Adobe thinks this is stealing because Adobe doesn’t think that its marginal cost of producing another copy of the software is low. Sure, the out-of-pocket cost for copying some bits and bytes is low, but Adobe wants to include some amount for the cost of writing the software in its accounting of the cost of providing another copy.
And Adobe is right (and rational) to want to do this. If you can’t figure out how to amortize the costs of the creating the product in the first place into the marginal price of another copy, you literally will never think that large upfront costs are a good idea. In other words, we aren’t deciding whether the legal regime allows non-payers to get Adobe after the payers get it. We are deciding whether to have a legal regime that creates incentives for the existence of Adobe at all. And that ignores the signalling costs Adobe has in figuring out when it has sold “all” the copies it can.
Obviously, there is an empirical question about how much protection provides the appropriate incentive for the creation of new stuff. But I think there is a far amount of evidence that zero protection does not create enough incentive.
Adobe doesn’t think that its marginal cost of producing another copy of the software is low.
Just a terminology note. Adobe might wish that customers conflate marginal and average costs, but there’s no reason for us to play along. Their average costs are indeed substantial. The marginal cost for a copy is the difference between the cost to make n copies and n+1 -- which is negligible for software.
If Adobe believed that the market would not respect the use of average cost rather than marginal cost, it wouldn’t make the software because it could not reasonably anticipate recovering its costs and making a profit.
I’m not saying that Adobe has a “right” to make a profit. I’m saying that there are consequences to the position “Adobe has no right to make a profit.”
Yes. I agree with you entirely about prices and profits.
My only reason for commenting is that I wanted to clarify the meaning of the terms “average cost” and “marginal cost”. The former includes amortized costs, the latter doesn’t.
Adobe thinks this is stealing because Adobe doesn’t think that its marginal cost of producing another copy of the software is low. Sure, the out-of-pocket cost for copying some bits and bytes is low, but Adobe wants to include some amount for the cost of writing the software in its accounting of the cost of providing another copy.
/s/marginal/average here. Like most firms facing fixed costs (including e.g. retail businesses), Adobe needs to defray these by charging a markup over marginal cost.
If you can’t figure out how to amortize the costs of the creating the product in the first place into the marginal price of another copy, you literally will never think that large upfront costs are a good idea.
Yes, with the proviso that there might be ways to defray these costs efficiently after all. For instance, use a provision-point contract (as seen from Groupon, Kickstarter, etc.) to pay for the fixed costs, and sell the product at marginal cost (zero in the software case). [This doesn’t solve all issues, e.g. because markups also have good incentive properties; but it is a huge step forward.]
In practice, price discrimination also helps; if Adobe can figure out Puya Sharif’s willingness-to-pay, they will sell him Photoshop at a lower price. Firms can approximate this outcome by creating a scaled-down version of the product (say, Photoshop Elements) which will sell to low-demand customers without cannibalizing sales of the up-market version (Photoshop proper).
Adobe thinks this is stealing because Adobe doesn’t think that its marginal cost of producing another copy of the software is low. Sure, the out-of-pocket cost for copying some bits and bytes is low, but Adobe wants to include some amount for the cost of writing the software in its accounting of the cost of providing another copy.
And Adobe is right (and rational) to want to do this. If you can’t figure out how to amortize the costs of the creating the product in the first place into the marginal price of another copy, you literally will never think that large upfront costs are a good idea. In other words, we aren’t deciding whether the legal regime allows non-payers to get Adobe after the payers get it. We are deciding whether to have a legal regime that creates incentives for the existence of Adobe at all. And that ignores the signalling costs Adobe has in figuring out when it has sold “all” the copies it can.
Obviously, there is an empirical question about how much protection provides the appropriate incentive for the creation of new stuff. But I think there is a far amount of evidence that zero protection does not create enough incentive.
Just a terminology note. Adobe might wish that customers conflate marginal and average costs, but there’s no reason for us to play along. Their average costs are indeed substantial. The marginal cost for a copy is the difference between the cost to make n copies and n+1 -- which is negligible for software.
If Adobe believed that the market would not respect the use of average cost rather than marginal cost, it wouldn’t make the software because it could not reasonably anticipate recovering its costs and making a profit.
I’m not saying that Adobe has a “right” to make a profit. I’m saying that there are consequences to the position “Adobe has no right to make a profit.”
Yes. I agree with you entirely about prices and profits.
My only reason for commenting is that I wanted to clarify the meaning of the terms “average cost” and “marginal cost”. The former includes amortized costs, the latter doesn’t.
/s/marginal/average here. Like most firms facing fixed costs (including e.g. retail businesses), Adobe needs to defray these by charging a markup over marginal cost.
Yes, with the proviso that there might be ways to defray these costs efficiently after all. For instance, use a provision-point contract (as seen from Groupon, Kickstarter, etc.) to pay for the fixed costs, and sell the product at marginal cost (zero in the software case). [This doesn’t solve all issues, e.g. because markups also have good incentive properties; but it is a huge step forward.]
In practice, price discrimination also helps; if Adobe can figure out Puya Sharif’s willingness-to-pay, they will sell him Photoshop at a lower price. Firms can approximate this outcome by creating a scaled-down version of the product (say, Photoshop Elements) which will sell to low-demand customers without cannibalizing sales of the up-market version (Photoshop proper).