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Creative Destruction in Markets

ClassicRobert
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8/20/2013 5:10:53 PM
Posted: 3 years ago
Do you think that creative destruction is a good thing, or that businesses ought to be protected?
Debate me: Economic decision theory should be adjusted to include higher-order preferences for non-normative purposes http://www.debate.org...

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wrichcirw
Posts: 11,196
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8/21/2013 3:25:37 AM
Posted: 3 years ago
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

It's good. It frees up capital from "bad" businesses and fuels innovation.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
Posts: 3,773
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8/22/2013 2:50:42 AM
Posted: 3 years ago
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

This is a pretty loaded question. The short answer is that it is probably good in the long run.

However, we need to look at the form of markets that usher the process of creative destruction. In a monopoly/ monopolistic competition/oligopoly, the 'new technology', if adopted by the market is because the benefits arising from the technology are higher than its costs. So its good. [ Notice this doesn't mean that market will definitely adopt every innovative strategy available in the market, especially in th ecase of a monopoly, where the business might not need to. But every innovative technology they adopt will be necessarily because benefit > cost]

In a perfect competition, however, any new technology adopted by a firm in an industry has to be necessarily adopted by the entire industry if they don't want to have to move out of the market. This would be bad for the market considering a quantifiable amount of resources are used up to usher a technology that isn't paying for its costs. So, regressive, in that sense.

Considering in real life, we have a lot more monopolies/ monopolistic competitive firms than perfect competitions or near perfect competitions, it is usually beneficial for the society.

There is this whole other debate about employment and producers and 'who ought to be protected', which calls upon normative judgements, but still, objectively, one can still draw upon this conclusion with reasonable certainty.
wrichcirw
Posts: 11,196
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8/22/2013 11:48:13 AM
Posted: 3 years ago
At 8/22/2013 2:50:42 AM, Cermank wrote:
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

This is a pretty loaded question. The short answer is that it is probably good in the long run.

However, we need to look at the form of markets that usher the process of creative destruction. In a monopoly/ monopolistic competition/oligopoly, the 'new technology', if adopted by the market is because the benefits arising from the technology are higher than its costs. So its good. [ Notice this doesn't mean that market will definitely adopt every innovative strategy available in the market, especially in th ecase of a monopoly, where the business might not need to. But every innovative technology they adopt will be necessarily because benefit > cost]

In a perfect competition, however, any new technology adopted by a firm in an industry has to be necessarily adopted by the entire industry if they don't want to have to move out of the market. This would be bad for the market considering a quantifiable amount of resources are used up to usher a technology that isn't paying for its costs. So, regressive, in that sense.

I think this is an unnecessary distinction. If I'm following you correctly, you're pointing out technology in the context of network effects, in the sense that if one company adopts, say, Windows or MacOS or Linux, it doesn't mean much to neither the producer nor the consumer unless everyone else adopts it.

However, not all technology is based upon the network effect. For example, I have an external hard drive sitting on my desk currently. I could care less if others had it, it's great technology and I store all kinds of things on it. It's not subject to the network effect.

Considering in real life, we have a lot more monopolies/ monopolistic competitive firms than perfect competitions or near perfect competitions, it is usually beneficial for the society.

There is this whole other debate about employment and producers and 'who ought to be protected', which calls upon normative judgements, but still, objectively, one can still draw upon this conclusion with reasonable certainty.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
Posts: 3,773
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8/23/2013 9:37:37 AM
Posted: 3 years ago
At 8/22/2013 11:48:13 AM, wrichcirw wrote:
At 8/22/2013 2:50:42 AM, Cermank wrote:
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

This is a pretty loaded question. The short answer is that it is probably good in the long run.

However, we need to look at the form of markets that usher the process of creative destruction. In a monopoly/ monopolistic competition/oligopoly, the 'new technology', if adopted by the market is because the benefits arising from the technology are higher than its costs. So its good. [ Notice this doesn't mean that market will definitely adopt every innovative strategy available in the market, especially in th ecase of a monopoly, where the business might not need to. But every innovative technology they adopt will be necessarily because benefit > cost]

In a perfect competition, however, any new technology adopted by a firm in an industry has to be necessarily adopted by the entire industry if they don't want to have to move out of the market. This would be bad for the market considering a quantifiable amount of resources are used up to usher a technology that isn't paying for its costs. So, regressive, in that sense.

I think this is an unnecessary distinction. If I'm following you correctly, you're pointing out technology in the context of network effects, in the sense that if one company adopts, say, Windows or MacOS or Linux, it doesn't mean much to neither the producer nor the consumer unless everyone else adopts it.

However, not all technology is based upon the network effect. For example, I have an external hard drive sitting on my desk currently. I could care less if others had it, it's great technology and I store all kinds of things on it. It's not subject to the network effect.

Not exactly. It's more like- suppose everyone had Windows. [This is not really a good example, since this is monopolistic competition in action- but suppose we have lots and lots of companies producing Windows, making it similar to a perfect competition.] So, there are X companies, each selling x output. Now, a company introduces a new software Zeta that costs more than px, but since they expect their output to increase after introducing the software, they expect to overcome the cost.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

This criticism extends to markets which have forms closer to that of a perfect competition. Sometimes even monopolies [think wallmart, although that's a different argument reasoning, the end result is still the same.]

Considering in real life, we have a lot more monopolies/ monopolistic competitive firms than perfect competitions or near perfect competitions, it is usually beneficial for the society.

There is this whole other debate about employment and producers and 'who ought to be protected', which calls upon normative judgements, but still, objectively, one can still draw upon this conclusion with reasonable certainty.
wrichcirw
Posts: 11,196
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8/23/2013 9:42:26 AM
Posted: 3 years ago
At 8/23/2013 9:37:37 AM, Cermank wrote:
At 8/22/2013 11:48:13 AM, wrichcirw wrote:
At 8/22/2013 2:50:42 AM, Cermank wrote:
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

This is a pretty loaded question. The short answer is that it is probably good in the long run.

However, we need to look at the form of markets that usher the process of creative destruction. In a monopoly/ monopolistic competition/oligopoly, the 'new technology', if adopted by the market is because the benefits arising from the technology are higher than its costs. So its good. [ Notice this doesn't mean that market will definitely adopt every innovative strategy available in the market, especially in th ecase of a monopoly, where the business might not need to. But every innovative technology they adopt will be necessarily because benefit > cost]

In a perfect competition, however, any new technology adopted by a firm in an industry has to be necessarily adopted by the entire industry if they don't want to have to move out of the market. This would be bad for the market considering a quantifiable amount of resources are used up to usher a technology that isn't paying for its costs. So, regressive, in that sense.

I think this is an unnecessary distinction. If I'm following you correctly, you're pointing out technology in the context of network effects, in the sense that if one company adopts, say, Windows or MacOS or Linux, it doesn't mean much to neither the producer nor the consumer unless everyone else adopts it.

However, not all technology is based upon the network effect. For example, I have an external hard drive sitting on my desk currently. I could care less if others had it, it's great technology and I store all kinds of things on it. It's not subject to the network effect.

Not exactly. It's more like- suppose everyone had Windows. [This is not really a good example, since this is monopolistic competition in action- but suppose we have lots and lots of companies producing Windows, making it similar to a perfect competition.] So, there are X companies, each selling x output. Now, a company introduces a new software Zeta that costs more than px, but since they expect their output to increase after introducing the software, they expect to overcome the cost.

Perfect competition does not imply a zero-sum game. The market could be expanding and still be perfectly competitive. There can be room for entrants without cannibalizing sales from existing firms.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

They earn no ECONOMIC profit initially, meaning that there's no better alternative than what firms are doing in a perfectly competitive market. They still earn BUSINESS profits.

This criticism extends to markets which have forms closer to that of a perfect competition. Sometimes even monopolies [think wallmart, although that's a different argument reasoning, the end result is still the same.]

Considering in real life, we have a lot more monopolies/ monopolistic competitive firms than perfect competitions or near perfect competitions, it is usually beneficial for the society.

There is this whole other debate about employment and producers and 'who ought to be protected', which calls upon normative judgements, but still, objectively, one can still draw upon this conclusion with reasonable certainty.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
Posts: 3,773
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8/23/2013 10:08:22 AM
Posted: 3 years ago
At 8/23/2013 9:42:26 AM, wrichcirw wrote:
At 8/23/2013 9:37:37 AM, Cermank wrote:
At 8/22/2013 11:48:13 AM, wrichcirw wrote:
At 8/22/2013 2:50:42 AM, Cermank wrote:
At 8/20/2013 5:10:53 PM, ClassicRobert wrote:
Do you think that creative destruction is a good thing, or that businesses ought to be protected?

This is a pretty loaded question. The short answer is that it is probably good in the long run.

However, we need to look at the form of markets that usher the process of creative destruction. In a monopoly/ monopolistic competition/oligopoly, the 'new technology', if adopted by the market is because the benefits arising from the technology are higher than its costs. So its good. [ Notice this doesn't mean that market will definitely adopt every innovative strategy available in the market, especially in th ecase of a monopoly, where the business might not need to. But every innovative technology they adopt will be necessarily because benefit > cost]

In a perfect competition, however, any new technology adopted by a firm in an industry has to be necessarily adopted by the entire industry if they don't want to have to move out of the market. This would be bad for the market considering a quantifiable amount of resources are used up to usher a technology that isn't paying for its costs. So, regressive, in that sense.

I think this is an unnecessary distinction. If I'm following you correctly, you're pointing out technology in the context of network effects, in the sense that if one company adopts, say, Windows or MacOS or Linux, it doesn't mean much to neither the producer nor the consumer unless everyone else adopts it.

However, not all technology is based upon the network effect. For example, I have an external hard drive sitting on my desk currently. I could care less if others had it, it's great technology and I store all kinds of things on it. It's not subject to the network effect.

Not exactly. It's more like- suppose everyone had Windows. [This is not really a good example, since this is monopolistic competition in action- but suppose we have lots and lots of companies producing Windows, making it similar to a perfect competition.] So, there are X companies, each selling x output. Now, a company introduces a new software Zeta that costs more than px, but since they expect their output to increase after introducing the software, they expect to overcome the cost.

Perfect competition does not imply a zero-sum game. The market could be expanding and still be perfectly competitive. There can be room for entrants without cannibalizing sales from existing firms.

Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

They earn no ECONOMIC profit initially, meaning that there's no better alternative than what firms are doing in a perfectly competitive market. They still earn BUSINESS profits.

In a perfect competition, business profit = profit that covers its labour costs and rent and stuff. They earn a LOSS, if they don't switch over and adapt to Zeta, because all their customers prefer zeta over windows, since its undeniably better quality, even though not cost efficient. Leads to improper/wasteful allocation of resources.

This criticism extends to markets which have forms closer to that of a perfect competition. Sometimes even monopolies [think wallmart, although that's a different argument reasoning, the end result is still the same.]

Considering in real life, we have a lot more monopolies/ monopolistic competitive firms than perfect competitions or near perfect competitions, it is usually beneficial for the society.

There is this whole other debate about employment and producers and 'who ought to be protected', which calls upon normative judgements, but still, objectively, one can still draw upon this conclusion with reasonable certainty.
wrichcirw
Posts: 11,196
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8/23/2013 10:23:43 AM
Posted: 3 years ago
At 8/23/2013 10:08:22 AM, Cermank wrote:
At 8/23/2013 9:42:26 AM, wrichcirw wrote:

Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Then consumers will do a proper cost-benefit analysis, and if the costs outweigh the benefits, consumers will still buy Windows.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

They earn no ECONOMIC profit initially, meaning that there's no better alternative than what firms are doing in a perfectly competitive market. They still earn BUSINESS profits.

In a perfect competition, business profit = profit that covers its labour costs and rent and stuff. They earn a LOSS, if they don't switch over and adapt to Zeta, because all their customers prefer zeta over windows, since its undeniably better quality, even though not cost efficient. Leads to improper/wasteful allocation of resources.

1) If Zeta is not cost-efficient, people will not switch over to "Zeta".
2) Business profit = profit AFTER labor, rent, etc... is considered. When business profit is zero, there is no profit whatsoever.
3) Economic profit = profit after alternatives are considered. When economic profit is zero, there may still be business profits, but not MORE business profits earned by switching to an alternative. Perfect competition is when economic profit is zero.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
wrichcirw
Posts: 11,196
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8/23/2013 10:28:52 AM
Posted: 3 years ago
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
Posts: 3,773
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8/23/2013 10:40:29 AM
Posted: 3 years ago
At 8/23/2013 10:23:43 AM, wrichcirw wrote:
At 8/23/2013 10:08:22 AM, Cermank wrote:
At 8/23/2013 9:42:26 AM, wrichcirw wrote:

Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Then consumers will do a proper cost-benefit analysis, and if the costs outweigh the benefits, consumers will still buy Windows.

Consumers don't care about costs to the businesses. They care about their prices and benefits.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

They earn no ECONOMIC profit initially, meaning that there's no better alternative than what firms are doing in a perfectly competitive market. They still earn BUSINESS profits.

In a perfect competition, business profit = profit that covers its labour costs and rent and stuff. They earn a LOSS, if they don't switch over and adapt to Zeta, because all their customers prefer zeta over windows, since its undeniably better quality, even though not cost efficient. Leads to improper/wasteful allocation of resources.

1) If Zeta is not cost-efficient, people will not switch over to "Zeta".

Customers don't care about the cost to the business. All they care about is the benefit. The benefit is higher. The business expects to get an economic profit initially, but as their consumer base falls, the expected profit dwindle and the market is stuck with a cost inefficient technology.

2) Business profit = profit AFTER labor, rent, etc... is considered. When business profit is zero, there is no profit whatsoever.
3) Economic profit = profit after alternatives are considered. When economic profit is zero, there may still be business profits, but not MORE business profits earned by switching to an alternative. Perfect competition is when economic profit is zero.

There is no business profit in a perfect competition. The economic profit, in this scenario, is positive initially. [Thus the change]. However, it turns negative after the entire market shifts to the new software.
wrichcirw
Posts: 11,196
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8/23/2013 10:45:28 AM
Posted: 3 years ago
At 8/23/2013 10:40:29 AM, Cermank wrote:
At 8/23/2013 10:23:43 AM, wrichcirw wrote:
At 8/23/2013 10:08:22 AM, Cermank wrote:
At 8/23/2013 9:42:26 AM, wrichcirw wrote:

Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Then consumers will do a proper cost-benefit analysis, and if the costs outweigh the benefits, consumers will still buy Windows.

Consumers don't care about costs to the businesses. They care about their prices and benefits.

For the consumer, the price tag is the "cost". The utility derived from the product is the "profit". Money in and of itself has no utility, so it's a matter of what consumers want compared to something else.

All the other firms would immediately lose their customers, if they are in a perfect competition, and because they earned no profit initially, they'll run into losses and would be forced to switch to sell the new software. [Even though it is not profitable, since its costs are higher] They are forced to make a transition, incurring unnecessary costs, when it would have been better for the companies to wait and introduce something cost effective.

They earn no ECONOMIC profit initially, meaning that there's no better alternative than what firms are doing in a perfectly competitive market. They still earn BUSINESS profits.

In a perfect competition, business profit = profit that covers its labour costs and rent and stuff. They earn a LOSS, if they don't switch over and adapt to Zeta, because all their customers prefer zeta over windows, since its undeniably better quality, even though not cost efficient. Leads to improper/wasteful allocation of resources.

1) If Zeta is not cost-efficient, people will not switch over to "Zeta".

Customers don't care about the cost to the business. All they care about is the benefit. The benefit is higher. The business expects to get an economic profit initially, but as their consumer base falls, the expected profit dwindle and the market is stuck with a cost inefficient technology.

See above.

2) Business profit = profit AFTER labor, rent, etc... is considered. When business profit is zero, there is no profit whatsoever.
3) Economic profit = profit after alternatives are considered. When economic profit is zero, there may still be business profits, but not MORE business profits earned by switching to an alternative. Perfect competition is when economic profit is zero.

There is no business profit in a perfect competition. The economic profit, in this scenario, is positive initially. [Thus the change]. However, it turns negative after the entire market shifts to the new software.

There is business profit in perfect competition. Please review the concept.

http://en.wikipedia.org... (see "profit" in this link)
http://www.investopedia.com...
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/23/2013 11:27:33 AM
Posted: 3 years ago
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

Everyone else in the market would lose their sales, since the new product provides a unit higher utility at same cost.

All of them would have to adopt the technology, in order to sustain themselves.

The sales per firm fall, as they get divided amongst themselves.

aka The new technology isn't cost effective in the long run, businesses lose. They can't recover their costs. Can't raise their prices as any firm raising their price would have to move out. aka viscious cycle.

The firm CAN keep its price above 10$, but the differential cannot be too large, considering the utility gained is just 1 util, and hence the new price needs to be somewhere closer to the previous price. The firm *would* adopt the new technology, because he expects the costs to be overcome by the new surge of sales.

Problem.
wrichcirw
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8/23/2013 3:53:54 PM
Posted: 3 years ago
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

You're changing the example. If price is the same for both products, then obviously Zeta is better. In your original example, you explicitly said that Zeta costs more than Windows. If that's the case, you have to do a cost-benefit analysis.

At 8/23/2013 10:08:22 AM, Cermank wrote:
Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Perhaps I should ask EXACTLY what you mean by "px". Are you doing a per-unit analysis? From the above, you make it pretty clear that Zeta costs more per unit, yet in your example you do not incorporate your premise.

Everyone else in the market would lose their sales, since the new product provides a unit higher utility at same cost.

You explicitly said that costs were higher. Why are you changing the example?

The firm CAN keep its price above 10$, but the differential cannot be too large, considering the utility gained is just 1 util, and hence the new price needs to be somewhere closer to the previous price. The firm *would* adopt the new technology, because he expects the costs to be overcome by the new surge of sales.

They can keep it at $11.99 and still do better than Windows.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
wrichcirw
Posts: 11,196
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8/23/2013 4:23:39 PM
Posted: 3 years ago
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

Anyway, questions aside, I'll just address this scenario.

1) Sales should be the same for both products to do a proper cost-benefit analysis. Just because Windows is supposedly inferior does not mean that every computer does not need one.

If a business has 1000 computers that need an OS, they will either need 1000 copies of Windows, 1000 copies of Zeta, or some mixture of the two that will equal 1000.

In this sense, that you're changing quantities per product is a tad absurd.

2) Markets can grow. Again, perfect competition is not a zero sum game. Look at cell phones. That market has grown exponentially in units, sales (in $$$), entrants, and profits. Market share is a zero-sum game, but perfect competition is not overly concerned with market share.

Because of the above, I don't find your breakdown to be valid.

---

To break down my own example:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 10,000$
Expected sales = 100
Price = 100$
Total Utility = 500
Price per unit of utility: $20

Zeta:
Utility = 500 utils
Total costs = 10,000,000$
Expected sales = 100
Price= 100,000$
Total utility = 50,000
Price per unit of utility: $200

Windows is clearly the most cost-effective product, even though zeta is 100 times better than Windows.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
Posts: 3,773
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8/24/2013 1:41:53 AM
Posted: 3 years ago
At 8/23/2013 3:53:54 PM, wrichcirw wrote:
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
: : Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
: : Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

You're changing the example. If price is the same for both products, then obviously Zeta is better. In your original example, you explicitly said that Zeta costs more than Windows. If that's the case, you have to do a cost-benefit analysis.

You're confusing the cost to the business with the price charged to the consumer. They are not the same. The cost of Zeta is still higher than the cost of Windows.

At 8/23/2013 10:08:22 AM, Cermank wrote:
Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Perhaps I should ask EXACTLY what you mean by "px". Are you doing a per-unit analysis? From the above, you make it pretty clear that Zeta costs more per unit, yet in your example you do not incorporate your premise.

px= price of the commodity (10$)* quantity sold initially (200).

The cost of Zeta is higher than px, but it expects to overcome this higher cost by increasing sales.

Everyone else in the market would lose their sales, since the new product provides a unit higher utility at same cost.

You explicitly said that costs were higher. Why are you changing the example?

Explained.

The firm CAN keep its price above 10$, but the differential cannot be too large, considering the utility gained is just 1 util, and hence the new price needs to be somewhere closer to the previous price. The firm *would* adopt the new technology, because he expects the costs to be overcome by the new surge of sales.

They can keep it at $11.99 and still do better than Windows.

At 11.99$, the revenue = 11.99$*1200= 14400, initially, but as everyone adopts the new technology, the revenue = 11.99*200= 2400. Not enough. Cost = 12000$.
wrichcirw
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8/24/2013 1:56:31 AM
Posted: 3 years ago
At 8/24/2013 1:41:53 AM, Cermank wrote:
At 8/23/2013 3:53:54 PM, wrichcirw wrote:
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
: : Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
: : Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

You're changing the example. If price is the same for both products, then obviously Zeta is better. In your original example, you explicitly said that Zeta costs more than Windows. If that's the case, you have to do a cost-benefit analysis.

You're confusing the cost to the business with the price charged to the consumer. They are not the same. The cost of Zeta is still higher than the cost of Windows.

Sigh, no. It simply does not matter if you're talking about a business purchase or a consumer market. In either case, you cannot change quantities of sales willy-nilly. Your example is off because of the reasoning I've already described in prior comments.

If a business is going to consider changing computer OS, they have to consider changing it across the board, meaning SAME quantities.

At 8/23/2013 10:08:22 AM, Cermank wrote:
Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Perhaps I should ask EXACTLY what you mean by "px". Are you doing a per-unit analysis? From the above, you make it pretty clear that Zeta costs more per unit, yet in your example you do not incorporate your premise.

px= price of the commodity (10$)* quantity sold initially (200).

The cost of Zeta is higher than px, but it expects to overcome this higher cost by increasing sales.

The bolded doesn't make any sense. You're essentially saying that the cost of Zeta is higher than the cost of Zeta.

The underlined also doesn't make sense. Of course there are variable costs associated with increased sales volume, and of course with higher sales, you marginalize the impact of fixed costs. However, there's simply no reason to think that Zeta sales would be materially different in quantity from Windows sales. Why do you keep making this erroneous assumption?

The firm CAN keep its price above 10$, but the differential cannot be too large, considering the utility gained is just 1 util, and hence the new price needs to be somewhere closer to the previous price. The firm *would* adopt the new technology, because he expects the costs to be overcome by the new surge of sales.

They can keep it at $11.99 and still do better than Windows.

At 11.99$, the revenue = 11.99$*1200= 14400, initially, but as everyone adopts the new technology, the revenue = 11.99*200= 2400. Not enough. Cost = 12000$.

Again, you can't change quantities like this if you're attempting a valid comparison. Why would a business with 100 computers need 1000 Zeta OSs?
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/24/2013 2:09:32 AM
Posted: 3 years ago
At 8/23/2013 4:23:39 PM, wrichcirw wrote:
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

Anyway, questions aside, I'll just address this scenario.

1) Sales should be the same for both products to do a proper cost-benefit analysis. Just because Windows is supposedly inferior does not mean that every computer does not need one.

If a business has 1000 computers that need an OS, they will either need 1000 copies of Windows, 1000 copies of Zeta, or some mixture of the two that will equal 1000.

In this sense, that you're changing quantities per product is a tad absurd.

This is what a perfect competition entails. Even a single unit increase in your price leads to a exponential fall of your sales. If the utility of Zeta > that of windows, at the SAME price, the market demand for for Windows WILL plunge to Zero.

2) Markets can grow. Again, perfect competition is not a zero sum game. Look at cell phones. That market has grown exponentially in units, sales (in $$$), entrants, and profits. Market share is a zero-sum game, but perfect competition is not overly concerned with market share.

Because of the above, I don't find your breakdown to be valid.

Of course. We are assuming a fixed market for ease of calculation. The focus is not on market share, it's on the amount of demand after introduction of a cost ineffective technology .

---

To break down my own example:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 10,000$
Expected sales = 100
Price = 100$
Total Utility = 500
Price per unit of utility: $20

Zeta:
Utility = 500 utils
Total costs = 10,000,000$
Expected sales = 100
Price= 100,000$
Total utility = 50,000
Price per unit of utility: $200

Windows is clearly the most cost-effective product, even though zeta is 100 times better than Windows.

There is no incentive for Zeta to introduce the new technology if it expects its costs to not be overcome by the revenues. With the price increasing 1000 times, on what basis does it expect the expected sales to remain 100 units?

IF they have a good enough reason to believe that, the technology isn't cost ineffective. Even though it costs a crore to the producers of Zeta, (as opposed to 10 thousand dollars to windows), the expected revenues are enough to overcome the costs.

And I don't really think the util/price is an adequate gauge of the actual utility gained by the consumer, since the util scale is more like a ritcher scale, in that context. A utility of 10 utils isn't really double the utility of a product offering 5 utils. [In real world application].
wrichcirw
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8/24/2013 2:21:35 AM
Posted: 3 years ago
At 8/24/2013 2:09:32 AM, Cermank wrote:
At 8/23/2013 4:23:39 PM, wrichcirw wrote:

To break down my own example:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 10,000$
Expected sales = 100
Price = 100$
Total Utility = 500
Price per unit of utility: $20

Zeta:
Utility = 500 utils
Total costs = 10,000,000$
Expected sales = 100
Price= 100,000$
Total utility = 50,000
Price per unit of utility: $200

Windows is clearly the most cost-effective product, even though zeta is 100 times better than Windows.

There is no incentive for Zeta to introduce the new technology if it expects its costs to not be overcome by the revenues. With the price increasing 1000 times, on what basis does it expect the expected sales to remain 100 units?

IF they have a good enough reason to believe that, the technology isn't cost ineffective. Even though it costs a crore to the producers of Zeta, (as opposed to 10 thousand dollars to windows), the expected revenues are enough to overcome the costs.

And I don't really think the util/price is an adequate gauge of the actual utility gained by the consumer, since the util scale is more like a ritcher scale, in that context. A utility of 10 utils isn't really double the utility of a product offering 5 utils. [In real world application].

Ok. I will just address this part because I think this is the crux of the misunderstanding.

All of the numbers I presented above are numbers available to the consumer. They do NOT take into account producer costs. The inherent assumption is that margins are the same for both Windows and Zeta.

Therefore, I'm going to ask you again what exactly do you mean by "cost"? Cost to the purchaser, or cost to the producer? Because the cost to the purchaser is the retail price, whereas the cost to the producer is fixed + variable costs. You don't breakdown producer costs at all, which led me to assume you are talking about costs from the purchaser perspective.

If you're going to say that Zeta has lower costs because of economies of scale, I'd have to ask you why this logic doesn't apply to Windows then. Again, to do a proper cost-benefit analysis in this case, you have to keep the quantities the same. I do not understand why you change the quantities and to my knowledge you never explain why you do.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/24/2013 2:26:10 AM
Posted: 3 years ago
At 8/24/2013 1:56:31 AM, wrichcirw wrote:
At 8/24/2013 1:41:53 AM, Cermank wrote:
At 8/23/2013 3:53:54 PM, wrichcirw wrote:
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
: : Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
: : Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

You're changing the example. If price is the same for both products, then obviously Zeta is better. In your original example, you explicitly said that Zeta costs more than Windows. If that's the case, you have to do a cost-benefit analysis.

You're confusing the cost to the business with the price charged to the consumer. They are not the same. The cost of Zeta is still higher than the cost of Windows.

Sigh, no. It simply does not matter if you're talking about a business purchase or a consumer market.

You are either not reading, or not comprehending. Cost to th ebusiness =/= business purchase. It is the cost to the business introducing the software in the market. aka the cost to Zeta.

In either case, you cannot change quantities of sales willy-nilly. Your example is off because of the reasoning I've already described in prior comments.
There is no willy nilly. The demand drops because the new product provides more utility at same cost. In a perfect competition, that means the market demand shifts to this product.

http://en.wikipedia.org...

This is a well established result.


If a business is going to consider changing computer OS, they have to consider changing it across the board, meaning SAME quantities.

Business in this particular example = introduction of a new software by the *software designer*. The point of the distinction, in my original post was- that a perfect competition leads to introduction of technologies that are not cost effective, and the only reason they are introduced is because of the expected distortions of the market mechanisms. The business taking up the software is the demand side of the issue. We are concerned with the supply.

At 8/23/2013 10:08:22 AM, Cermank wrote:
Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Perhaps I should ask EXACTLY what you mean by "px". Are you doing a per-unit analysis? From the above, you make it pretty clear that Zeta costs more per unit, yet in your example you do not incorporate your premise.

px= price of the commodity (10$)* quantity sold initially (200).

The cost of Zeta is higher than px, but it expects to overcome this higher cost by increasing sales.

The bolded doesn't make any sense. You're essentially saying that the cost of Zeta is higher than the cost of Zeta.

px= revenues. Not costs.

The underlined also doesn't make sense. Of course there are variable costs associated with increased sales volume, and of course with higher sales, you marginalize the impact of fixed costs. However, there's simply no reason to think that Zeta sales would be materially different in quantity from Windows sales. Why do you keep making this erroneous assumption?

Because. perfect competition. better utility. same cost. the entire market prefers Zeta. That is what a perfect competition entails.Also the variable costs in the sale of a software are minimal., hence the introduction of fixed overhead costs. Look at the bertrand competition link.

The firm CAN keep its price above 10$, but the differential cannot be too large, considering the utility gained is just 1 util, and hence the new price needs to be somewhere closer to the previous price. The firm *would* adopt the new technology, because he expects the costs to be overcome by the new surge of sales.

They can keep it at $11.99 and still do better than Windows.

At 11.99$, the revenue = 11.99$*1200= 14400, initially, but as everyone adopts the new technology, the revenue = 11.99*200= 2400. Not enough. Cost = 12000$.

Again, you can't change quantities like this if you're attempting a valid comparison. Why would a business with 100 computers need 1000 Zeta OSs?

Addressed, I hope.
Cermank
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8/24/2013 2:38:01 AM
Posted: 3 years ago
At 8/24/2013 2:21:35 AM, wrichcirw wrote:
At 8/24/2013 2:09:32 AM, Cermank wrote:
At 8/23/2013 4:23:39 PM, wrichcirw wrote:

To break down my own example:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
Total costs = 10,000$
Expected sales = 100
Price = 100$
Total Utility = 500
Price per unit of utility: $20

Zeta:
Utility = 500 utils
Total costs = 10,000,000$
Expected sales = 100
Price= 100,000$
Total utility = 50,000
Price per unit of utility: $200

Windows is clearly the most cost-effective product, even though zeta is 100 times better than Windows.

There is no incentive for Zeta to introduce the new technology if it expects its costs to not be overcome by the revenues. With the price increasing 1000 times, on what basis does it expect the expected sales to remain 100 units?

IF they have a good enough reason to believe that, the technology isn't cost ineffective. Even though it costs a crore to the producers of Zeta, (as opposed to 10 thousand dollars to windows), the expected revenues are enough to overcome the costs.

And I don't really think the util/price is an adequate gauge of the actual utility gained by the consumer, since the util scale is more like a ritcher scale, in that context. A utility of 10 utils isn't really double the utility of a product offering 5 utils. [In real world application].

Ok. I will just address this part because I think this is the crux of the misunderstanding.

All of the numbers I presented above are numbers available to the consumer. They do NOT take into account producer costs. The inherent assumption is that margins are the same for both Windows and Zeta.

Therefore, I'm going to ask you again what exactly do you mean by "cost"? Cost to the purchaser, or cost to the producer? Because the cost to the purchaser is the retail price, whereas the cost to the producer is fixed + variable costs. You don't breakdown producer costs at all, which led me to assume you are talking about costs from the purchaser perspective.

Since we were dealing with the sale of the software, the variable cost in the case is negligible. We are concerned with the producer costs. Since the question asks for the impact of creative destruction on the market, and I pointed out that some of the products are not cost effective, I assumed it was clear that I was talking about how some products are introduced *but* they cannot sustain themselves in the long run.

If you're going to say that Zeta has lower costs because of economies of scale, I'd have to ask you why this logic doesn't apply to Windows then. Again, to do a proper cost-benefit analysis in this case, you have to keep the quantities the same. I do not understand why you change the quantities and to my knowledge you never explain why you do.

Zeta has a higher cost, for the producer. We cannot keep the quantities the same because the only reason Zeta introduced in the market was because it expected its sales to improve, and hence cover up the cost. However, because every other firm *would* have no option other than either adopting the new technology or moving out of market, they'd have to adopt a cost ineffective technology- lowering the output for the others and messing with their revenue structure.

This leads to a new technology being introduced in the market, even though it allocates more resources for lower benefits- to the society as a whole. Thus creative destruction isn't always good. There are some caveats. This is one of them.
wrichcirw
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8/24/2013 2:38:18 AM
Posted: 3 years ago
At 8/24/2013 2:26:10 AM, Cermank wrote:
At 8/24/2013 1:56:31 AM, wrichcirw wrote:
At 8/24/2013 1:41:53 AM, Cermank wrote:
At 8/23/2013 3:53:54 PM, wrichcirw wrote:
At 8/23/2013 11:27:33 AM, Cermank wrote:
At 8/23/2013 10:28:52 AM, wrichcirw wrote:
Basic utility analysis:

If Windows gave 5 utility per copy, and cost $100 per copy ($20/unit of utility), while Zeta gave 500 utility per copy but cost $100,000 ($200/unit of utility), people will still buy Windows, regardless of the fact that Zeta is literally 100 times better than Windows.

Windows:
Utility = 5 utils
: : Total costs = 2000$
Expected sales = 200
Price = 10$

Zeta:
Utility = 6 utils
: : Total costs = 12000$
Expected sales = 1200 [Assumption: 6 shops, but more generally, expected sales = n*200]
Price= 10$

The introduction of Zeta would take place.

You're changing the example. If price is the same for both products, then obviously Zeta is better. In your original example, you explicitly said that Zeta costs more than Windows. If that's the case, you have to do a cost-benefit analysis.

You're confusing the cost to the business with the price charged to the consumer. They are not the same. The cost of Zeta is still higher than the cost of Windows.

Sigh, no. It simply does not matter if you're talking about a business purchase or a consumer market.

You are either not reading, or not comprehending. Cost to th ebusiness =/= business purchase. It is the cost to the business introducing the software in the market. aka the cost to Zeta.

No, your example is incomprehensible. When you say "cost to the business" do you mean the business selling or the business purchasing? Also, "price" =/= "costs". That's simply improper use of economic terms.

In either case, you cannot change quantities of sales willy-nilly. Your example is off because of the reasoning I've already described in prior comments.
There is no willy nilly. The demand drops because the new product provides more utility at same cost. In a perfect competition, that means the market demand shifts to this product.

The demand does NOT drop. If demand drops, why do sales increase? You're contradicting yourself.

http://en.wikipedia.org...

This is a well established result.

How is this relevant to your example? Both firms are charging the same price, according to your example.

If a business is going to consider changing computer OS, they have to consider changing it across the board, meaning SAME quantities.

Business in this particular example = introduction of a new software by the *software designer*. The point of the distinction, in my original post was- that a perfect competition leads to introduction of technologies that are not cost effective, and the only reason they are introduced is because of the expected distortions of the market mechanisms. The business taking up the software is the demand side of the issue. We are concerned with the supply.

Nothing you say here addresses my point. What is the cost structure of Windows and Zeta? Perhaps you can start there.

At 8/23/2013 10:08:22 AM, Cermank wrote:
Zeta is better than Windows. No one would want windows after the introduction of Zeta. But the cost of the new technology is higher than px.

Perhaps I should ask EXACTLY what you mean by "px". Are you doing a per-unit analysis? From the above, you make it pretty clear that Zeta costs more per unit, yet in your example you do not incorporate your premise.

px= price of the commodity (10$)* quantity sold initially (200).

The cost of Zeta is higher than px, but it expects to overcome this higher cost by increasing sales.

The bolded doesn't make any sense. You're essentially saying that the cost of Zeta is higher than the cost of Zeta.

px= revenues. Not costs.

What IS the costs then? For you, px = total costs for both firms. Either your example or your explanation is extremely inaccurate.

The underlined also doesn't make sense. Of course there are variable costs associated with increased sales volume, and of course with higher sales, you marginalize the impact of fixed costs. However, there's simply no reason to think that Zeta sales would be materially different in quantity from Windows sales. Why do you keep making this erroneous assumption?

Because. perfect competition. better utility. same cost. the entire market prefers Zeta. That is what a perfect competition entails.Also the variable costs in the sale of a software are minimal., hence the introduction of fixed overhead costs. Look at the bertrand competition link.

Here, you say costs are the same, yet in prior posts you keep reiterating that Zeta "costs more". Well, which one is it?

Again, you can't change quantities like this if you're attempting a valid comparison. Why would a business with 100 computers need 1000 Zeta OSs?

Addressed, I hope.

No, I believe you are contradicting yourself.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
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8/24/2013 2:42:21 AM
Posted: 3 years ago
Okay, maybe I'll explain the example better a little later. I guess I'm not explaining it properly. I'm trying to work on two things simultaneously and its showing.
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8/24/2013 2:43:35 AM
Posted: 3 years ago
At 8/24/2013 2:38:01 AM, Cermank wrote:
At 8/24/2013 2:21:35 AM, wrichcirw wrote:

Since we were dealing with the sale of the software, the variable cost in the case is negligible. We are concerned with the producer costs. Since the question asks for the impact of creative destruction on the market, and I pointed out that some of the products are not cost effective, I assumed it was clear that I was talking about how some products are introduced *but* they cannot sustain themselves in the long run.

Break down the costs. As you have it in your example, costs = price x quantity, which is exceptionally misleading and runs contrary to what you state here.

If you're going to say that Zeta has lower costs because of economies of scale, I'd have to ask you why this logic doesn't apply to Windows then. Again, to do a proper cost-benefit analysis in this case, you have to keep the quantities the same. I do not understand why you change the quantities and to my knowledge you never explain why you do.

Zeta has a higher cost, for the producer.

Jesus. 5 minutes ago, you state this:

At 8/24/2013 2:26:10 AM, Cermank wrote:
Because. perfect competition. better utility. same cost. the entire market prefers Zeta.

Again, why are you contradicting yourself?

We cannot keep the quantities the same because the only reason Zeta introduced in the market was because it expected its sales to improve, and hence cover up the cost. However, because every other firm *would* have no option other than either adopting the new technology or moving out of market, they'd have to adopt a cost ineffective technology- lowering the output for the others and messing with their revenue structure.

Again, you're not making any sense. Why is Zeta "cost-ineffective"??

This leads to a new technology being introduced in the market, even though it allocates more resources for lower benefits- to the society as a whole. Thus creative destruction isn't always good. There are some caveats. This is one of them.

No, you're example is totally off. You're making multiple contradictions, which seem to stem from not stating costs properly.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/24/2013 3:03:55 AM
Posted: 3 years ago
Okay, I can't let it go.

At 8/24/2013 2:43:35 AM, wrichcirw wrote:
At 8/24/2013 2:38:01 AM, Cermank wrote:
At 8/24/2013 2:21:35 AM, wrichcirw wrote:

Since we were dealing with the sale of the software, the variable cost in the case is negligible. We are concerned with the producer costs. Since the question asks for the impact of creative destruction on the market, and I pointed out that some of the products are not cost effective, I assumed it was clear that I was talking about how some products are introduced *but* they cannot sustain themselves in the long run.

Break down the costs. As you have it in your example, costs = price x quantity, which is exceptionally misleading and runs contrary to what you state here.

The cost for making Windows software is $2000. For Zeta, it is 12000$. The net increase in utility is 1 util. The variable cost, for every unit of Software produced, is assumed to be negligible, because the cost for developing an extra unit of software, once you produce the new software, is just copying, which can be assumed to be negligible. [Please point out if you have a problem with this assumption].

In my example, the price was calculated by dividing the net cost with the expected sales. That is the minimum price it can charge in both the cases. In the second case, however, it CAN charge more than 10$, [given that Zeta gives a utility of more than 5 utils, even if marginally], but at 10$, the entire market will demand only Zeta, because the utility of Zeta is greater than Windows, and the price of both is the same.

If you're going to say that Zeta has lower costs because of economies of scale, I'd have to ask you why this logic doesn't apply to Windows then. Again, to do a proper cost-benefit analysis in this case, you have to keep the quantities the same. I do not understand why you change the quantities and to my knowledge you never explain why you do.

Zeta has a higher cost, for the producer.

Jesus. 5 minutes ago, you state this:

At 8/24/2013 2:26:10 AM, Cermank wrote:
Because. perfect competition. better utility. same cost. the entire market prefers Zeta.

Typo. I meant same price for the consumers. The cost of Zeta is higher.

Again, why are you contradicting yourself?


We cannot keep the quantities the same because the only reason Zeta introduced in the market was because it expected its sales to improve, and hence cover up the cost. However, because every other firm *would* have no option other than either adopting the new technology or moving out of market, they'd have to adopt a cost ineffective technology- lowering the output for the others and messing with their revenue structure.

Again, you're not making any sense. Why is Zeta "cost-ineffective"??

Because it costs 10000$ extra for increasing 1 util of utility, and Zeta cannot sustain itself unless it doesn't have a monopoly/ monopolistic position- which it does not. Remember that was a caveat in the initial post {//This is not really a good example, since this is monopolistic competition in action- but suppose we have lots and lots of companies producing Windows, making it similar to a perfect competition.//} Once the sale drops as everyone starts producing Zeta and their revenues> costs, making it cost ineffective.

Maybe softwares is a bad example, since it is patented, making it a monopoly for a short time in real world. But the point remains the same.

This leads to a new technology being introduced in the market, even though it allocates more resources for lower benefits- to the society as a whole. Thus creative destruction isn't always good. There are some caveats. This is one of them.

No, you're example is totally off. You're making multiple contradictions, which seem to stem from not stating costs properly.
wrichcirw
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8/24/2013 3:12:56 AM
Posted: 3 years ago
At 8/24/2013 3:03:55 AM, Cermank wrote:
Okay, I can't let it go.

At 8/24/2013 2:43:35 AM, wrichcirw wrote:
At 8/24/2013 2:38:01 AM, Cermank wrote:
At 8/24/2013 2:21:35 AM, wrichcirw wrote:

Since we were dealing with the sale of the software, the variable cost in the case is negligible. We are concerned with the producer costs. Since the question asks for the impact of creative destruction on the market, and I pointed out that some of the products are not cost effective, I assumed it was clear that I was talking about how some products are introduced *but* they cannot sustain themselves in the long run.

Break down the costs. As you have it in your example, costs = price x quantity, which is exceptionally misleading and runs contrary to what you state here.

The cost for making Windows software is $2000. For Zeta, it is 12000$. The net increase in utility is 1 util. The variable cost, for every unit of Software produced, is assumed to be negligible, because the cost for developing an extra unit of software, once you produce the new software, is just copying, which can be assumed to be negligible. [Please point out if you have a problem with this assumption].

In my example, the price was calculated by dividing the net cost with the expected sales. That is the minimum price it can charge in both the cases. In the second case, however, it CAN charge more than 10$, [given that Zeta gives a utility of more than 5 utils, even if marginally], but at 10$, the entire market will demand only Zeta, because the utility of Zeta is greater than Windows, and the price of both is the same.

Again, the main problem I see with your example is shifting quantities. Since Zeta can shift quantities to cover costs, why can't Windows? After all, there are no variable costs, so why not just charge $1 for Windows and print one million copies?

This argument addresses the rest of your arguments from what I can tell.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/24/2013 3:17:24 AM
Posted: 3 years ago
At 8/24/2013 3:12:56 AM, wrichcirw wrote:
At 8/24/2013 3:03:55 AM, Cermank wrote:
Okay, I can't let it go.

At 8/24/2013 2:43:35 AM, wrichcirw wrote:
At 8/24/2013 2:38:01 AM, Cermank wrote:
At 8/24/2013 2:21:35 AM, wrichcirw wrote:

Since we were dealing with the sale of the software, the variable cost in the case is negligible. We are concerned with the producer costs. Since the question asks for the impact of creative destruction on the market, and I pointed out that some of the products are not cost effective, I assumed it was clear that I was talking about how some products are introduced *but* they cannot sustain themselves in the long run.

Break down the costs. As you have it in your example, costs = price x quantity, which is exceptionally misleading and runs contrary to what you state here.

The cost for making Windows software is $2000. For Zeta, it is 12000$. The net increase in utility is 1 util. The variable cost, for every unit of Software produced, is assumed to be negligible, because the cost for developing an extra unit of software, once you produce the new software, is just copying, which can be assumed to be negligible. [Please point out if you have a problem with this assumption].

In my example, the price was calculated by dividing the net cost with the expected sales. That is the minimum price it can charge in both the cases. In the second case, however, it CAN charge more than 10$, [given that Zeta gives a utility of more than 5 utils, even if marginally], but at 10$, the entire market will demand only Zeta, because the utility of Zeta is greater than Windows, and the price of both is the same.

Again, the main problem I see with your example is shifting quantities. Since Zeta can shift quantities to cover costs, why can't Windows? After all, there are no variable costs, so why not just charge $1 for Windows and print one million copies?

This argument addresses the rest of your arguments from what I can tell.

Because there is no subsequent shift in demand for windows. Zeta isn't arbitrarily shifting quantities, it is *estimating* the increase in demand because of the increasing utility it provides in the previous homogeneous market.
wrichcirw
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8/24/2013 3:21:20 AM
Posted: 3 years ago
At 8/24/2013 3:17:24 AM, Cermank wrote:
At 8/24/2013 3:12:56 AM, wrichcirw wrote:

Again, the main problem I see with your example is shifting quantities. Since Zeta can shift quantities to cover costs, why can't Windows? After all, there are no variable costs, so why not just charge $1 for Windows and print one million copies?

This argument addresses the rest of your arguments from what I can tell.

Because there is no subsequent shift in demand for windows. Zeta isn't arbitrarily shifting quantities, it is *estimating* the increase in demand because of the increasing utility it provides in the previous homogeneous market.

Why can't Windows make the same estimation of increase in demand if Windows lowers prices to compensate for the increase in utility per Zeta?

BTW, by adding this ability to shift quantities, IMHO you affirm that creative destruction in markets is a net positive.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Cermank
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8/24/2013 3:36:26 AM
Posted: 3 years ago
At 8/24/2013 3:21:20 AM, wrichcirw wrote:
At 8/24/2013 3:17:24 AM, Cermank wrote:
At 8/24/2013 3:12:56 AM, wrichcirw wrote:

Again, the main problem I see with your example is shifting quantities. Since Zeta can shift quantities to cover costs, why can't Windows? After all, there are no variable costs, so why not just charge $1 for Windows and print one million copies?

This argument addresses the rest of your arguments from what I can tell.

Because there is no subsequent shift in demand for windows. Zeta isn't arbitrarily shifting quantities, it is *estimating* the increase in demand because of the increasing utility it provides in the previous homogeneous market.

Why can't Windows make the same estimation of increase in demand if Windows lowers prices to compensate for the increase in utility per Zeta?

Because it would already have decreased its prices if it were possible to do so. See the Bertrand competition. If there was a possibility of lowering the price, one of the firm would have already done it and increased the demand of its product n times [in this case, 6 times].

BTW, by adding this ability to shift quantities, IMHO you affirm that creative destruction in markets is a net positive.

Net positive for whom? IF this was a monopoly [Which incedently, it is in the real world], it is definitely good, as the producers could stop other producers from developing the product and introduce a new technology. It could even have decided that introducing the technology wasn't worth it because they couldn't really charge that high of a price and not make that high of a profit, and thus they should keep on innovating and try discovering a cost effective technology, that offers high enough utility. This would lead to a better allocation of resources in the market, and their better utilization.

It is however, good for the consumers in the Short run. In the long run, Zeta wont be able to sustain themselves and crash, making it bad for them.
wrichcirw
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8/24/2013 9:40:32 AM
Posted: 3 years ago
At 8/24/2013 3:36:26 AM, Cermank wrote:
At 8/24/2013 3:21:20 AM, wrichcirw wrote:
At 8/24/2013 3:17:24 AM, Cermank wrote:
At 8/24/2013 3:12:56 AM, wrichcirw wrote:

Again, the main problem I see with your example is shifting quantities. Since Zeta can shift quantities to cover costs, why can't Windows? After all, there are no variable costs, so why not just charge $1 for Windows and print one million copies?

This argument addresses the rest of your arguments from what I can tell.

Because there is no subsequent shift in demand for windows. Zeta isn't arbitrarily shifting quantities, it is *estimating* the increase in demand because of the increasing utility it provides in the previous homogeneous market.

Why can't Windows make the same estimation of increase in demand if Windows lowers prices to compensate for the increase in utility per Zeta?

Because it would already have decreased its prices if it were possible to do so. See the Bertrand competition. If there was a possibility of lowering the price, one of the firm would have already done it and increased the demand of its product n times [in this case, 6 times].

Bertrand competition is not applicable here. It assumes constant marginal costs, whereas your example has falling marginal costs. Bertrand competition requires insignificant fixed costs and uniform variable costs...the example here is the opposite.

BTW, by adding this ability to shift quantities, IMHO you affirm that creative destruction in markets is a net positive.

Net positive for whom? IF this was a monopoly [Which incedently, it is in the real world], it is definitely good, as the producers could stop other producers from developing the product and introduce a new technology.

How is the Windows monopoly good? The cost of buying a computer has decreased dramatically over the past 10-20 years, whereas the price of the Windows OS has actually risen. Consumers cannot say whether or not Windows is "good" because there's nothing to compare it to - "good" is a relative judgment term.

It could even have decided that introducing the technology wasn't worth it because they couldn't really charge that high of a price and not make that high of a profit, and thus they should keep on innovating and try discovering a cost effective technology, that offers high enough utility. This would lead to a better allocation of resources in the market, and their better utilization.

This can occur in a perfectly competitive market. In a monopoly, there is less incentive for anyone to find this "cost effective technology", not new entrants because they'd have to compete against the monopoly, and not the monopoly because why would they want to cannibalize their own sales?

It is however, good for the consumers in the Short run. In the long run, Zeta wont be able to sustain themselves and crash, making it bad for them.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?