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A Beautiful Theory Falls to Ugly Data

marginalrevolution.com

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Re: A Beautiful Theory Falls to Ugly Data

#21

Post by zwaps »

0zer0 wrote: post #17
eru wrote: post #14

Earlier quoted context omitted.

> 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 sam…

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.

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

Re: A Beautiful Theory Falls to Ugly Data

#22

Post by tskj »

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).

Re: A Beautiful Theory Falls to Ugly Data

#23

Post by zwaps »

skrebbel wrote: post #2

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 ex…

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.

Re: A Beautiful Theory Falls to Ugly Data

#24

Post by tskj »

myrmidon wrote: post #5
skrebbel wrote: post #2

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 ex…

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, c…

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

Re: A Beautiful Theory Falls to Ugly Data

#25

Post by PunchyHamster »

myrmidon wrote: post #5
skrebbel wrote: post #2

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 ex…

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, c…

> 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.

Re: A Beautiful Theory Falls to Ugly Data

#26

Post by zwaps »

athrowaway3z wrote: post #18
lrasinen wrote: post #8

Earlier quoted context omitted.

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 exam…

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 m…

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.

Re: A Beautiful Theory Falls to Ugly Data

#27

Post by jdhwosnhw »

myrmidon wrote: post #5
skrebbel wrote: post #2

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 ex…

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, c…

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

Re: A Beautiful Theory Falls to Ugly Data

#28

Post by 0zer0 »

tskj wrote: post #24
myrmidon wrote: post #5

Earlier quoted context omitted.

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, c…

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

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.

Re: A Beautiful Theory Falls to Ugly Data

#29

Post by zwaps »

tskj wrote: post #22

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).

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?

Re: A Beautiful Theory Falls to Ugly Data

#30

Post by efavdb »

gregw2 wrote: post #11

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?

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.
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