[hacknews]

"This means a much higher level of competition, and competition destroys margins."

This has wider implications on the ability to profit over the long run in a capitalist society. In open markets margins should tend to zero. It seems the only way to profit would be to have some edge in terms protected market (monopoly) or slight protected technical advantage for a short period. But once the protected advantages are gone margins should tend to zero. Therefore, this isn't just a problem of old media but of all markets.

[mseebach]

> This has wider implications on the ability to profit over the long run in a capitalist society. In open markets margins should tend to zero.

... unless you constantly innovate faster than the competition. Politico.com is profitable because the read the situation correctly and innovated in terms of hiring and retaining the best political reporters in DC, even though what they're doing is what "old media" tries to make us believe they're doing: reporting the news. Anyone can try to compete with politico.com, but building a comparable network of well-connected reporters is hard = a new barrier to entry.

> Therefore, this isn't just a problem of old media but of all markets.

First, it's not a problem, it's a good thing. Second, no, this is specifically a problem for old media (and postal services): The internet completely removed the single barrier to entry that protected that business - the local monopolies on dissemination of information.

[crc32]

I am not sure that "margins tending to zero" applies at all to any market where the marginal cost of producing is non-zero.

[mseebach]

Yeah it does. The margin that tends to zero is the profit margin, not the marginal cost of production. That's why the commodities business is so tough: If you make $10 profit pr. ton of CommodityFoo, someone's gonna come along and underbid you $5, unless you bring some value to the game that the new guy can't.

And that's exactly what's happened to the news business: The internet ate the newspapers USP, classifieds, and effectively turned them into commodities. Take away the classifieds and the agency-dispatches, and the rest barely fills an interesting blog.

[crc32]

"unless you bring some value to the game that the new guy can't." yes, like the supply of a scarce resource. This little get out clause renders your argument meaningless.

If there are only 100 tons of gold available per week, (the marginal cost of producing the 101st item is infinite, i.e. non-zero) it does not matter how many competitors there are in the market. If demand is for more than 100 tons, profit margins will not "tend to zero". This scenario illustrates that even in a commodities market a situation may arise where a large number of competitors will not cause margins to tend to zero.

Let alone situations where branding is involved etc. - all factors that we can assume are permissable under the stated condition of an "open market", and all in the category of "some value to the game that the new guy can't". So in other words your comment amounts to "yes it does, except where it doesn't"

[mseebach]

You're confusing profit from speculation and profit from value added sales.

Especially in the gold-market, profits come from speculation, not value added sales.

[crc32]

No, I contend that it is you who is confused. There is only one type of profit, and I am correct that profit may be derived from demand exceeding supply irrespective of the number of suppliers. This has nothing to do with speculation, it is a basic concept of market economics that holds true in an "open market" as defined by the original commenter.

[hacknews]

Could you clarify this statement?

rs

[crc32]

My understanding of your comment is that open markets means competition. Competitors will compete on price, forcing prices down, with constant production costs margins will "tend to zero"

However this is incorrect. Where demand is greater than supply, prices (and therefore profits) may be stable or rise regardless of the number of competitors. A drought is a scenario of restricted supply where all competitors in the water supply market may increase profits due to demand.

Additionally, competition in markets where there is imperfect knowledge is not always based on price. It may be based on many other factors for example branding etc.

So your statement "In open markets margins should tend to zero" is not true, they will tend towards an equilibrium based on supply and demand, and even then individual suppliers may be differentiated by factors other than price allowing them to make a higher margin than their competitors.

The fact that competition may in some cases reduce margins, does not therefore have any "wider implications on the ability to profit over the long run in a capitalist society."

Note that where the marginal cost of production is zero, we can say that supply is infinite, and so prices cannot be maintained by restricted supply. This is a different case. But I cannot think of any market where the marginal cost of production is zero. Even copying and pasting a news article requires a small investment of time. So this qualifier may be unneccessary since it refers to an absurd situation.

[pbhjpbhj]

Jinx!

[pbhjpbhj]

Surely you need there to be no restriction on resources as well as an free market in order for the profits to tend to zero. A free market doesn't help if one person/group owns all the resources (though I gather Adam Smith's free market definition excluded monopolies this doesn't appear to be within the modern definition).

[mseebach]

They tend to zero, they don't actually go there. No-one does anything for a $0 profit margin. Scarcity of resources doesn't do anything to the profit margin, since the cost of the resource is an expense to the seller. What you can make money on is refining, and there the same rules apply (drilling and pumping oil out of the ground is a form of refining). Also, obviously, speculating.

Adam Smith was in no way a free market fundamentalist (Burke, ironically, was much more fundamentalist, even though he's considered the father of Conservatism). His legacy is the idea that "by pursuing his own interest, [the individual] frequently promotes that of the society more effectually than when he intends to promote it."

[crc32]

"Scarcity of resources doesn't do anything to the profit margin,"

This is patently false. For example during a drought, most people would pay well above the cost of production for a glass of water.

[mseebach]

No it's not.

An increase in scarcity increases the value of the good. If you have a small store on an island with 100 $1 bottles of water, your stock is worth maybe $60. Now, the ferry breaks down, and people start paying you $5 pr. bottle. You now have to report the value of your stock at ~$460, and at every sale book a cost of ~$4.60 against your stock. Thus your profit is (pretty much) the same.

You made a healthy profit on your accidental speculation in the bottled water market, but that's not your profit margin.

[crc32]

So... I pull water out of my well at a cost of $1 per bottle, later sell for $5 per bottle, have $400 in my hand, and yet my profit margin is zero.

I am not sure how to respond to this. You are self-evidently wrong, unless we are to accept your redefining of profit to be "the selling price of goods minus the selling price". Very strange.

[sebg]

"I pull water out of my well at a cost of $1 per bottle." This is the same as buying a bottle of water from a supplier. Your input costs $1 per bottle. You sell it for $1 dollar. Your profit is zero and your margin is zero. (profit = revenue - cost of inputs // profit margin = profit / revenue )

"I later sell if for $5 dollars per bottle." If you were to buy from a supplier now because there is no ferry it would cost you $5 dollars per bottle. You then sell the water for $5 per bottle. Your profit is zero and your profit margin is zero. (profit = revenue - cost of inputs // profit margin = profit / revenue )

So your profit margin is still zero.

You have $400 dollars in your pocket though. Where does this come from - this comes from speculation. You "invest" in 100 bottles of water at $1 dollar. The market for water goes up so people are now willing to buy bottles of water at $5 dollars. You speculation profit = revenue - cost of inputs[where this is the prior cost for you]. The speculation profit is $400 dollars.

This is the answer to your other comment [ http://news.ycombinator.com/item?id=1118301 ].

These are two types of profit.

profit = revenue - cost (at the same time)

profit margin = profit / revenue

speculation profit = revenue - costs from an earlier time