RE: Cause and Effect Reversed? -- MIDRANGE-L

Leif,

What you are saying (translated into economics jargon ;) is that you believe
there is a lot more price elasticity in the market than IBM's price setters
believe - basically, dropping software prices will increase IBM's profits
overall on the AS/400 due to increased sales.  I don't have a quarrel with
that, I tend to think that you're correct.  That doesn't mean that the price
setting algorithm is not applicable, only that IBM is assuming wrong values
for some of its parameters, whether it's being applied explicitly or
implicitly.  They probably also need to look at their AS/400 offerings in
more of a "package" form, rather than as discrete product entities each of
which has to generate a profit on its own.  Are we in the same hymn book?
<grin>

Linux folks set prices very low or at zero because they believe that in the
future there will be a huge demand from which they will profit in some
manner.  They use a very loose definition of "profit" - many aren't looking
for a monetary profit at all.  Things like personal satisfaction and career
recognition are also viewed as "profits" in economic theory.

Microsoft constantly tinkers with its prices, with the objective of
maximizing its monetary profits in the near term without giving up market
share in the long term.  They probably don't explicitly use this algorithm,
but their implicit assumptions about the values of the parameters are very
interesting if you work the equation "backwards".

Dave Shaw
Spartan International, Inc.
Spartanburg, SC

-----Original Message-----
From: Leif Svalgaard [mailto:leif@leif.org]

From: Shaw, David <dshaw@spartan.com>
> Pete is clearly stating the classical price-setting algorithm that
marketing
> folks in any industry are taught to use>
>That doesn't invalidate the algorithm.  In
> fact, from an economic perspective a prediction of micro-economic theory
is
> that even if this algorithm isn't used explicitly in a market, prices and
> unit quantities sold will still tend to approach the values suggested by
the
> algorithm - that's the effect of entities which seek to maximize their
> profits competing in a market.

I don't think the algorithm is invalid, just that it is not applicable.
The duplication cost for software is essentially zero ($0.25 per CD).
I don't think MicroSoft uses the algorithm in pricing MS-Word, or
Windows, or anything else. The Linux people certainly don't.
It is time to get back to the original problem: Can we by lowering
the unit price on software (OS/400) increase the sales of AS/400
hardware. I think so. I think that the AS/400 is overpriced (most
of that is software - at least compared to Linux or NT) and that
that partly (apart from lousy marketing) is the reason for the
slow sales. Do you have a problem with that?
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