Monday, August 20, 2018
Wednesday, August 15, 2018
Gates concern that the rules have not kept up with the changes in the economy is also not new. People said the same thing in the late nineteenth century with the rise of railroads and other big businesses with high start up costs and low marginal costs.
Gates does not address the demand side but these are generally firms that have some degree of market power. They face a downward sloping demand like the firm in the graph. Because other people do not regard other goods as perfect substitutes the firm won't lose all of its customers if it raises its price. The more the firm can convince people that other goods are not close substitutes for its good the greater its ability to raise its price above marginal cost. I some ways the more important thing is whether it can keep other companies from offering close substitutes. In other words, can it create what economists call barriers to entry. You can have a great idea, but if you can't keep other people from copying it you are not going to make great profits.
1. If you want to charge a price that is greater than marginal cost you need to convince people that other goods are not close substitutes for yours. Think of the old Porsche slogan: "Porsche. There is no substitute."
2. If you want to make more than an average rate of profit you need to keep other people from copying you, that is introducing substitutes for your good (or you need to keep coming up with new things that don't have close substitutes).
Those two ideas actually are Econ 101.