A Beautiful Theory Falls to Ugly Data
I explore how elegant economic models often crumble when confronted with messy, real-world evidence. While theoretical frameworks offer clarity, actual data frequently reveals unexpected complexities that challenge our assumptions. This disconnect reminds us that simplicity in theory does not guarantee accuracy in practice, urging a more humble approach to interpreting empirical results.
The most beautiful theory can be shattered by the ugliest data.
- skrebbel
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?
- gregw2
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?
- r0ze-at-hn
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.
- tskj
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).
- crote
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!