Comment by jeff18 | Hacker News Reader

Comment by jeff18 | Hacker News Reader

Cool article and informative anecdotes, and I ultimately agree that a $500 of wine is overpriced but for different reasons. I can't agree with the article's reasoning which is essentially: products should be priced based on how much they cost to manufacture.

A couple counter examples: Apple computers and high-end cars.

A few more extreme counter examples, where the cost to "manufacture" is almost $0: a $30 ebook, a web app subscription, or a top 10 iPhone app.

If you are going to say something should be priced based on the cost to produce, I think you need to prove that it has been commoditized.

What I mean by that is that if there are, for example, one hundred different pure gold nugget distributors, you should choose the cheapest, pure gold you can find since it is all exactly the same. If you pay more than the base value for your gold nugget, you are truly paying for nothing more than the packaging, marketing, and other fees, since the end result is simply a pure gold nugget.

So has wine been commoditized? That would be a more interesting article, and I don't know the answer myself without doing more research. My grandfather founded a famous California winery which actually holds its own against ye olde European vineyards in many high profile taste-tests. He was an engineer at SRI and produced wine with a scientific philosophy, happy to share his "secrets" with anyone, so my guess is that he would agree. I'd love to ask him his thoughts but sadly I can only speculate.

Egad. Cost to produce = (Fixed cost / total units) + marginal cost. That's why design-heavy items like software, music, books start out expensive and get cheaper over time as the fixed cost is amortized, while "manufactured" items like cars or wine are heavily dependent on marginal cost of each item.

For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. Whether high prices that pay for marketing are justifiable is a different discussion, because the heavily marketed product is arguable more valuable to the customer because they don't have to take the time to discover it.

> For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost.

With the quote marks, I'm not sure if you're being serious or not, but a fair deal is one that both sides agree is good for them. Now often, there's a range of prices that make sense for the seller to sell at (anything $40 or higher will be fine for them) and a different range that is okay for the buyer (anything $60 or lower). Anywhere between $40 and $60 they can do the deal and be happy, and it'll be a fair deal so long as it's voluntary and nothing crazy is happening.

As for efficiency - again, there's no ideal profit margin. If anything, if you really like a field, you want higher profit margins in that field, because it encourages new competition and investment and innovation. Getting good value is more important than ensuring the person selling is making a small margin. For instance, McDonalds only marks its food up a tiny bit, but it's still not a good value for me because I don't value McDonalds highly. But there might be some Brazilian food that's marked up 50% or 80% that seems like a real bargain for me.

tl;dr - "Everything is worth what its purchaser will pay for it." Publilius Syrus, ~100 BC in Rome.

The Syrus quote is exactly what I meant when I put the quotes around fair and efficient. I still remember when I learned that lesson: when I took my comic collection to sell and got maybe $50 for what the Wizards guide said was worth $700 or so. I couldn't find anyone willing to pay guide prices so it was actually worth much less than what I thought was 'fair'.

Are you claiming that books, software, and other pieces of intellectual property become cheaper over the years because the creator has finally recouped his or her costs of the initial creation and benevolently decides to give consumers a break on pricing?

Before I start explaining how I believe the economy actually works, I'd like to make sure I understood you properly and you're not being sarcastic.

'New' information is more valuable than 'old' information, so I don't think that's how it works, exactly.

Right effect, wrong explanation. IP products don't become cheaper because creators magnanimously lower the prices, it's because they become less valuable because they've used up the market and are replaced by new products from competitors and creators.

For instance, when people stop seeing movies for full price, they go to second run or dollar theaters. Paperback books come out when hardback sales lag (note - this is on a predicted schedule based on experience, not on real time signals). Windows Vista costs a lot less than Windows 7 does right now, and everyone has seen the disgusting bargain bins of DVDs for $5.

IP creators would happily charge high prices until the end of time but competition prevents them from doing so. In circumstances where competition is limited or markets have failed, they can do so for a long time. Windows + Office is a good example - they're so embedded in people's and companies' experience that they can't be commoditized, so they have maintained high prices and profit margins for a generation.

The word you're looking for is 'marginal cost', econ 101 goes into your points in great detail.

I assure you that your counter examples of an ebook, web app subscription, or top 10 iPhone app do not have a zero cost.

Since when is anyone's time free? Good books are not written overnight, and neither are top 10 iPhone apps. Good web apps have similarly thousands of man hours of coding behind them.

What I meant was that they have a single fixed cost (which may actually be very small) and the cost to manufacture an infinite number of them is near zero, despite charging a pretty penny for each one.

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