I remember an example similar to this from high school algebra-- when we had started learning about conic sections and polynomials. A barber's profit was modeled as a function of the price he charged per haircut. It turned out that the graph was an upside-down parabola. If he charged too much, no one would come and he wouldn't make any profit. If he charged too little, he wouldn't be able to cover his expenses, and he wouldn't make any profit. Our job was to find the function maximum in order to find what he should charge in order to make the most money. This article surprised me be cause it suggests the price-profit function is not only linear but horizontal over an interval. One possible explanation is that we don't have continuous data, and the actual function is some kind of complicated polynomial that has a lot of waves, which would allow a horizontal line to intersect the function at several points.
"No matter what price we choose, we always make the same revenue"
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Re: "No matter what price we choose, we always make the same revenue"
#22A question that's important to consider is support costs: Does the amount of support a customer requests scale twice as they pay twice the amount for a certain app, or no? My guess is "no".
Re: "No matter what price we choose, we always make the same revenue"
#23Is this why products often enter market at a high price, which is then lowered gradually?
No, that's for price discrimination.
Isn't price discrimination what this developer should want though (assuming he's interested in maximizing revenue)? I.e., getting people who are willing to pay more to do so, while still getting revenue from people who aren't willing to pay as much?
I thought that was Zash's point anyway.
Re: "No matter what price we choose, we always make the same revenue"
#24A fine example of the price elasticity of demand. Not surprising in the slightest, but a helpful real-world illustration.
Actually, I found it surprising because almost all theoretical economic models seem so divorced from reality that nothing ever works as you expect.
Re: "No matter what price we choose, we always make the same revenue"
#25A fine example of the price elasticity of demand. Not surprising in the slightest, but a helpful real-world illustration.
Well, it means that the demand curve (units demanded as a function of price) is proportional to 1/price for a large range. That seems pretty unusual, since the general idea of price elasticity is compatible with any curve decreasing with price, i.e. 1/price^2, 1/sqrt(price), 1/e^price, etc.
Re: "No matter what price we choose, we always make the same revenue"
#26So, of the people paying $1 for the product, you know that half of them would gladly pay $2? Sounds like it's time for 2 versions of the product : (i) The almost-full-featured version ($1) and (ii) The super-duper gold-plated version ($2). The removed feature doesn't even have to be very useful : You might lose 10% of the $1 value people, but snag 25% of the $2 value people (who just want some justification for payin…
Apple's simple take on this may be revealing:
iSomething = $X
iSomething+ = $X+100
iSomething++ = $X+200Re: "No matter what price we choose, we always make the same revenue"
#27Is this why products often enter market at a high price, which is then lowered gradually?
To clarify xenophanes comment: steadily lowering the price will provide a degree of price discrimination which takes advantage of any demand curve which decreases with price. The OP is talking about a very special case where demand is proportional to 1/price.
Re: "No matter what price we choose, we always make the same revenue"
#28For one of our app, which was selling well, we eventually doubled the price.
Revenues started growing, month after month, and stabilized after about 6 months.
Conclusion: revenues more than doubled, units sold slightly increased.
Re: "No matter what price we choose, we always make the same revenue"
#29Earlier quoted context omitted.
What is "consumer surplus"?
Let's say there was an product that you were willing to pay $10 for, but someone was selling it for only $6. By purchasing the product you get $4 worth of consumer surplus. In general you probably get at least a bit of consumer surplus for everything you buy. The more surplus, the easier the decision to purchase (Of couse I would like to buy that brand new MacBook Pro for 10 bucks, thank you good sir!).
adding to that..
@ half the price and twice the customers you have all the customers who would have bought at the higher price "earning" whatever their surplus would have been + the (half) price - . On top of that you have all of the new customers "earning" a surplus beteen zero and the lower price.
Re: "No matter what price we choose, we always make the same revenue"
#30A fine example of the price elasticity of demand. Not surprising in the slightest, but a helpful real-world illustration.
Well, it means that the demand curve (units demanded as a function of price) is proportional to 1/price for a large range. That seems pretty unusual, since the general idea of price elasticity is compatible with any curve decreasing with price, i.e. 1/price^2, 1/sqrt(price), 1/e^price, etc.
Thank you; you're right. It's not surprising that there is some relationship, but what is actually surprising is that the relationship would so closely match an idealized, particular relationship (unitary elastic demand). (And this should have been obvious to me, since the general use of the demand curve is not, by any means, to prove to people that the price they choose doesn't matter.) I'd edit my original post if I were still within the edit window.