I don't understand software pricing
(This post has been sitting around in my Future Blog Posts folder for a long time, so I thought I'd finally post it.)
Okay, so, in economic terms, firms price goods so as to maximize profit, with total profit being determined by marginal profit multiplied by the number of items sold at a given price (the latter being determined by the demand curve). Right?
Now, we know that lots of people pirate programs like Photoshop. Lest we make the classic error of the RIAA, we must note that many of these pirates have a willingness-to-pay for Photoshop that is less than its $300-odd price tag. Some pirates have a willingness-to-pay that's close to $0, in fact, but given that going through the hassle of pirating Photoshop incurs a significant opportunity cost of some kind, it seems reasonable to assume that these people are in the minority. Without getting into the whole "information on the internet is a congestible public good and therefore has a natural market price of zero" argument, it seems as if plenty of people who might otherwise pirate Photoshop would probably buy it if it were available at a lower price. We also know that the marginal cost of production for software is very low, so there's no reason that Adobe couldn't lower the price. At $300, lots of people are pirates; at $30, even people who didn't much like manipulating images would probably own a legitimate copy.
In other words, it intuitively seems like a lot of software is rather expensive for no damn good reason, as the people that write it could probably make oodles of cash by lowering their prices. It's my personal suspicion that this phenomenon extends to many cases where it is assumed that a piece of software has a very limited market&mdash it seems to me that the market for software like MATLAB is artificially restricted by its insane price.
froborr suggests that Adobe prices its software so as to get maximum profit from businesses, and turns a blind eye to piracy for home use, as the latter merely enhances the popularity of its software. This is a plausible explanation, but Adobe really doesn't seem to turn a blind eye to piracy at all&mdash last I heard, they were pretty aggressive about it.
I get rather frustrated about this sort of thing. I've always subscribed to the "bicycle for the mind" view of computers, regarding them as creative tools rather than passive conduits of information. If computers are to be this way, though, then the neat programs can't stay locked behind multiple-hundred-dollar price tags! What I wouldn't do with a cheap molecular modeling program...! The open source movement seems to offer some kind of answer, but so far I have to admit that I've been disappointed with it.
Anyway, does anybody care to do an actual economic assessment of the situation, as opposed to making a half-assed post on LiveJournal?
Ten to one such an assessment already exists; I just don't know where it is. Quick and precise research seems to be invaluable to me. I should study the methodology of it.
Okay, so, in economic terms, firms price goods so as to maximize profit, with total profit being determined by marginal profit multiplied by the number of items sold at a given price (the latter being determined by the demand curve). Right?
Now, we know that lots of people pirate programs like Photoshop. Lest we make the classic error of the RIAA, we must note that many of these pirates have a willingness-to-pay for Photoshop that is less than its $300-odd price tag. Some pirates have a willingness-to-pay that's close to $0, in fact, but given that going through the hassle of pirating Photoshop incurs a significant opportunity cost of some kind, it seems reasonable to assume that these people are in the minority. Without getting into the whole "information on the internet is a congestible public good and therefore has a natural market price of zero" argument, it seems as if plenty of people who might otherwise pirate Photoshop would probably buy it if it were available at a lower price. We also know that the marginal cost of production for software is very low, so there's no reason that Adobe couldn't lower the price. At $300, lots of people are pirates; at $30, even people who didn't much like manipulating images would probably own a legitimate copy.
In other words, it intuitively seems like a lot of software is rather expensive for no damn good reason, as the people that write it could probably make oodles of cash by lowering their prices. It's my personal suspicion that this phenomenon extends to many cases where it is assumed that a piece of software has a very limited market&mdash it seems to me that the market for software like MATLAB is artificially restricted by its insane price.
froborr suggests that Adobe prices its software so as to get maximum profit from businesses, and turns a blind eye to piracy for home use, as the latter merely enhances the popularity of its software. This is a plausible explanation, but Adobe really doesn't seem to turn a blind eye to piracy at all&mdash last I heard, they were pretty aggressive about it.
I get rather frustrated about this sort of thing. I've always subscribed to the "bicycle for the mind" view of computers, regarding them as creative tools rather than passive conduits of information. If computers are to be this way, though, then the neat programs can't stay locked behind multiple-hundred-dollar price tags! What I wouldn't do with a cheap molecular modeling program...! The open source movement seems to offer some kind of answer, but so far I have to admit that I've been disappointed with it.
Anyway, does anybody care to do an actual economic assessment of the situation, as opposed to making a half-assed post on LiveJournal?
Ten to one such an assessment already exists; I just don't know where it is. Quick and precise research seems to be invaluable to me. I should study the methodology of it.