A Beautiful Theory Falls to Ugly Data

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 examples (pharma anyone? plenty pills are mega durable). Nevertheless, somehow economists cheered at this theory and called it beautiful, despite how obviously ridiculous it is. But now the authors of this post debunked it with real data to, I hope, nobody’s surprise.

That can’t be it, can it?

Coase’s math assumes that the intervals between price changes approach zero, but every state change (such as the ebook price updates) is an informational bit erasure or write event. In a real market there is a cost that is > 0 for any price change (landauer floor). One can not assume that there is "free" energy in the system to find the optimal price.

Anyone writing books (or a "firm in coses math) needs to persist, aka they need to keep things like consumers understanding of their quality and pricing. If they drop prices to nothing they have consumers learn that. Consumers that try to wait forever in an "idle" state make no purchases and are not part of the ecosystem. Only consumer that don't wait forever matter. aka if they are looking at your ebook and don't buy they will rapidly buy a different ebook because they cannot wait for infinite time. aka if you teach your customers to wait they wont actually wait for you, but will simply switch to something else.

This is a control-and-feedback problem. Coase Conjecture fails because it assumes that you can have a system that persists without a governor. The two real world explanations correspond to the two ways you can introduce a governor.

What seems intuitively wrong as a layperson new to this about Coase's theory, is that the "surprising" collapse in prices to marginal cost "in period 1" assumes that consumers have no marginal utility, and thus no price sensitivity, of consuming the good sooner rather than later.

If that fails. Coase's argument fails. No?

It seems stupid to model books as a durable good. Reading this summer’s bestseller next summer sounds at its face like you should gain the same utility. But that is clearly not the case for the population buying books after a bit of thinking.

Also books without copyright are obviously cheaper beyond pricing than those with copyright. There is a rights holder there somewhere making a cut.

I think E-Books are a bad test subject. Theoretically they are a durable good, but realistically the demand for a single public domain eBook is not a large market and easily satisficed.

If you look at real world examples like wheelbarrows (something like 80% of all wheelbarrows sold in the US come from one company) - sure they use a bunch of tricks to charge more for some customers - but the cheapest, basic wheelbarrow is being sold for something close to marginal cost.

But do the consumers know that ebooks are durable goods and that the publisher has a monopoly on them?

In practice a lot of reader will just be looking for a hit for their dark academia vampire romantasy addiction. The book is essentially read once, and the buyer is perfectly fine with a different title. It's durable in the same way that a newspaper is, and the publisher has a monopoly in the same way that a used car salesman has a monopoly on the car with VIN f6d45280.

Similarly, the reader's perceived value isn't constant. A newly-released "part 1 of 7" of an unknown author (who knows if it'll ever even get a part 2) is less interesting than the debut novel of a well-established author. Likewise, demand can significantly increase due to the release of a spinoff TV series, or significantly decrease when the author is disgraced in some scandal.

There's only a true monopoly on things like college books, and there the demand has basically zero elasticity: either accept paying $200 for the book now, or fail your $2000 course. And those aren't exactly durable either!

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.

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).

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.

Anyone more econ literate know why Coase isn't trivially answered by accounting for corporate time-discounting? Maybe I'm missing something, but this always confused me.

In other words, theory does not conform to reality, i.e. ugly data. Being an academically trained economist, not surprised.

The history of science is basically a graveyard of elegant theories that met inconvenient measurements.

There are a limited number of bitcoins and Satoshi started out as a monopolist of them... so Coase expects them to get sold at the marginal cost?

There are a limited number of iPhones....?

Do either of those examples shed light on where Coase went wrong that agree or disagree with the authors?

I would argue that books are not a durable good as their value depends in part on the author's reputation. So lowering the cost of an e-book has some additional cost to the author or publisher beyond the production cost.

How is this theory taken seriously when people have other motivators to buy durable goods early even when they know for certain the price will go down but not when?

I read it. So it seems like this is a counterexample showing that the Coase conjecture doesn't hold in the ebook market.

I mean, with any theoretical modeling, you have to assume that the market actually fits the theory's requirements, right? From what I can gather just reading about it, the market the Coase conjecture model requires is one with a fixed set of consumers, a homogeneous durable good, and a monopolistic seller. But the real ebook market has a constant influx of new consumers, substitute content, complex contract structures, and, crucially, promotional events and coupons.

So in the end, I think we have to understand it as something that only holds under very specific conditions, not something that maps neatly onto real world cases.

That said, I'm curious. If you were to model the ebook market in general, what would the high impact variables be, and which ones would have relatively little influence?

But what I don't get is, are there even that many markets where the Coase conjecture actually holds? I'm not so sure.

I mean, you take reality and you turn it into a theoretical model. So my question is, are there really that many markets out there that fit the Coase conjecture in the first place? Sometimes when I read stuff about economics, it feels like people slice up the variable modeling to only look at what they want to see, and only in the regions they want to see, and then they claim it's universal. Of course, counterexamples keep popping up. And that's why it always feels so shaky.