video cards are something of a special case because they are highly redundant so companies can sell highly damaged chips as slightly different models. However, demand rarely matches the rate of defects so often chips are sold below capacity. What confuses the issue is 'pro' cards that may preform worse than 'gamer' cards, but cost a lot more. However, that's more a case of different needs. Consider, stability is a lot more important to the 'pro' market which down clocking provides. Toss in some driver tweaks and a small market and you end up with a high priced product that does not cost more to manufacture.
k2enemy 14y ago
It is a form of price discrimination. In a nutshell, price discrimination is always better for the producer and results are mixed for consumers -- sometimes it leaves them better off, and sometimes worse off. The claim that this is not economically efficient isn't so straightforward. In particular, your counterfactual isn't "at no additional cost." It would reduce revenue to the card-maker as no one would pay the higher price for the more expensive cards. If the producer can only charge one price, then it would be somewhere in the middle, which would hurt the consumers buying the low end card. Worst case it would make the entire card unprofitable and it would never get produced in the first place.
podperson 14y ago
There's a "law" somewhere that says if a vendor can segment a msrket easily it will. Hence academic software pricing, lunch menus, military discounts for movie tickets, and so on. If there's a simple way to segment a market it will always be profitable to do so (unless you somehow piss off one of your segments, I suppose).
- kale 14y ago
  Academic Software pricing and military/age discounts for tickets are direct price discrimination, where you can identify groups and prevent any arbitrage. nVidia chips are a classic example of indirect price discrimination, where you can't prevent arbitrage. In tech this is common because both hardware and software have huge upfront costs (new fab design, coding and testing software), and it's cheaper to produce one and cripple than it is two different designs. Without the "high- margin" fully unlocked segments, businesses might not pursue projects at all, or greatly reduce the scope and budget for R&D. It feels wrong because humans are much more wired to feel loss than unrealized gains, but it is the best solution for everyone.
mseebach 14y ago
The biggest problem with deciding whether a given system leads to "the most economically efficient solution" is in deciding what the most efficient solution is. Another way of viewing this is wealthy business users subsidising less wealthy gamers - which is a pretty good thing IMO.
oh_sigh 14y ago
Don't you feel a little stupid for bringing up the term "economically efficient" when you don't know what you're talking about? "Economically efficient" is not equivalent to "the cheapest possible goods"
- snikolic 14y ago
  Could you elaborate in a less rude and more informative manner?
  - oh_sigh 14y ago
    No.
Houshalter 14y ago
Not necessarily. The people who were buying the high-end version with all the features enabled would then be paying a lot less so the total revenue is significantly reduced. Of course they could raise the prices but then the people who were buying it at lower prices for just the features they wanted will suffer. The price increase might be so much that the lower-end consumers just stop buying it altogether, and then they have to raise prices even further to make up for all the decreased revenue. And then the cost per person will actually be even higher since there are fewer consumers but presumably the total cost of production is the same. Look at it this way. By decreasing prices in exchange for disabling some features, they increase the total number of consumers. With more consumers the total production costs can be distributed amongst more people. Which lowers prices for everyone, including the people paying for all of the features.

stdbrouw 14y ago

I think nobody would call nerfing high-end chips for people with higher price sensitivity an optimal solution, but something gotta give. Either there's a lot of consumer surplus (cheaper prices for better products), or there's a lot of producer surplus through market segmentation (bigger R&D budgets, better products in the long term). You can't have both. This problem is more obvious with software, by the way: higher-end SaaS plans may cost marginally more (storage, support) but they're really mostly about price discrimination: getting people who can pay more to pay more even if you could provide all your customers with the top-tier experience.

martincmartin 14y ago

Why is that? The major cost is the one-time cost of designing the chip, not producing it. Software is even more extreme: the distribution costs are essentially zero. That doesn't mean the most economically efficient solution is for the software to sell for nothing.

Peaker 14y ago
Say you have 2 audiences: Gamers and professionals. For gamers, a low performance value yields a value of $10, and a high performance value yields a value of $12. For professionals, a low performance value yields a value of $5, and a high performance value yields a value of $20. If nVidia sold a single design to all of them, with a high performance value, then gamers would be willing to pay less than $12, and professionals would pay less than $20. If they want to sell to the entire market, they have to price it less than $12, and lose around $8 from each professional buyer. However, if they sell 2 designs (e.g: one a cripple of the other), they can derive around $10 of value from each gamer, and $20 from each professional. The reason this is inefficient, is because for each gamer buying the crippled design, there is a loss of $2 of real value. This loss is a real value loss that could be avoided if there was some other way to extract the actual value for gamers and professionals without crippling the product. In short, the inefficiency is not that the price is not near the production cost, but that the intentional crippling of the product (necessary to extract maximal value via market segmentation) is causing an actual value loss in the economy.
- Sumaso 14y ago
  However in your latter scenario, the net loss is only 2$ versus your original scenario where the net loss is 8$. (lose 8$ per card to the perfessional, versus gamer losing 2$ of performance) So its socially optimum to continue to do what Nvidia is doing ;).
  - bjustin 14y ago
    If they sell at a >4:1 ratio in favor of the gamer version, it is still suboptimal. If I had to guess, I would say their gamer card prices are by and large good approximations of the value they provide. No idea about professional card prices.
  - Peaker 14y ago
    In the original scenario, there is no economic value loss, there is only monetary loss for nVidia. i.e: the surplass 8$ value are captured by the professionals rather than nVidia.
Retric 14y ago
That's not really true, for small runs design time is a significant cost, but at scale it's mostly a question of manufacturing and capital costs. Consider, Intel produces a wide range of CPU designs specifically because production capacity is what is most expensive. Video cards are something of a special case because they are highly redundant so companies can sell highly damaged chips as slightly different models. However, demand rarely matches the rate of defects so often chips are sold below capacity. What confuses the issue is 'pro' cards that may preform worse than 'gamer' cards, but cost a lot more. However, that's more a case of different needs. Consider, stability is a lot more important to the 'pro' market which down clocking provides. Toss in some driver tweaks and a small market and you end up with a high priced product that does not cost more to manufacture.

k2enemy 14y ago

It is a form of price discrimination. In a nutshell, price discrimination is always better for the producer and results are mixed for consumers -- sometimes it leaves them better off, and sometimes worse off. The claim that this is not economically efficient isn't so straightforward. In particular, your counterfactual isn't "at no additional cost." It would reduce revenue to the card-maker as no one would pay the higher price for the more expensive cards. If the producer can only charge one price, then it would be somewhere in the middle, which would hurt the consumers buying the low end card. Worst case it would make the entire card unprofitable and it would never get produced in the first place.

podperson 14y ago

There's a "law" somewhere that says if a vendor can segment a msrket easily it will. Hence academic software pricing, lunch menus, military discounts for movie tickets, and so on. If there's a simple way to segment a market it will always be profitable to do so (unless you somehow piss off one of your segments, I suppose).

kale 14y ago
Academic Software pricing and military/age discounts for tickets are direct price discrimination, where you can identify groups and prevent any arbitrage. nVidia chips are a classic example of indirect price discrimination, where you can't prevent arbitrage. In tech this is common because both hardware and software have huge upfront costs (new fab design, coding and testing software), and it's cheaper to produce one and cripple than it is two different designs. Without the "high- margin" fully unlocked segments, businesses might not pursue projects at all, or greatly reduce the scope and budget for R&D. It feels wrong because humans are much more wired to feel loss than unrealized gains, but it is the best solution for everyone.

mseebach 14y ago

The biggest problem with deciding whether a given system leads to "the most economically efficient solution" is in deciding what the most efficient solution is. Another way of viewing this is wealthy business users subsidising less wealthy gamers - which is a pretty good thing IMO.

oh_sigh 14y ago

Don't you feel a little stupid for bringing up the term "economically efficient" when you don't know what you're talking about? "Economically efficient" is not equivalent to "the cheapest possible goods"

snikolic 14y ago
Could you elaborate in a less rude and more informative manner?
- oh_sigh 14y ago
  No.

Houshalter 14y ago

Not necessarily. The people who were buying the high-end version with all the features enabled would then be paying a lot less so the total revenue is significantly reduced. Of course they could raise the prices but then the people who were buying it at lower prices for just the features they wanted will suffer. The price increase might be so much that the lower-end consumers just stop buying it altogether, and then they have to raise prices even further to make up for all the decreased revenue. And then the cost per person will actually be even higher since there are fewer consumers but presumably the total cost of production is the same. Look at it this way. By decreasing prices in exchange for disabling some features, they increase the total number of consumers. With more consumers the total production costs can be distributed amongst more people. Which lowers prices for everyone, including the people paying for all of the features.