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The problem with this post is that it neglects recouping non-marginal costs. If the factory costs you $100 Million to build and you sell the cars for $20,000,

by fnid 17y ago

The problem with this post is that it neglects recouping non-marginal costs. If the factory costs you $100 Million to build and you sell the cars for $20,000, which is the marginal cost, how are you going to recover the $100 Million?

jsankey 17y ago
This is even more glaring in the flawed movie analogy. Consumers of movies are not just paying for the experience of the movie. The movie itself is the main distinguishing factor. There is no "perfect competition" across all movies as the article seems to imply by limiting the differentiating factors to things surrounding the movie itself.
sethg 17y ago
In the long run competition drives the price down to marginal cost. You sell products for more than their marginal cost by either innovating techniques to keep your costs lower than your competitor's costs (Wal-Mart does a lot of this) or by providing some feature that justifies a price higher than whatever the lower-priced competitors offer. The difference between your price and the marginal cost goes to paying off the investors who subsidized that hundred-million-dollar factory.
sshumaker 17y ago
There's one additional flaw in his reasoning - there's certain psychological thresholds with regards to pricing - especially at the 'free' mark. I can be convinced to buy a TV that is twice as expensive if I think it provides the same value. But once you drop down to the 0 mark, it's a different matter entirely (certainly, naive calculations of value break down). Even if you charge for your far superior product, you will have difficulty competing with an inferior free product. The only real strategy here is to target a niche audience who's needs can't be satisfied with the free product. Many web services take this approach by offering both a free version (for the masses) and a premium one (for the hardcore users), while some solely target the niche (e.g. Smugmug). But targeting a niche really means that you really aren't competing for the same users as the free product.

by fnid 17y ago

jsankey 17y ago

This is even more glaring in the flawed movie analogy. Consumers of movies are not just paying for the experience of the movie. The movie itself is the main distinguishing factor. There is no "perfect competition" across all movies as the article seems to imply by limiting the differentiating factors to things surrounding the movie itself.

sethg 17y ago

In the long run competition drives the price down to marginal cost. You sell products for more than their marginal cost by either innovating techniques to keep your costs lower than your competitor's costs (Wal-Mart does a lot of this) or by providing some feature that justifies a price higher than whatever the lower-priced competitors offer. The difference between your price and the marginal cost goes to paying off the investors who subsidized that hundred-million-dollar factory.

sshumaker 17y ago

There's one additional flaw in his reasoning - there's certain psychological thresholds with regards to pricing - especially at the 'free' mark. I can be convinced to buy a TV that is twice as expensive if I think it provides the same value. But once you drop down to the 0 mark, it's a different matter entirely (certainly, naive calculations of value break down). Even if you charge for your far superior product, you will have difficulty competing with an inferior free product. The only real strategy here is to target a niche audience who's needs can't be satisfied with the free product. Many web services take this approach by offering both a free version (for the masses) and a premium one (for the hardcore users), while some solely target the niche (e.g. Smugmug). But targeting a niche really means that you really aren't competing for the same users as the free product.