Theoretical support of free economics

How an old joke turned into a law of digital economics.

In 1838, Antoine Courtneau, a mathematician living in Paris, published "Research on the Mathematical Principles of the Theory of Wealth", which is now regarded as a masterpiece in economics (although it was not praised by the outside world at the time) . In this book, he tried to propose an economic model of corporate competition, and after a lot of mathematical calculations, he concluded that all competitive relationships between companies are related to the quantity of products they produce. If there is already a factory that produces bowls in the market, and another company also wants to open a factory that produces bowls, then care must be taken to avoid overproduction, because too many similar products on the market will cause prices to fall. In any case, the two companies will plan their output independently and independently to keep prices as high as possible.

The book was quickly forgotten, as is often the case with even the most illuminating works. The French Liberal School, which dominated French economic circles at that time, was not interested in Cournot's theory, which undoubtedly made him feel painful and frustrated. (In any case, he had an outstanding academic career and won numerous awards. He died in 1877.) After his death, subsequent generations of economists reread the classic "Inquiry into the Mathematical Principles of the Theory of Wealth" and concluded that Courno was unfairly ignored by his contemporaries, who called for a reexamination of Courno's model of competition.

In 1883, the French mathematician Joseph Bertrand decided to give an appropriate review to the book "Studies Concerning the Mathematical Principles of the Theory of Wealth." Bertrand hated this book. Virtually none of Curno's conclusions are correct. Indeed, Bertrand felt that Cournot's establishment of output as the key factor in corporate competition was so arbitrary that he half-jokingly reframed Cournot's model as price rather than output as the key to determining competitive relationships. variable. Oddly enough, he found a model that was neat, if not particularly neat.

Bertrand believes that instead of limiting production to increase selling prices and profits, major companies are more likely to lower prices to gain more market share. Indeed, they try to undercut each other until the price is only slightly higher than the cost of the product, a practice known as "marginal cost pricing." Moreover, if, as Weixin Encyclopedia said in introducing Courno, "lower prices create higher demand, that would be great.

Bertrand's theory of competition can It is simplified to the following statement:

In a competitive market, price equals marginal cost

Of course, there were not that many truly competitive markets at the time, at least. It is very different from the situation defined by these mathematical models, because each enterprise produces a homogeneous product (there is no product differentiation) and there is no collusion between enterprises. Therefore, other economists classify them as trying to operate in a way that is not necessary. Among the theorists who identified complex human behavior with various rigid equilibria, the dispute between the two economists was forgotten over the next few decades as another academic debate arose. /p>

However, as the development of economics enters the 20th century and market competition becomes increasingly more competitive and the market becomes more measurable, researchers from all walks of life begin to pay attention to Courno and Bertrand again. A Frenchman with a different view. Generations of economists have tried to figure out which industries the Cournot model of competition is more suitable for and which industries the Bertrand model of competition is suitable for. I will omit the details. To put it simply: in various market types, in which type of market it is easier to obtain more raw materials, Bertrand's competitive model is better, and the price is often the same as the marginal cost.

If it weren't for the fact that we are building one of the most competitive market environments ever, Bertrand's competitive model would still only be of academic interest to a large extent. It is a marginal cost of each service and product. A near-zero model. On the Internet, where information is a commodity and products and services are easily copied, we see Bertrand's competitive model playing out in a way that would shock even Bertrand himself. .

If "price equals marginal cost" is the law of the market, then free is not just one of the options, it is the inevitable end point, it is the power of economic laws, and you can only deal with it in the long term. It fights!

But please wait. Isn’t software another market where marginal costs are close to zero? Doesn't Microsoft charge users hundreds of dollars to use Office and Windows software? The answer is undoubtedly yes. So how does this fit with Bertrand's theory?

The answer lies in "competitive markets". Microsoft has created a product that benefits greatly from network effects: the more people who use a product, the more people who feel compelled to do the same. Take an operating system like Windows as an example. The most popular operating system attracts the most software developers to create the most programs that can run on it. Taking Office as an example, since you want to be able to share files with other people, you tend to use the same program that everyone uses.

Both of these examples are prone to creating winner-take-all markets, which is how Microsoft achieves its monopoly. And when you get a monopoly, you can charge "monopoly rents," meaning that two plastic discs in a box labeled "Office" cost $300 when the actual cost of making them was only one to two dollars.