'Economics In One Lesson' Apparently Doesn't Include Pricing; Kindle Version Most Expensive

from the let's-try-that-again dept

Copycense, who has done a really bangup job in pointing out some ironic ebook pricing decisions, has another one. The book "Economics in One Lesson," by Henry Hazilitt is available new from Amazon in paperback for $7.95... or at $9.99 for the Kindle. Apparently, "Economics In One Lesson" either doesn't include a section on pricing... or whoever did the pricing on the book didn't read that section...

Filed Under: books, ebooks, economics, pricing

More Video Game Makers Fear The Free Market And Don't Know How To Compete

from the welcome-to-market-changes dept

Here we go again. Remember a few months ago when Nintendo's President Reggie Fils-Aime was bitching about the fact that people were buying video games on mobile phones for a buck or two, rather than spending many, many multiples that for his games? Apparently, he's got friends. Epic Games president Mike Capps is playing the role of Nintendo parrot by saying the same thing:

"If there's anything that's killing us [in the traditional games business] it's dollar apps," he continued. "How do you sell someone a $60 game that's really worth it? They're used to 99 cents. As I said, it's an uncertain time in the industry."

To be fair, he admits that it's also "an exciting time for whoever picks the right path." But if he's worrying about selling $60 games, perhaps he's made it clear that he's not picking the right path. After all, time and time again we've seen that video game makers have found it to be significantly more profitable to drastically lower the prices of their games and rake in significantly higher sales.

And, of course, the same time he's complaining about pricing, we're seeing the third Humble Indie Bundle selling quite well yet again (just like the first two) using a pay what you want model, that is quite flexible, DRM free and also has a charitable component. If you want to look at who's on the right path, perhaps you should be looking at those "cheap" game makers who are so profitable and the success of things like the Humble Indie Bundles. Perhaps the problem isn't convincing anyone to buy a $60 game, but convincing yourself that $60 isn't the right price.

Then again, this is Epic Games we're talking about -- which, you may recall, was the same company who's VP scoffed at some indie gamers for talking about the importance of really connecting with their fans. So, basically, this is a company that doesn't want to connect and wants to charge super high prices. Good luck...

Filed Under: competition, disruption, economics, innovation, markets, video games
Companies: epic games

Can Bitcoin Really Succeed Long Term?

from the questions-to-ponder dept

For quite some time, I've been interested in the general concept of currencies and how money works in general. I remember an early episode of NPR's Planet Money podcast, in which they tried to answer the simple question: what is money? They quickly discovered it's not an easy question to answer (and, in fact, those working on the podcast have revisited the question many times in many interesting ways -- including a fascinating episode a few months back looking at the Island of Stone Money. That episode discussed the island of Yap in the South Pacific, that for many years used massive limestone discs as money. And, by massive, I mean sometimes weighing upwards of a ton. In other words, it didn't have one of the key features that many normally associate with "money," which is that it's a "currency of exchange." In theory, you can't easily "exchange" a giant rock.

But the clever islanders on Yap came up with a solution. It was made clear who actually owned which stones, and then you could effectively transfer "title" to the stones, even if you didn't move the stones themselves. There was even the story of boat that was bringing in a new giant limestone disc (the limestone all came from another island), and due to a storm, the boat capsized and the stone sunk to the bottom of the ocean. However, it still counted as money, just so long as everyone knew whose it was. Now, when you hear that at first, it sounds ridiculous, but as the Planet Money folks pointed out, is it really all that different than your bank account? The only reason you have "money" in your bank account is because the bank marks it in its database. The bank isn't literally holding a stack of cash for you. In fact, as soon as you give it your money, it's probably handing it out to someone else.

All that brings me around to the question of Bitcoin. In various techie circles, there's been a fair amount of buzz about Bitcoin lately. Especially following efforts by other payment companies like Paypal and Mastercard to cut off contributions to Wikileaks, there's been a lot more interest in figuring out what infrastructure pieces in today's world should be more decentralized, and an obvious target is "money."

And that's where many point to Bitcoin. Jerry Brito has a nice writeup on Bitcoin about how it's a decentralized digital currency that is growing in popularity, and, in theory can resist attacks and problems of previous attempts at various digital currencies, while providing significant anonymity. Tim Lee quickly responded with skepticism about whether or not Bitcoin can really work, looking both at the demand side of the question and the supply side. I'm not sure Lee's specific arguments are entirely accurate, but I think his general arguments may be.

This doesn't mean Bitcoin (or something like it) can't be successful. It's just that it has an uphill battle. I think it's already useful in certain areas, but that's a big step away from getting to where it really needs to be to succeed in the long run -- and those steps can be much bigger than most people imagine. However, I could certainly envision scenarios that lead to rapid Bitcoin (or similar offering) adoption. I just wonder how sustainable it would really be vs. how much would just be a fad. In the end, I have to admit that I'm torn on this one. While I appreciate the concept of Bitcoin, and think that it might be nice if something like it was really popular, I do wonder if it really has the legs to reach such a level of success. One thing I do know for sure, however: I'd certainly like to hear the folks at Planet Money examine Bitcoin and how it plays into their sporadic explorations of money itself.

Filed Under: bitcoin, currency, economics, money

Economist Explains Why Paying Certain Bribes Should Be Legal

from the taking-them?-not-so-much... dept

With a big bribery scandal continuing to unfold in India, it's a bit interesting to see Kaushik Basu, the chief economic advisor to India's Ministry of Finance, make the argument that paying bribes should be perfectly legal. Before you jump to conclusions, you have to realize he's just saying that paying bribes should be legal. Accepting them should remain against the law. As it stands now, both the bribee and the briber are guilty of a crime, and he thinks that's a mistake.

Under current Indian law, Basu writes,

once a bribe is given, the bribe giver and the bribe taker become partners in crime. It is in their joint interest to keep this fact hidden from the authorities and to be fugitives from the law, because, if caught, both expect to be punished.

But if the law were changed as Basu suggests,

once a bribe is given and the bribe giver collects whatever she is trying to acquire by giving the money, the interests of the bribe taker and bribe giver become completely orthogonal to each other.

... In other words, the interests of the bribe taker and the bribe giver are no longer aligned.

The argument is that this way, there's less incentive to actually have bribery, because if someone demands a bribe, you can pay it, but then you can report it and get the person in trouble:

In Basu's world, you pay the bribe and get your refund. Then you go to the authorities and report the clerk who collected the bribe. If the clerk is convicted of taking the bribe, he has to pay you back, and faces additional penalties. You get your money back, and you face no charges.

Of course, the clerk knows that you have this incentive to report him. So, Basu argues, he'll be less likely to demand the bribe in the first place. These kinds of bribes, which Basu says are currently "rampant" in India, will become much less common.

Of course, the link above, to the Planet Money discussion about this, notes that there would be some unintended consequences. Certainly, it wouldn't remove all bribery, as many people willingly pay bribes to try to get favors, and in such cases, this would make the power of those bribes even stronger, since they'd have something to hold over the bribe-taker. To deal with this Basu is suggesting that this idea of making it "legal" should only apply to bribes people are pressured to pay to get something they're legally entitled to receive -- and not for things like a company paying off the government to get a contract. Still, another unintended consequence is that it could increase false accusations of bribery. So it's not a perfect solution by any means, but it is interesting to think about.

Filed Under: bribes, economics, kaushik basu

Discussions About Scarcity vs. Abundance In Copyright From A Century Ago Sound Just Like Those Today

from the history-repeats-itself dept

A reader by the name of Shadow-Slider points us to a fascinating report from a 1897 Copyright Commission in Great Britain in which the report points out how content is different than real property because of the difference between scarcity and abundance. It sounds very much like what we discuss here -- just well over a century ago.

Some of the witnesses whose evidence has been received by Your Majesty's Commission have urged the claim of authors to perpetual copyright, on the ground that the right of an author to property in his published works is as complete and extends as far as the right of any person to any property whatever.

If this analogy were admitted, it appears to me that it would be difficult to dispute the claim of an author to perpetual copyright; but I venture to submit that the claim of an author to a right of property in his published works rests upon a radical economic fallacy, viz., a misconception of the nature of the law of value.

The necessity which is recognize in all civilised societies of conferring rights of private or personal property arises from the limited supply of that for which there is an unlimited demand. It is only from a limitation of supply that there can be any value in exchange.

But supply may be limited either by natural or artificial causes.

Wherever supply is limited by natural causes it is necessary in the public interest to limit the demand, by investing the possessor of the subject of it with proprietary rights, for without them the progressive increase of an unlimited demand operation on a limited supply would lead to the dissolution of society. To whatever extent these rights partake, as they often must, of the character of a monopoly, they do so in virtue of attributes derived from the nature of things, which may be regretted, but must be accepted as inevitable, and which the law is therefore compelled to recognise.

There is no such necessity in the case of those objects which are useful or necessary for mankind of which supply is unlimited. In that which is absolutely unlimited, in the air, in sunlight, in the forces of nature, such as heat, electricity, magnetism, &c., there is no natural exchangeable value, and therefore no property; that which, although absolutely unlimited in itself, nevertheless exceeds all probable or possible demands in exchange, there can be little or no value, and little or no property, e.g., in the sea, in the water of large or unfrequented streams, in the game of a wild country, or in the fish of the sea. It is in fact scarcity which creates value, and renders property necessary. Property exists in order to provide against the evils of natural scarcity. A limitation of supply by artificial causes, creates scarcity in order to create property. To limit that which is in its nature unlimited, and thereby to confer an exchangeable value on that which, without such interference, would be the gratuitous possession of mankind, is to create an artificial monopoly which has no warrant in the nature of things, which serves to produce scarcity where there ought to be abundance, and to confine to the few gifts which were intended for all.

Apparently my own thoughts on this stuff is accidentally derivative of what came way before...

Filed Under: 1897, abundance, copyright, economics, history, scarcity

According To Microsoft's Own Numbers, Microsoft Costs The World Economy $500 Billion

from the money-could-go-elsewhere dept

It's always amusing when you see studies done by companies about how much money is "gained" or "lost" from certain activities -- as if the actual money wouldn't or doesn't go to other sources if diverted. So, when Microsoft hired IDC to write a report hyping up how Microsoft and its various partners "generated revenue of $580 billion in 2010," the idea was clearly to suggest that Microsoft was very good for the economy. Yet, that's only one way to view it. Glyn Moody, quite reasonably, points out the other side of the story, which is that if that money weren't spent on Microsoft products, it could have gone to much more productive uses. By his (somewhat tongue-in-cheek) back-of-the-envelope calculation, this study really seems to suggest that Microsoft cost the world economy somewhere in the range of $500 billion:

Red Hat's CEO Jim Whitehurst makes an interesting point about the cost of software:

He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed "replacing $50 billion of revenue" currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion.

That is, open source software typically costs only 10% of the equivalent proprietary products. This isn't about "destroying" wealth, though: customers are left with the other 90% to spend on other things. It is still in the economy, but spent elsewhere.

Applied to IDC's figures for Microsoft, this would imply that the $580 billion revenue might well be replaceable by a tenth of that - let's say $80 billion, to be on the safe side. Which means, of course, that the effective cost of the Microsoft ecosystem to the world in terms of money spent needlessly is around half a trillion dollars.

Seems only fair. If Microsoft and others are going to claim "ripple effects" for unauthorized copies, it seems reasonable to point out that there are ripple effects to people paying for Microsoft software, rather than spending it on other, potentially more productive, uses.

Filed Under: economics, ripple effects
Companies: microsoft

Android, Economic Moats, And How Zero Marginal Cost Defenses Can Also Be Great Offenses

from the ain't-just-defensive dept

Venture capitalist Bill Gurley has another excellent economic analysis of how powerful Android is and what it really means for Google. I have one (somewhat serious) quibble with it, in that I actually think Gurley misses the key economic point that would have made his argument even more convincing, but I'll get to that later on. The key points he makes are dead on, and should be recognizable to regular readers of this blog on our economic analysis of zero marginal cost products.

He kicks it off with a general business observation from Warren Buffet:

One of Warren Buffet's most famous quotes is that "In business, I look for economic castles protected by unbreachable 'moats'." An "economic castle" is a great business, and the "unbreachable moat" is the strategy or market dynamic that heightens the barriers-to-entry and makes it difficult or ideally impossible to compete with, or gain access to, the economic castle....

For Google, the economic castle is clearly the search business, augmented by its amazing AdWords monetization framework. Because of its clear network effect, and amazing price optimization (though the customer bidding process), this machine is a monster. Also, because of its far-reaching usage both on and off of Google, AdWords has a volume advantage as well. Perhaps the most telling map with regards to the location of the castle can be found in Jonathan Rosenberg's "Meaning of Open" blog post. In this open manifesto, Jonathan opines over and over again that open systems unquestionably result in the very best solutions for end customers. That is with one exception. "In many cases, most notably our search and ads products, opening up the code would not contribute to these goals and would actually hurt users." As Rodney Dangerfield said in Caddyshack, "It looks good on you, though."

From there, Gurley points out that pretty much all of Google's other products are effectively that "moat." They're the things that keep bringing you back to Google's search and ad products. And that's where Android fits in:

So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not "products" in the classic business sense. They have no plan to become their own "economic castles." Rather they are very expensive and very aggressive "moats," funded by the height and magnitude of Google's castle. Google's aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

From there, he points out, that this makes it difficult for anyone else "trying to extract economic rent for a competitive product in the same market." Indeed. And while that may raise some antitrust alarm bells, Gurley later points out why it should not:

One might yearn to suggest that there is a market unjust here that should be investigated by some government entity, but let us not forget that the consumer is not harmed here -- in fact far from it. The consumer is getting great software at the cheapest price possible. Free. The consumer might be harmed if this activity were prevented. And as we just suggested above, the market is finally driving towards software pricing that represents "perfect competition."

I actually think there's a decent retort to this, which is that someone could say that this moat situation means that others cannot get into the market at all, and thus consumers could be hurt in the decrease of competition, which could mean that certain innovations don't make the market and/or that Google begins to stagnate on innovation as it faces no serious competition in those areas. To date, however, I don't believe there's much evidence that this is happening with Google (though, it is an area worth watching carefully).

But, really, what Gurley is describing is the same stuff that we've been talking about for over a decade: it's the natural economics of digital goods. Over time, someone will figure out a way to price those goods at the marginal cost of zero, and use that to support some other business. So, if you're sitting around hoping to charge for those goods, you're going to be left out in the cold. We know that argument and live that argument, though it's always nice to see it being validated yet again in real life.

But here's the key point that I think Gurley is missing, and which would have made his argument even stronger. Above, I bolded the line in his writeup that said that "Google's aim is defensive not offensive," with these products. I think he's actually underestimating Google here. These moves are both defensive and offensive (the best offense is a good defense, right?), though not in the traditional way of trying to directly monetize those offerings. It's that those "free" or abundant goods don't just act as a defensive shield, but they can also make the scarce "castle" good much more valuable. If we're sticking with the moat analogy, it's a situation where the moat not only acts as a defense, but it also serves to float the castle to even higher levels.

We've described this in other fields many times. For example, in a simplistic example, with music, freeing up the music makes it easier to spread the music, build a bigger fan base, and then increase the value of the scarcities around the musician (so they can make more on tour or through merch or more creative business models).

And I think that's certainly true with Android as well. It doesn't just build a "moat" around Google search/AdWords that protects that business, but it actually enhances those businesses and makes them more valuable directly. It does those things by extending the availability and usage of such businesses (I do searches on the go from my phone all the time these days), but also opens up those businesses to scenarios where they never would have been useful before at all.

So I agree with Gurley's basic premise, that making use of such zero marginal cost infinitely available goods by embracing their free nature acts as a very powerful moat, but I think he underestimates how much of an offensive play it is in not just protecting the castle, but vastly enhancing the castle's offensive power as well.

Filed Under: android, competition, economics, free, marginal cost
Companies: google

On NYT Paywall, Citigroup says 'Good Buy'; Techdirt says 'Hello!?!'

from the say-what-now? dept

We've been having some fun mocking the NY Times paywall, which makes no sense to us at all. While we're sure some people will subscribe, the overall math is hard to make work, especially considering anyone who wants to can easily get around the paywall. In fact, the way the NY Times set up the paywall, it actually takes away significant value from the NY Times itself. Instead, it drives that traffic to other sites that link in to NYT stories, because readers don't use up "free clicks" if they come in via other sites.

In the meantime, we've got plenty of stories of other paywalls out there that suggest that people aren't particularly eager to sign up for paywalls. Some will. Perhaps a fair number will. The NY Times has the kind of brand that will certainly lead a bunch of people to just subscribe, perhaps without realizing they really don't need to do so.

However, consider ourselves confused and scratching our heads to hear that an analyst at Citigroup, Leo Kulp, is making the rather shocking prediction that "Revenue generated by an annual digital subscription will likely dwarf the advertising revenues generated by even heavy users." Say what? The only way I can see this happening is if the NY Times has the world's worst online ad sales force, which I doubt. And, of course, we already have some data on a NY Times subscription plan, back from the last time they tried a paywall. It generated some money -- about $10 million per year. Not chump change, but hardly a huge number for a publication like the NY Times, which was why they did away with it. They knew that expanding ad revenue was a much better plan.

So can anyone explain the math by which the NY Times' digital subscription revenue will "dwarf" ad revenue? I've been plugging numbers into spreadsheets, and unless the online ad market totally collapses, I just can't see the math making any sense.

Filed Under: business models, economics, paywalls
Companies: citigroup, ny times

Retroactive Drug Monopoly Raises Rates From $10... To $1,500

from the the-high-price-of-monopolies dept

A bunch of you have been sending in the somewhat horrifying story of how KV Pharmaceutical has been retroactively granted a monopoly on the drug Makena, which is use to prevent premature births. The product has been on the market for years, and normally costs about $10 per dose... but thanks to the new monopoly, the price is immediately jumping up to an astounding $1,500 per dose -- and this is something that many pregnant women need around 20 doses of during their pregnancy. That increases the overall price from about $200 to $30,000. For something that's been on the market for years. I'm reminded of Thomas Macaulay's famous statement:

"the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad."

Tragically, many obstetricians and the March of Dimes had vociferously supported this move, without understanding the basic economics of monopoly pricing. They thought that granting a monopoly to one company would mean that it would make the drug "more available." Joke's on them, and now they're upset:

"That's a huge increase for something that can't be costing them that much to make. For crying out loud, this is about making money," said Dr. Roger Snow, deputy medical director for Massachusetts' Medicaid program.

"I've never seen anything as outrageous as this," said Dr. Arnold Cohen, an obstetrician at Albert Einstein Medical Center in Philadelphia.

"I'm breathless," said Dr. Joanne Armstrong, the head of women's health for Aetna, the Hartford-based national health insurer.

Doctors say the price hike may deter low-income women from getting the drug, leading to more premature births. And it will certainly be a huge financial burden for health insurance companies and government programs that have been paying for it.

It's really amazing that people don't understand the basics of monopoly pricing and how drastically it has distorted the market for drugs. Hopefully this story of Makena will get some people to wake up as to why this is a massive problem.

Filed Under: drugs, economics, makena, monopolies, prices
Companies: kv pharmaceutical

Maybe Super Cheap Video Games Are Helping, Not Destroying, The Video Game Industry

from the hello-price-elasticity dept

One of the early economics lessons you learn in any competent intro econ class is the concept of elasticity. The basic concept is how much does demand increase for a product if you lower the price. If a product is highly elastic, decreasing the price can often earn you more money. A simplified version of this: I have a widget that I want to sell for $100 dollars, but only one person is willing to pay that price. With that pricing, I'd make $100 (gross) on the widget. However, if I were to drop the price to $1, let's say 1,000 people are willing to buy at that price. Then, I'd make $1,000 (gross) on the widget. So, even though producers often fear lowering the price, if there's strong elasticity, lowering the price can often make you much more money (and, yes, the marginal cost matters here as well).

We've seen over and over again that video games appear to have very high price elasticity of demand. Two years ago, we wrote about some experiments by Valve, where it tried lowering prices of games by 10%, 25%, 50% and 75% -- and saw the increase in sales at a stupendous rate. While the 10% decrease only resulted in 35% higher gross revenue (already pretty good!), at a 75% discount, the gross revenue shot up by 1470%. Think about that, for a second. Basically, dropping the price by 75% increased revenue by almost a factor of 15. Not bad.

Last year, we saw a similar experiment that also had great results. An online video game store in Sweden tried dropping its prices by 75% and saw an increase in sales of 5500% (in unit sales). When looking at the gross revenue, it appears that it came out approximately to a similar 1300% increase.

And now we have some more examples. Capitalist Lion Tamer points us to an article that looks at some super popular iOS (iPhone/iPad) apps that drastically cut their price, but saw their gross revenue shoot way up because of it.

Street Fighter IV for iOS recently slashed its price by a breathtaking 90% overnight, from £5.99 to 59p. Within 48 hours its position in the overall Top-Grossing chart (that's the list of all apps, not just games) instantly rocketed from 116 to 2. Coincidence or magic? You decide. But that's not all.

And just to reiterate -- we're monitoring the Top-Grossing chart, ie the one measuring money made, NOT the ordinary numer-of-sales one, where SFIV currently sits comfortably on top of everything else. What that means is that the game's sales have increased by dramatically more than 1,000% (because it would have had to sell 10 times as many just to hold the No.116 position at the new price, never mind climb 114 places).

And yet, time and time again we hear how execs at big entertainment companies feel the need to keep raising prices. Hell, we just mentioned how Nintendo's President Reggie Fils-Aime was complaining that cheap games might kill the industry. Apparently, they don't teach basic economics to folks who become president of Nintendo.

Filed Under: business models, economics, price elasticity, pricing, video games