grylliade.org Free minds. Free markets. Free beer.

1) I couldn't get through it. The guy throws around a lot of economic jargon like "utility", but doesn't seem to put together a logical argument or even clearly state what his point is.
2) What I could get was that the author didn't like the way games were priced or that "poor gamers" couldn't afford quality games. (Not being a gamer myself, I couldn't give a flying fuck.)

Well, that situation is imperfect. The idea that there's something horribly wrong and broken with imperfection is the error - hence all the smarmy remarks you see now and again from dumb leftists who say capitalism can't work because it requires perfect information. Uh, look around you, buddy - it works awfully well even without omniscience. Can't say the same for any alternative ever offered.

After all, turn your example around, Jennifer - if you had bought a very similar afghan around the corner for $15 and never seen that lady's stuff, you'd be nearly as happy (as would that other seller), even if you had been operating on imperfect information about a nearby bargain.

(Now, there's always room for improvement, and maybe one day we'll have some nigh-perfect market where awesome software systems connect every seller and buyer in the world, so that every buyer knows the best offers for an item and every seller knows what X thousand people would pay for that item. Imagine something like a commodities market, with extremely precise commodities like "hand-made afghans within 20 miles of me with cool colors, mostly reds and oranges". That'd be cool...but it would only be whittling away at imperfect information.)

True; I think my main complaint here is with using "perfect economic world" to mean "A world where buyers never gets pleasant surprises like 'Wow, I'm amazed by how cheap this thing I want is!' "

Also: having spent some time as a seller in the eBay/flea market business myself, I know there's a good chance that lady bought the afghan at an estate auction literally for pennies, and had I haggled she might've gone down as low as a dollar. There's a good chance we were BOTH pleasantly surprised by how well we did in that trade. So which of us should've got the maximum happiness for that to have been a perfect trade: me as a buyer paying a dollar, or her as a seller receiving twenty?

Irony: I was technically Poor back in those days, and this man's idea of a "perfect economy" is one where poor people like me would be even MORE poor because we parted with more money than we might have in exchange for something.

And even the perfect price for any one buyer or seller changes from time to time. I bought that afghan right after I moved from Virginia to Connecticut, so I was in the market for a LOT of cold-weather items because the keep-warm stuff I'd brought with me from southern Virginia did NOT meet the keep-warm requirements for winter in Connecticut. Also, I was still a student looking for bright, colorful things to jazz up my dull apartment, and the afghan hid much of the ugliness of my then-sofa. Nowadays, I have a lot more blankets, a lot more household decorations and a much better sofa than I did when I bought the afghan. It probably wouldn't be worth $20 (in 1995 dollars) for me to buy one now.

ADDITION: Actually, the afghan spends most of its time in the closet these days.

I think there is one more point to be added.

The buyer decides on the price at the moment she makes the purchase - at that point, the buyer makes her decision on the "utility" of the purchase: "To me, is this object worth what I am giving for it?"

The seller, on the other hand, is there to maximize his return: "If I sell x many widgets for $y, where x is dependent on how many buyers will pay $y for it, what values of x and y give me the biggest profit?" The seller knows that there are a certain number of people k who will pay $y+n for the priviledge of being "first buyers", so he will make his first asking price at some point where k*n is a maximum. He knows, however, that another group will wait until the price drops below $y to buy the widget, but at any given time, there is a price which will maximize his return. So the seller will always take the maximum he can get at any point. Demanding that he sell it to you for less is equivalent to demanding that he forego his income for your benefit.

The "utility" which the writer refers to is the buyer's defense against paying more than it is worth to him. The gamer may want Empire of Hell, but at some price, he will purchase Kingdom of Purgatory, even though the play and graphics are inferior.

Similarly, the Corvette that J sub D posted about a few days ago might be a fun car, but my Mazda 323 does what I need. The thrill of driving the Corvette is not worth the extra $100,000+++ to me.

EDIT: To disguise my memory lapse.

First: for those of you who don't know background, the author of that piece is a game-maker who 1) kicked up a huge fire-storm by releasing a game with a price people thought was offensively high ($15 on XBox Arcade, rather than the usual $10), and 2) shortly afterward decided to try to understand game piracy by asking gamers who pirate games to tell him why. So this isn't about someone trying to get cheap games; it's an indie game designer trying to understand the economics of game market so he can price his games effectively.

Second, the dude does have a point (explained much better by Joel Spolsky [url=http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html]here/[url]). Basically, in a perfectly competitive market, everything gets sold at marginal cost, which means that every person who values a thing at least as much as the resources that go into creating it can have one. So if widgets cost ten dollars of resources to make and I think they're worth $10.50, I get one.

In a monopoly, things are sold for a price above marginal cost, because the monopolist can make more money selling 100 widgets for $12 a piece than he can selling 110 widgets for $10 a piece. This is why monopoly is inefficient and thus generally considered 'bad'; there's an extra $5 of utility that's being left on the ground because the monopolist is selling at $12. The problem isn't that the monopolist is redistributing welfare from consumers to himself; it's that in the process he's outright destroying some of it.

Now, you can see that if he could sell to the other ten of us (and only the other ten of us) at $10.25 we'd be better off and so would he. So monopolists try to do this sometimes with price discrimination; if we sell to everyone at precisely his marginal utility for widgets, then there's no utility being left on the table. On the other hand, the consumers don't gain any utility either; the monopolist gets all of it. Strictly speaking this is more efficient, although perhaps less fair. Most economists instead prefer to try to get prices closer to marginal cost by making industries more competitive.

But this problem becomes much bigger when we deal with IP industries like video games. As the author says, it costs him maybe 10 cents to distribute another copy of the game. So in an efficient world everyone who values the game at at least $.10 would get a copy. But of course he can't sell the game for $.10, because then he has no way of recouping development costs. So he's looking for ways to price discriminate so that he can get the game to people who value it maybe at $5 or at $2 without totally nuking the revenue stream from people who value it at $10 or $15. It's a good question. If there were actually a good answer the world would be much better off.

But it's already been pointed out here that there are already similar price schemes in place (not counting piracy), especially for techy stuff: high prices when it first comes out (the "first to buy it" premium), then slightly lower prices until eventually the game hits the rock-bottom remainder bin, plus the secondhand market and borrowing from friends or libraries.

He has a couple interesting points, but I don't think he has any great insight. The main example that came to mind for me was Windows Vista, for which Microsoft tried to pull exactly that kind of "granularity" stuff: you can buy Windows Vista Basic, or Home, or Home Plus, or Enterprise, or Ultimate, or Super-Dee-Duper or WTFever else they were offering. Now, there is definitely something to be said for only paying for the features you need. But one thing that the author overlooks is that when you make your product more granular, you're actually imposing a utility cost on the customer, because now they have to decide what version they want. "Well, right now I can only run this game at 1280x1024 at medium detail...but what if I upgrade my computer at some point, and I want to play the game at higher resolution afterwards? What are the odds that within six months I'll upgrade my machine and still be into this game and care about the display quality and is all that worth the extra $15?" That actually adds friction to the economic transaction. Some of your customers will overspend, some will underspend, and a certain proportion will say "fuck it" and choose something simpler.

He also manages to avoid the elephant sitting in the living room of his argument: he mentions that development costs are fixed and sunk, and marginal costs are extremely low per copy of a game. So if GigantiGames Inc. tries to charge me $35 for the "Basic" version vs $50 for the "Super" version, I know that they're essentially trying to extort another $15 from me by intentionally crippling one version. The development costs are sunk - they already made the Super version whether I buy it or not - and the marginal costs are the same. And customers are not that stupid; they know this. So they get the feeling that they're being charged extra for work GigantiGames has already done, which is not a way to generate warm fuzzies in the customer base.

As far as I know, all their stuff actually differs by feature, rather than by buyer. Even buying through a third party gets you nothing, except maybe a bundled printer (with rebate).

They don't even do much time discrimination, with the notable exception of the iPhone. Even then it was more an attempt to maximize sales. The following price drop came from AT&T insisting on a different deal for the iPhone 3G.

No way, the black casing totally makes my laptop faster. I also got the optional racing stripe and spoiler to make it look cooler and cut down on wind resistance so that I could squeeze that last bit of speed from it.

However, that's still a difference, if a lame one. The only thing I can think of that's actual same-product price difference would be the educational and student discounts, and I don't think that's the sort of thing in mind, here.

Hmm. First, I don't think price discrimination is bad. Second, the black tax is a nearly perfect example of price discrimination, isn't it? How about MP3 player vs. IPod?

It is just trying to get people who are willing to pay more for a product to pay what they are willing to pay even if not everyone can be convinced. You can do it with organic produce, limited editions, or whatever. In general you have to create a demand based on some criteria that doesn't actually cost much to insert into your product. If you market an identical product in identical packaging in an identical store for two different prices, well, that is a poor attempt to price discriminate.

Actually, that is a classic example of price discrimination. Students don't have much money, so they can buy the software cheaper.

And in general, price discrimination can be an unmitigated good. Suppose I'm selling software for $100 a pop, but it only costs me $20 to produce another package. If I manage to go around to everyone who wouldn't pay $100 for it and offer it for $50, many people are better off and no one is worse off.

They usually aren't identical.

People who aren't price sensitive or otherwise get more jollies from feeling special than from getting the lowest price.

True, there are always some people who will pay for something they could have gotten for free or cheaply. I've seen this in the software market - some organizations just HAVE to spend money on a product even when there's a free version available. Sometimes there's some marginal improvement that makes the difference, but sometimes it's just perceived value. That's the thing about claiming price discrimination in general: you can only really say that people pay for perceived value, and it's a judgement call.

Adult: $8.50
Senior: $6.50
Child: $4.50
Student: $7.50

Four different prices for the exact same showing of the exact same film, please explain to me how that's not exactly price discrimination.

Actually, the black tax is that you have to go high end to get the black one. Funny enough, for the iPhone, there's a "white tax". Airlines are the kings of price discrimination. The internet made them worse at it, but they're still damn good. Especially now that they're doing things like charging extra for food, exit rows and the like.

Oh, the burning hate.