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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

#31

Post by Someone »

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…

> 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.

Re: A Beautiful Theory Falls to Ugly Data

#32

Post by 0zer0 »

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).

This.

The full set of constraints (monopoly, durability, constant MC, timelessness) can hardly ever be fulfilled. So it is not falsifiable by empirical data.

But nobody has questioned the logic conjecture itself here, even the article doesn't try. It seems pretty plausible, doesn't it?

Re: A Beautiful Theory Falls to Ugly Data

#33

Post by taeric »

This feels apples to oranges. There has to be a "cost of inventory" consideration that applies to non digital goods far far stronger than to digital ones. To the point that expecting electronic book sales to give any insight to durable goods feels farcical.

Similarly, the marginal cost of a new release has to include all of the creative production of it to that point. Authoring and editing. Not just the marginal cost of replication of a completed work.

That is, the marginal cost of a new release is creating the new release's content! Which is very very different from the marginal cost of just making a copy of it months later.

Re: A Beautiful Theory Falls to Ugly Data

#34

Post by tskj »

0zer0 wrote: post #28
tskj wrote: post #24

Earlier quoted context omitted.

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 a…

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.

Re: A Beautiful Theory Falls to Ugly Data

#36

Post by francisofascii »

The conjecture seems to assume the monopolist won't be patient enough, and will be "tempted" to drop the price to "mop up" extra customers. Yet it also assumes the consumers will be the patient ones, and will wait for the price to drop before buying. It seems like in reality, the opposite it true.

Re: A Beautiful Theory Falls to Ugly Data

#37

Post by [deleted] »

eru wrote: post #14
grumbelbart2 wrote: post #4

Earlier quoted context omitted.

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?

> 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…

[deleted]

Re: A Beautiful Theory Falls to Ugly Data

#38

Post by simiones »

zwaps wrote: post #26
athrowaway3z wrote: post #18

Earlier quoted context omitted.

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…

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.

Re: A Beautiful Theory Falls to Ugly Data

#39

Post by [deleted] »

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.

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