[skrebbel]

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]

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.

[jdhwosnhw]

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

[mitthrowaway2]

Yes, especially for a durable good like a video game, having it now means having it now AND also having it later. It strictly dominates having it later, so I would be willing to pay more. Plus, there's utility in synchronizing with my friend group so we can play through together at the same time, discuss it without spoilers, play multiplayer while our skill levels are similar, etc. And that purchase timing will typically be set by the eagerest friend, rather than the stingiest.

So yeah. I do wait for deals sometimes but it would be silly to say that these two things have the same value in the eye of the consumer.

[Ferret7446]

This still applies to "non durable" goods. Food is worth more today than it is next year, not least of which because if you starve, you won't get a chance to eat it next year. All goods are worth more sooner than later (relative to when they are needed), which is why people pay a premium for faster delivery.

[_alternator_]

An example that came up in the article is medicine (or more precisely a medical patent), which also clearly has an extremely strong time value, particularly for lifesaving medicine.

[xg15]

Maybe that's what "durable" means in economic jargon? A good that does not (or only very slowly) lose value over time?

If that what it means, Steam would not apply, because games were by that definition very much not durable.

[satvikpendem]

Games don't lose value over time though (barring exceptions like live service). A game now is just as fun as later.

[xboxnolifes]

This ignores the cultural/community value of games. Games have more value when other people are also playing the game. They don't lose all of their value over time, but, like watching a TV show as it is airing and having the shared experience of talking about it with others, video games also have a shared experience time frame.

This doesn't just apply to multiplayer games either. There is value in the active community conversation surrounding games like Expedition 33, Elden Ring, Baldur's Gate 3, etc.

[xg15]

It doesn't fall to zero, but for some people, there is still a difference between playing a game directly after release when everyone is figuring out and talking about it vs playing it years later.

It's the same as watching a movie in cinema or following a series or watching it later.

[satvikpendem]

Sort of, for many the cinema screen itself is the experience. In contrast, games played today vs 5 years from now are largely on the same hardware, whether it be the console or PC driving it and the TV and sound system displaying it. Like I said I make affordances for live service or multiplayer games but not sure there's such a strong connection to playing games as soon as they're out, although it does exist somewhat. That's why I classify games as a durable good.

[Someone]

> 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.

[tskj]

But this conjecture predicts that Steam prices will drop immediately to their final low price. So Steam is actually also a counterexample.

[0zer0]

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.

[tskj]

Yeah I guess it's fine to demand the situation actually conform to the assumptions of the theory, but these assumptions are so extreme they have literally never held for any situation, and they never will.

[PunchyHamster]

> 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.

[ahartmetz]

Well yeah. Challengers of a (quasi-) monopoly need to be better, but they behave like they are the monopoly who can piss on its users and Steam doesn't. The situation is completely ridiculous.

[akk0]

Confused readers may note that EGS refers, I think, to the Epic Games Store, and not to EroGameScape (which does not run a marketplace)

[skrebbel]

These aren’t monopolists, unless you define the market as “that single game” which frankly is a bit ridiculous.

[grumbelbart2]

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]

> 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]

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]

Some of the papers are linked. These papers, decades old, helpfully even show cases where the result does not hold.

[danaris]

The problem is, the entire right-wing/neoliberal subfields of economics have been utterly refusing to actually compare to reality and make adjustments since Reagan. They just repeat their dogma (like trickle-down economics), and when you point out that it's not working, they claim you're just not doing it hard enough.

[AnimalMuppet]

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.)

[zwaps]

Yes, the logic applies to all sorts of bargaining situations - that's what later papers mentioned in the article is about

[lrasinen]

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]

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]

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.

[athrowaway3z]

I think you misunderstood my previous comment.

Game theorists, like any academic, prefer models with the least number of assumptions and (transitive) dependencies.

My issue is with thinking this presumed fixed point was created with an elegant model (and thus conclude it's relatively interesting to study).

If you deconstruct the model - i.e. look through its full dependency tree to state the assumptions - It's not simple or elegant.

Other assumptions like modeling without irrational behavior are purer in that sense.

[simiones]

But the point of the conjecture is not that "some equilibrium price exists and can be reached". The whole point is that even monopolists will actually sell this type of good directly at the marginal cost, at the fix point. That is the whole prediction; and/or that no one would buy if they did otherwise.

[mitthrowaway2]

The monopolist would probably not even make the good in the first place if they knew they'd have to sell it at the marginal cost, because they'd make zero profit and be underwater on all of their development costs.

[skrebbel]

Sorry but what goods are more durable than a pill and cannot be resold?

EDIT: I now understand “durable” to mean “something that lasts long”, whereas I thought it just meant “non-perishable” (ie not fruit or flowers).

Gotta admit I still don’t understand how the original theory resonated with anyone though. I can’t even come up with an example. What monopolist sells a durable good? Games aren't a monopoly. Most other monopolists sell subscriptions or consumables (eg a train ride).

[ahartmetz]

You're not the first person with... an opinion on economic "science".

Paul Krugman: https://www.princeton.edu/~pkrugman/interstellar.pdf

"This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics."

[0zer0]

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.

[zwaps]

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.

[skrebbel]

This is exactly the explanation I was looking for. Thanks!

[_alternator_]

My read was that MC = "market clearing price" not "marginal cost".

Being a bit more humble, perhaps the lesson is that the difference between the theory and reality highlights externalities that always exist in the real world that make the theoretical model miss a crucial piece of the real world. It's logically correct in some sense, but incomplete.

[user____name]

A common misunderstanding, this. Economists in theory don’t focus on starting with the right set of assumptions, like any gentleman they instead focus on starting with the right set of conclusions. They then, in theory, argue passive-aggressively over why their model is The Right One using increasingly obtuse game theoretic models, usually with a drawing of two lines intersecting. The rest of the world? We simply shrug and ignore them.

Much like the the people ignored the idiot savants tucked away in medieval monasteries. At some point they become useful, like when the king needs to know what the nature of God is, who It approves and why it’s him and not the other guy.

Now that we've traded our warrior nobility for economic nobility, the neurodivergent and mildly touched ones are tucked away in academia instead. Pleasantly seperated from their subject of study. To figure out the nature of "The Market", and why it is, in theory, as Rational and Self Organizing as a medieval Thomist Universe.

And we are like the medieval peasantry who cannot understand an iota of what they're scribbling in their intimidating books. But we can see they're still fighting over It, just like they fought over resolving the philosophic contradictions of the faith.

It makes one wonder: what shape and mission will They have next? Will it be in explaining the actions of some sentient supercomputer, which both feeds and spanks us? Or which irradiated plants will take us beyond the Seventh Sphere, in theory? More at eight.

[zaphar]

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]

I think basically economists aren't that interested in looking at real world, messy data.

[budsniffer952]

"I don't know who any of these people are, or what the theory is, but it's obviously wrong."

- Classic HN commentor

[skrebbel]

I honestly asked what I misunderstood. Come on. At least do me the courtesy of explaining where I’m wrong.

Sure, my tone was dismissive but that’s because what I understood the article to mean was clearly, obviously ridiculous and I tried to make that clear.

I also clearly introduced myself as someone not knowing anything about economics, having to google “MC”.