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taeric 35 seconds ago [-]
This feels apples to oranges. There has to be a "cost of inventory" consideration that applies to non digital goods far far stronger than to digital ones. To the point that expecting electronic book sales to give any insight to durable goods feels farcical.
Similarly, the marginal cost of a new release has to include all of the creative production of it to that point. Authoring and editing. Not just the marginal cost of replication of a completed work.
That is, the marginal cost of a new release is creating the new release's content! Which is very very different from the marginal cost of just making a copy of it months later.
skrebbel 2 hours ago [-]
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?
myrmidon 2 hours 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.
Someone 18 minutes ago [-]
> 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
Or they are, and assign higher value to having the product now, rather than in the future.
I can easily see that apply in the case of pharma, where paying $$$ now can be preferable even over getting the product for free a month from now, when you’re dead.
jdhwosnhw 29 minutes ago [-]
I think the biggest (and, in my opinion, obvious) problem with this argument is that it relies on time having no value in the eyes of the consumer (or, equivalently, that the seller believes this to be the case). A consumer 5 years after a game's release may only purchase said game at marginal cost, but the consumer 1 day after release is willing to pay a premium to receive the product. There really doesn't seem to be any logical support for the component of the conjecture that says "because the price may eventually settle to the marginal cost, it must immediately settle to the marginal cost". There is obviously a time-constant present
tskj 41 minutes ago [-]
But this conjecture predicts that Steam prices will drop immediately to their final low price. So Steam is actually also a counterexample.
0zer0 26 minutes 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.
PunchyHamster 37 minutes 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.
grumbelbart2 2 hours 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?
eru 2 hours 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 1 hours 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 46 minutes ago [-]
Some of the papers are linked. These papers, decades old, helpfully even show cases where the result does not hold.
zwaps 49 minutes ago [-]
Yes, the logic applies to all sorts of bargaining situations - that's what later papers mentioned in the article is about
AnimalMuppet 2 hours 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.)
lrasinen 2 hours 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 1 hours 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 34 minutes 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.
zwaps 41 minutes 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.
0zer0 2 hours 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.
zaphar 2 hours 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 52 minutes ago [-]
I think basically economists aren't that interested in looking at real world, messy data.
gregw2 2 hours ago [-]
What seems intuitively wrong as a layperson new to this about Coase's theory, is that the "surprising" collapse in prices to marginal cost "in period 1" assumes that consumers have no marginal utility, and thus no price sensitivity, of consuming the good sooner rather than later.
If that fails. Coase's argument fails. No?
efavdb 19 minutes ago [-]
Indeed, having a hard time thinking of anything I desire that I wouldn’t want sooner rather than later. Maybe a grave yard plot — hopefully won’t need that anytime soon.
tskj 43 minutes ago [-]
Idk the obvious answer seems to be that buying now vs buying later isn't the same? Seems like a preposterous assumption; or rather an assumption that obviously never holds for any market ever so this theory is unfalsifiable by empirical data (and also irrelevant to the real world).
0zer0 17 minutes ago [-]
This.
The full set of constraints (monopoly, durability, constant MC, timelessness) can hardly ever be fulfilled. So it is not falsifiable by empirical data.
But nobody has questioned the logic conjecture itself here, even the article doesn't try. It seems pretty plausible, doesn't it?
zwaps 21 minutes ago [-]
Obviously the theory is decades old. I think nowadays a Game Theorist would not go and claim that the fixed-point convergence is an actual market process with consumers and monopolists trying to outsmart each other in some kind of bizarro bazar game.
An equilibrium for a given game is - depending on the equilibrium concept (bummer, even more conditions) - is a stable outcome of some sort with usually no claims as to how it would actually be reached.
By that, you can already see that this is not really an actual theory of an empiric situation, but rather a mathematical model of a certain solution structure.
If you were to write this paper today as an economist and your goal was to claim that is actually, really holds in reality, then you'd not only have to produce the theory but you'd also have to build some sort of empirical model that you can estimate with somewhat plausible identification conditions and structure, or be able to show it in a (pseudo-)experiment setup that is believable enough.
Suffice to say that there are very few such claims made on reality in modern microeconomics (that is to say, Game Theory by and large)
As it turns out, these sort of mathematical models have quite a bit of value in a normative setup, say if you go and design a market or an auction. Less so as a theory to explain all of reality.
I think in Coase's time, it was easier to write a 6 page paper from your bathtub and claim something about the world. Wasn't there an xkcd comic like this?
crote 1 hours ago [-]
But do the consumers know that ebooks are durable goods and that the publisher has a monopoly on them?
In practice a lot of reader will just be looking for a hit for their dark academia vampire romantasy addiction. The book is essentially read once, and the buyer is perfectly fine with a different title. It's durable in the same way that a newspaper is, and the publisher has a monopoly in the same way that a used car salesman has a monopoly on the car with VIN f6d45280.
Similarly, the reader's perceived value isn't constant. A newly-released "part 1 of 7" of an unknown author (who knows if it'll ever even get a part 2) is less interesting than the debut novel of a well-established author. Likewise, demand can significantly increase due to the release of a spinoff TV series, or significantly decrease when the author is disgraced in some scandal.
There's only a true monopoly on things like college books, and there the demand has basically zero elasticity: either accept paying $200 for the book now, or fail your $2000 course. And those aren't exactly durable either!
preetham_rangu 2 hours ago [-]
The history of science is basically a graveyard of elegant theories that met inconvenient measurements.
ludicrousdispla 1 hours ago [-]
I would argue that books are not a durable good as their value depends in part on the author's reputation. So lowering the cost of an e-book has some additional cost to the author or publisher beyond the production cost.
gregw2 2 hours ago [-]
There are a limited number of bitcoins and Satoshi started out as a monopolist of them... so Coase expects them to get sold at the marginal cost?
There are a limited number of iPhones....?
Do either of those examples shed light on where Coase went wrong that agree or disagree with the authors?
dudinax 2 hours ago [-]
How is this theory taken seriously when people have other motivators to buy durable goods early even when they know for certain the price will go down but not when?
jdw64 2 hours ago [-]
I read it. So it seems like this is a counterexample showing that the Coase conjecture doesn't hold in the ebook market.
I mean, with any theoretical modeling, you have to assume that the market actually fits the theory's requirements, right? From what I can gather just reading about it, the market the Coase conjecture model requires is one with a fixed set of consumers, a homogeneous durable good, and a monopolistic seller. But the real ebook market has a constant influx of new consumers, substitute content, complex contract structures, and, crucially, promotional events and coupons.
So in the end, I think we have to understand it as something that only holds under very specific conditions, not something that maps neatly onto real world cases.
That said, I'm curious. If you were to model the ebook market in general, what would the high impact variables be, and which ones would have relatively little influence?
But what I don't get is, are there even that many markets where the Coase conjecture actually holds? I'm not so sure.
I mean, you take reality and you turn it into a theoretical model. So my question is, are there really that many markets out there that fit the Coase conjecture in the first place? Sometimes when I read stuff about economics, it feels like people slice up the variable modeling to only look at what they want to see, and only in the regions they want to see, and then they claim it's universal. Of course, counterexamples keep popping up. And that's why it always feels so shaky.
Similarly, the marginal cost of a new release has to include all of the creative production of it to that point. Authoring and editing. Not just the marginal cost of replication of a completed work.
That is, the marginal cost of a new release is creating the new release's content! Which is very very different from the marginal cost of just making a copy of it months later.
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?
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.
> But in reality, customers are not 100% rational
Or they are, and assign higher value to having the product now, rather than in the future.
I can easily see that apply in the case of pharma, where paying $$$ now can be preferable even over getting the product for free a month from now, when you’re dead.
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.
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.
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?
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?
> 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.
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.
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.
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.
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.
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.
If that fails. Coase's argument fails. No?
The full set of constraints (monopoly, durability, constant MC, timelessness) can hardly ever be fulfilled. So it is not falsifiable by empirical data.
But nobody has questioned the logic conjecture itself here, even the article doesn't try. It seems pretty plausible, doesn't it?
An equilibrium for a given game is - depending on the equilibrium concept (bummer, even more conditions) - is a stable outcome of some sort with usually no claims as to how it would actually be reached.
By that, you can already see that this is not really an actual theory of an empiric situation, but rather a mathematical model of a certain solution structure.
If you were to write this paper today as an economist and your goal was to claim that is actually, really holds in reality, then you'd not only have to produce the theory but you'd also have to build some sort of empirical model that you can estimate with somewhat plausible identification conditions and structure, or be able to show it in a (pseudo-)experiment setup that is believable enough. Suffice to say that there are very few such claims made on reality in modern microeconomics (that is to say, Game Theory by and large)
As it turns out, these sort of mathematical models have quite a bit of value in a normative setup, say if you go and design a market or an auction. Less so as a theory to explain all of reality.
I think in Coase's time, it was easier to write a 6 page paper from your bathtub and claim something about the world. Wasn't there an xkcd comic like this?
In practice a lot of reader will just be looking for a hit for their dark academia vampire romantasy addiction. The book is essentially read once, and the buyer is perfectly fine with a different title. It's durable in the same way that a newspaper is, and the publisher has a monopoly in the same way that a used car salesman has a monopoly on the car with VIN f6d45280.
Similarly, the reader's perceived value isn't constant. A newly-released "part 1 of 7" of an unknown author (who knows if it'll ever even get a part 2) is less interesting than the debut novel of a well-established author. Likewise, demand can significantly increase due to the release of a spinoff TV series, or significantly decrease when the author is disgraced in some scandal.
There's only a true monopoly on things like college books, and there the demand has basically zero elasticity: either accept paying $200 for the book now, or fail your $2000 course. And those aren't exactly durable either!
There are a limited number of iPhones....?
Do either of those examples shed light on where Coase went wrong that agree or disagree with the authors?
I mean, with any theoretical modeling, you have to assume that the market actually fits the theory's requirements, right? From what I can gather just reading about it, the market the Coase conjecture model requires is one with a fixed set of consumers, a homogeneous durable good, and a monopolistic seller. But the real ebook market has a constant influx of new consumers, substitute content, complex contract structures, and, crucially, promotional events and coupons.
So in the end, I think we have to understand it as something that only holds under very specific conditions, not something that maps neatly onto real world cases.
That said, I'm curious. If you were to model the ebook market in general, what would the high impact variables be, and which ones would have relatively little influence?
But what I don't get is, are there even that many markets where the Coase conjecture actually holds? I'm not so sure.
I mean, you take reality and you turn it into a theoretical model. So my question is, are there really that many markets out there that fit the Coase conjecture in the first place? Sometimes when I read stuff about economics, it feels like people slice up the variable modeling to only look at what they want to see, and only in the regions they want to see, and then they claim it's universal. Of course, counterexamples keep popping up. And that's why it always feels so shaky.