Why companies make their products worse
1843magazine.com
1843magazine.com
Trademark restrictions to prevent importing what could be effectively the same textbook or wrist watch.
DVD region locking where you can sell practically an identical product but charge vastly different rates in different areas, and it's illegal to work around.
License agreements on software not to restrict specific functionality, but rather the usage scenarios.
The example in the article of the slower LaserPrinter example morphs from being a physical restriction to modern printer cartridges that block ink refills via DRM.
Comcast's battle with Google Fibre where the price will heavily drop in just the areas where Google Fibre operates. Makes it much harder for Google Fibre to make any gains, but the vast majority of Comcast customers see no decrease in their bills.
Even the recent EpiPen drama, where they want to be able to milk as much as possible out of the pockets of insurance companies, but end users don't want to play the real price, so they introduce the co-pay discount to try and offset that cost. It makes the "rich" organisation pay, but reduces the amount paid by an individual.
If a game cost say 50$ they sell approximately zero of them in India. Dropping that to 5$ does not mean they sell 10x as many worldwide thus company keeps the higher price. If they can sell them for 5$ just in India they may sell 10x as many in India which is good for people in India and the Company. But, people in US are never getting 5$ disks either way. Making this a net win.
The counter argument is price discrimination often operates inside a country. Coupons are the classic example, but clearly Coupons are a net economic loss.
Which IMO suggests we should have limits on the kind of acceptable price discrimination.
I'm not so sure about that. Yes, the process of printing, distributing, and using coupons is a deadweight loss to society, but the ability to price discriminate can create surplus.
If the captured producer surplus were less than the cost to print and distribute coupons, then manufacturers would stop doing it.
This is exactly analogous to your example with India as well. There is a deadweight loss associated with administering and enforcing regional trade barriers so that you can't just go buy the $5 Indian version of a good.
Basically, if you sell the 100 widgets for 10$ that's 1,000$. But if you use coupons to sell the good for 30 widgets for 9$ and 70 widgets for 12$ at the cost of 20$ that's 1110$ - 20 = 1090$. It's the same number of sales in the second place, but your profit is higher.
Thus, just because it's more profitable does not mean it's a net economic gain. Monopolies are great when they are your Monopoly.
Economics in general is not a zero sum market. People trade because they see benefits to doing so. I buy something because the value I derive is more than the cost -- that's why economies and markets create value. We call that value 'surplus' (https://en.wikipedia.org/wiki/Economic_surplus)
> just because it's more profitable does not mean it's a net economic gain
In the specific example you made, yes, the producer is just capturing more of the surplus, more hasn't been created. In general, price discrimination shifts surplus from consumers to producers.
However, it also shifts surplus from richer buyers to poorer ones. So coupons are a benefit to the poor, and airline price discrimination benefits you if you buy 3rd class tickets. Unless you are very rich, price discrimination is generally a monetary benefit to you.
Note that 3rd-degree price discrimination can increase or decrease total welfare depending on the specifics:
http://www.econ.ucla.edu/hopen/econ171/monopoly2.ppt (see slide 4)
You're not accounting for the deadweight loss from the crippled product.
Suppose if there were no coupons the product would cost $20 to everyone, vs. when coupons are used it costs $15 with coupon or $30 without. But using the coupon requires an hour worth of labor on the part of the customer. So the rich customer pays the $30 and the poor customer pays the $15 + $10 worth of labor. Compared to the case with no price discrimination, the rich customer pays $10 more and the poor customer pays $5 more. Neither customer is ahead, only the seller is.
Likewise with crippled products, if the full version of the product was available for $20 to everyone then the poor customer may get $25 worth of value from it and have a $5 surplus. Making the full version $30 and the crippled version $15 means the poor customer won't buy the full version, but the crippled version may only provide $16 worth of value, so now the poor customer's surplus is down to $1 from $5.
You're also assuming price discrimination costs the rich more than the poor. But volume licensing and bulk discounts are a form of price discrimination.
In the limit where the seller can engage in perfect price discrimination, the seller captures ~100% of the consumer surplus from all consumers, which is obviously worse for every consumer than any case where the consumer gets to keep any part of the surplus.
For example, without the excess profits provided by price discrimination, a company may decide a market is simply too small to serve, in which case all surplus is lost.
Also, the baseline for comparing a crippled product is not necessarily the same but uncrippled product. If a manufacturer knows crippling is unavailable, they may just develop the reduced feature set entirely, in which case rich consumers are hurt.
Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case.
Conversely, the baseline for the lower priced product is not necessarily lower than the existing product. If the full version is currently $50, the profit-maximizing strategy could be to sell a crippled version for $50 and the full version for $500, leading to more profit for the seller but less surplus overall.
> Microeconomic theory can be subtle, and whether something is good or bad depends very much in the specific case.
That's what I'm saying. Your argument was that price discrimination generally helps the poor. But it only does when the specific method of price discrimination happens to do that entirely by accident -- if it happens it's because the seller set the price of the lower cost version at less than they actually needed to, or didn't cripple it as much as they could have which would have increased sales of the more expensive version.
The one thing price discrimination is designed to do is convert consumer surplus into producer surplus. Which in general is not good for the consumer.
* Effect of 3rd-degree price discrimination on total surplus can be positive or negative, and that was the point I was trying to make
* We both agree that price discrimination transfers surplus from consumers as a whole towards the producer
* However, it's easy to show that at least in the simple case of perfect 3rd-degree price discrimination, the 'poor' consumer is either indifferent or is made better off when the producer can price discriminate
Sketch of a proof: In a 3rd-degree price discriminated market, let P1 and P2 be the reserve prices of 'poor' and 'rich' consumers, respectively. Now let's get rid of price discrimination -- what's the new profit-maximizing price for the producer?
It's easy to show that it cannot be less than P1 or more than P2, so the new price P* lies in [P1, P2].
In that case, all the 'poor' consumers that were paying P1 must now pay P* or not transact at all, so they are all now worse off.
Note that you have been emphasizing the transfer of wealth from consumer to producer, but classical microeconomics focuses most of its attention towards total surplus, which includes producer profit. This is because you can always find ways to divvy up surplus once it's been created to make things more fair (e.g. by taxing the producer or by distributing equity around), but you can never recover deadweight losses.
Except that P1 and P2 cannot be different unless what you get for them is different, or else the rich customers would also choose P1. So the poor who pay P1 pay less money but in exchange for an inferior product, which is not guaranteed to yield a net positive outcome.
This implies that relatively cheap ways of borking a product (make one chip, disable some features) can be better for low-end consumers than more expensive methods (such as actually running two production lines), even though it seems less fair.
The poor consumer is agnostic to how much of the surplus is captured by the rich consumer vs. the producer. It's possible for that transaction to affect the poor consumer, e.g. if the producer gets it and spends it on R&D or the rich consumer gets it and spends it on some other public good, either of which could benefit the poor consumer. But either of them could also use it for something adverse to the poor consumer's interests, or just put the money in their pocket and walk away.
And just because the producer is extracting as much as possible from the rich consumer doesn't mean it isn't also extracting as much as possible from the poor consumer -- doing that is the definition of perfect price discrimination.
Steam has said this kind of activity to be punishable and sometimes people get their account locked. However when you can save 40 euros on a game title by spending ten extra minutes on a VPN connection then it kind of makes it worth it. Gambling this way is also thrilling.
It's a hard issue to address and ultimately there is no way Steam can effectively block out people from doing it. I could appeal any ban by saying that I visited Russia in person, bought the physical game there and activated it on a cafe or through $VPN_PROVIDER.
> Trademark restrictions to prevent importing what could be effectively the same textbook or wrist watch.
The case law on this is mixed. the Costco-Omega case [1] was a 4-4 decision that bears no precedential weight, and is from the 9th Circuit (this means it could be cited but is not binding on lower courts). It was decided in favor of Omega, which sought to prevent importation by Costco, notwithstanding the First Sale Doctrine (which generally says that after you buy a copyrighted article, you can do what you want with it). If this were a binding case from a high court, this would be bad. It is much less unfortunate because it is not binding, and because a subsequent case from a higher court went differently.
The textbook case (Kirtsaeng-Wiley) went the other way, and allowed importation [2]. This was a US Supreme Court case and was decided by a majority. So on balance, the law on this seems to impair the effectiveness of price discrimination, which is good for the consumer. This case did not overrule the Omega case, which was factually distinguishable, so this doesn't mean that there aren't still potential issues lurking.
> DVD region locking where you can sell practically an identical product but charge vastly different rates in different areas, and it's illegal to work around.
DVD region locking, and especially the DMCA overlay, is definitely problematic. This applies equally to printer cartridge refills. The only potential benefit for consumers is that printer companies (and their analogs in other industries) can make printers less expensive, so that more people can afford them. If they couldn't lock you in to their ink cartridges, then they would have to charge more up-front. The counterargument to this is that many people don't understand the cost structure and end up locked in. Some printers even come with part-full cartridges, which is particularly deceptive.
> License agreements on software not to restrict specific functionality, but rather the usage scenarios.
This sort of thing can be done in "bad" ways, but it can also be done to offer academic discounts, discounts for small startups/businesses (think Slack's model). I'm not sure how one would draw the line between beneficial and nefarious applications of this model.
> Comcast's battle with Google Fibre where the price will heavily drop in just the areas where Google Fibre operates. Makes it much harder for Google Fibre to make any gains, but the vast majority of Comcast customers see no decrease in their bills.
Completely agree—this relates to there being a monopoly in many areas, which throws everything out of whack. Consumers definitely lose here, on the whole. (This is also why I wrote this article [3] about one way to hedge this problem.)
> Even the recent EpiPen drama...
This is mostly a problem because of the way health insurance presents a principal-agent problem. The person making the decision (insured) is not the person paying for them (insurance company). This definitely creates problems. It is arguably a good thing that medical device/drug companies can offer discounts to lower-income folks. On the whole, not sure how to weigh the pros/cons in the medical industry generally.
1 https://en.wikipedia.org/wiki/Omega_S.A._v._Costco_Wholesale...
2 https://en.wikipedia.org/wiki/Kirtsaeng_v._John_Wiley_%26_So...
3 https://medium.com/@nicklum/how-my-hatred-of-comcast-drove-m...
Australia's minimum wage is ~$16/hr, so Adobe products, Apple, even online downloads cost a lot more than the US, because people in Australia have more money to spend.
When the citizens of a country have a lot of spending money, international companies charge them more than in countries where the citizens don't have a lot of money.
Viewed this way, it's really interesting to note that "stuff" (cars, laptops, phones, beer, smokes) is cheaper in America than any other developed country in the world. This is an interesting way to come to the conclusion that the average American citizen has less spending money than the average developed country citizen
Cigarettes are jaw-droppingly expensive in Australia because the government wants as few people smoking as possible. The icky labels on packages don't make it very attractive either.
Whereas in America, cigarettes can range in price from annoyingly pricey to cheap as dirt, especially if you buy in southern states or Native American reservations (another price distortion).
You seem to be confusing real and nominal prices. Australian's merely have more dollars worth less, in goods, each. That's not necessarily a "good" thing. In fact, it's likely a negative.
The interesting thing about the per capita mean in the US is that it's completely meaningless. So few have so much, that it doesn't tell us anything about how much money regular folks on the street actually have to spend on stuff.
Often times it's the reverse: international goods are same or significantly higher than USA or first world prices: the west embraced free trade but the rest of the world not so much....
A few things like McDonalds will be lower by 30% but many chain stores will go the opposite direction: luxury pricing premium...reasons vary from local tariff(especially for cars or electronics) or just brand snobbery(Nike is expensive in china for example) or protective laws(Korean electronics and cars are more expensive in Korea than USA, tariffs keep out cheaper foreign competitors).
Often times, poor countries have crazy bad wealth distribution ratios so overcharging to enhance prestige is fairly normal. Going low on price is a bad strategy since 90% of the population can't even afford your goods but the top 5-10% can spend like kings.
Australia getting screwed on pricing is likely due to some goofball middle man system or taxing/tarriff scheme combined with island isolation surcharge(hawaii suffers this too).
I wouldn't be surprised if their is some foreign software tax.
On the contrary, I spent 2 years in Central and South America (almost lived in Argentina) and I'm now making my way down the West Coast of Africa.
That aside, I wasn't really talking about "poor" countries, I was talking about the pricing of stuff like cars, TVs, laptops among developed countries.
People from Europe/Australia are continually staggered when I tell them how little I paid for a 4x4, or an Apple Laptop in the USA.
This doesn't seem like quite the same thing. Eurostar makes a real saving on their "manufacturing" here - they can give the customer a seat on whichever train has space, rather than having to allocate them a seat ahead of time and maybe fill up a train and drive potential customers to fly instead.
This article reminds me of an article on Unpleasant Design that has been posted on Hacker News before:
Take the train example that he mentioned. He is effectively suggesting that higher margin 2nd class tickets subsidize 3rd class tickets. Companies may be afraid to improve 3rd class, thinking it would eat into their 2nd class and lower profits. But they would very likely just sell more tickets, as their 3rd class was now the best in the business. And provided there were an actual differentiated service in 2nd class, those tickets would still sell. And if the was no difference, they could eliminate 3rd class altogether and sell second class only for greater volume and slightly lower price (or make 2nd class improvements).
Cannibalization is no problemo for business. Some folks at Apple were afraid the iphone would cannibalize ipod sales. Imagine if they actually went with that thinking and sold iphones that didn't play music. And iPods still sell to this day.
Unless the sector has high barrier to entry (e.g. Intel), such practices are very often short sighted. You don't see IBM selling printers anymore.
IMO, you're simply begging the question by presuming that 2nd class won't be cannibalized.
We're also forgetting that one can't simply increase ticket supply, because trains and airlines are capital constrained once you run out of seats. At best, you can hope to charge more for 3rd-class tickets, at the expense of having cheaper, or empty, or fewer 2nd-class seats.
Even if a company manages to raise price of 3rd-class tickets, they face both a 1) lower effective subsidy from 2nd class and 2) the cost of providing 3rd-class amenities. Which effect dominates very well depends on the relative preferences of 2nd and 3rd-class buyers.
The sweet spot is to find an inconvenience that only affects 3rd-class ticket-holders a little bit, but annoys 2nd-class ticket-holders a lot.
The Eurostar is a good example of that -- most people aren't inconvenienced too much by being told their flight time 2 days in advance (so depresses economy ticket prices only slightly), but deep-pocketed business travelers find it completely unacceptable (which shifts effective demand to the business seats).
Best choice is to raise the price of 3rd-class seats, which brings us back to whether the increased ticket revenue there offsets cannibalization.
In the semiconductor industry, often cheaper chips are the same chip is the expensive chip, but because it didn't test as well, features are disabled or the chip is intentionally sold at a lower clock speed.
IMO, I would call intentionally crippling a product a win-win-win situation if it's basically test-marketing that leads to lower manufacturing costs. (This only works if people don't catch on and hack the product to re-enable the disabled features.)
[1] http://archive.computerhistory.org/resources/text/IBM/IBM.Se...
> The key test is whether the practice means more goods are sold. Suppose the French had regulated trains so that all carriages had roofs. All those in second class might have switched to third class, potentially rendering both uneconomical to provide.
Could not there be a third option where the quality is not crippled so much but priced such that there is an increase in both supply and demand for a reasonable ride? In the current scenario, business chugs along, with lower-tier customers settling for an inferior product and upper-tier customers extorted to the maximum extent.
If you have very little competition, then correct pricing is relatively less important. In high competition enviroment several price points help to reach the "right" quantity and price fast.
And in high competition enviroment, shareholders see very little of it.
If they pick High Price, then they will include lots of features, but only people with a high willingness to pay and high ability to pay will end up purchasing the product. This means that people who would have been willing to purchase the low-end version of the product do not have that option and will instead purchase no product.
If the company picks Low Price, they will not include as many features because (in many cases) there is not sufficient profit incentive. This means that even customers who would have been willing to pay for these features cannot purchase them.
Ultimately, the assumption is that if customers are interested in making a purchase of a "crippled" or "feature-enhanced" product, and the company is willing to make that exchange, then the exchange makes both parties better off. This is what economists call "gains from trade."
Does this mean that everyone customer is better off with price discrimination under every circumstance, or that one cannot imagine a way in which a company could operate altruistically in order to make some customers better off? No. But generally they won't, and this is typically tied to the company's duty to their shareholders. (This is why B-Corps are nice—they give more flexibility in this regard.)
Edit: communism might be such a scenario, because multiple price tiers might be seen as ideologically incompatible, but even that would be a misconception as it misses variability personal preference: one might be willing to make compromises in other areas to have a bigger TV screen, while their neighbor might be more than happy to sacrifice screen size for a more sophisticated bicycle.
Price discrimination has always been fundamental aspect of business and economics: companies often offer different "values" different price points.
BUT, software businesses have another aspect many physical product & service companies do not: the ongoing cost of maintenance and support for legacy applications, and the (typically) increasing cost to add new features.
Consider the opening example: Microsoft Outlook. It's highly likely that Microsoft was motivated by cost issues, and was not executing a deliberate de-feature move.
Look how motivated Microsoft was to drop XP support.
I refused to do that when I did induction and LED lighting. My products are still in use by the people that bought them. I don't expect them to need a replacement for 20 years. Maybe by then I'll be back in the lighting business.
Were I making such superior LEDs, I'd market the living shit out of it, including lifetime warranties and public demonstrations of quality and whatever. If you can't ensure recurring sales by making the product shitty (like most companies do), you need to grow very fast to compensate. Once such a brand reaches high enough trust level, it should not die without making you FU money.
If anyone here is thinking about starting a company making high-quality, lifetime, user-serviceable stuff with well-defined lifecycle from purchace, through repair until eventual recycling / scrapping for parts, please do so; I'll happily put you next to SpaceX and Tesla on the "list of companies I'm an active fanboy of" list.
You could probably find them from my old clients, if they're ever willing to part with the lights. I deal with minerals and mining, now. Maybe I'll get back into LEDs when Cree finally releases their 330+ l/w LED. Till then, there's really no point, LED tech is past HID tech as-is so unless you buy REALLY CHEAP you're pretty much guaranteed to get something that's quality (just watch out for bad power drivers. That's your biggest worry with LED units - they will advertise a 300w unit and it only draws 150 at the wall, and the drivers are under-specced and fail. The LED tech itself is so robust that I've taken cheap stuff like Nichia 219 LEDs or Epistar COBs, hit them with a hammer while they're in operation, pop the protective dome off and flatten the gold bonding wires to the die(s), and it's still lit.
486dx/sx anyone? Here the maths coprocessor was not wired up in the budget version. Yield had as much to do this as marketing.
Lame Teslas. If you want auto drive and to use all those battery cells then pay extra. The mass production can be extra efficient plus upsells are possible as the customer can pay for the upgrade later.
1000 hour light bulb. The cartel of lightbulbs required bulbs to last a lot less. Worse product, more repeat sales, rigged market.
The smaller chocolate bar. To hit a price point, e.g. a dollar/pound/euro the product can be made worse or smaller.
The cheap board game. Times have changed, people play a board game once and it goes in the bin. Before TV the product would have been played year round and passed on to the next generation. There is no need to build a product to that standard any more.
Patents expire too, this means products get worse.
Changing laws. Imagine that you can no longer use bright food colours, the product gets worse.
This article didn't address anything I didn't know of and made no mention of what is obvious.
That's a common misperception. Early filaments could last for decades. It took a lot of work to design a filament that burned out after a certain amount of time:
https://en.wikipedia.org/wiki/Phoebus_cartel
"The cartel was a convenient way to lower costs and worked to standardise the life expectancy of light bulbs at 1000 hours, while at the same time raising prices without fear of competition. Members' bulbs were regularly tested and fines were levied for bulbs that lasted more than 1000 hours."
I suspect its more of a tragedy of the commons type thing with pricing.
Some people when buying products always go with the cheapest initial purchase price regardless of how good of an idea it is. In other cases features beyond the industry norm can actively harm reviews of the product as too many people will misunderstand the feature. A game recently[0] let people set the max draw distance much higher than comparable games. It was blasted in reviews for being "poorly optimized". When the developers reduced the max draw distance by ~50% people started praising them for doing a good job optimizing for that patch when they actually crippled a feature.
[0]: Dying Light part of http://www.pcgamer.com/what-optimization-really-means-in-gam...
It's a complex world that's unraveled, one where our popular methods of survival can be perfectly legal, unethical, hypocritical and irrational simultaneously, and the ensuing conflicts arising therefrom, conveniently viewed and treated as isolated. I think Adam Curtis's The Century of the Self[2] offers a bit of insight on where things starting going silly, and some of the mechanisms involved.
While the article may not be directly supporting PO as a paradigm, it gets uncomfortably close. Planned Obsolescence is great fun and games for a while, but I think the final results are predictably grim. There are definitely great challenges in maintaining a thriving economy without enslaving ourselves to endless consumerism, but these challenges must be faced. PO isn't the way.
1. https://en.wikipedia.org/wiki/Phoebus_cartel 2. https://en.wikipedia.org/wiki/The_Century_of_the_Self
In the software realm, plenty of software that should have been replaced or constantly updated chugs along managing critical infrastructure. Old hardware compatible with such systems get rarer thus raising operating costs and difficulty in servicing.
THe Phoebus Cartel was some major bullshit hence laws against price fixing were passed. These days trade is global so smuggling products from other countries is easy...unlike in 1939 where you only had a few stores/vendors to choose from who sold lightbulbs.
The modern version is vendor lock-in(see microsoft, sony, and apple which love this): hopefully this philosophy dies in the long run.
I sure hope so. Although there are myriad more, here's another example of this philosophy in action:
https://www.techdirt.com/articles/20160920/07021035568/hp-la...
I'd rather work manual labor than be the guy who decided on that - profits considered.
Typically though, this "making the product worse" thing is used as part of the sales cycle of a patented product. There has to be some "proprietary" piece (whether a large up-front investment in infrastructure or a new technology) or else it's a commodity and this type of segmentation doesn't work.
So far the result has been all bus services lowering prices, train tickets going lower too and overall people traveling more. It was needed price cut as some people we're switching to air travel as plane ticket was cheaper than train.
http://www.sciencedirect.com/science/article/pii/S0165176597...
This is ignoring competitive and redistributive effects, but the competitive implications should be positive (higher profits encourage competition) and this tool is sufficiently blunt for it to be unlikely to be the optimal feasible redistributive mechanism.
There are issues with:
1) Estimating the demand system and so picking the optimal gross margin. However, banning price discrimination is also relatively blunt and leads to a somewhat arbitrary outcomes from a welfare perspective.
2) Effects on firm incentives to reduce costs. If a firm knows that it will be subject to maximum gross margin restrictions in the future, it will have a weaker incentive to innovate possibly?
A third class is a form of subsidy, it will be sold at a loss.
I don't think having a train company decide for the date of your trip a choice. It's just that train management is expensive, so if you remove the date constraint, everything is simpler, because you can fill an entire train that will travel a certain week, instead of having to deal with the uncertainty of a train which is not entirely full.
Ouigo do that in France.
Unfortunately you won't find anything informative like that in this article. Instead you get examples such as why in 1849 French railways offered three classes of travel, and why the lowest tier was deliberately very bad. That doesn't really help explain current practices (unless Apple inexplicably wants to force me to use Firefox instead of Safari?).
[1] fortunately the internets have already discovered a command line workaround, but should that really have been necessary?
defaults write com.apple.Safari com.apple.Safari.ContentPageGroupIdentifier.WebKit2MinimumFontSize -int 18And in fact such by-products needn't even be based on "lying", such as when a business "withdraws" its cheaper alternative by changing the rules of purchase, e.g. requiring the customer to buy a high-markup item at the same time.