Subject: Re: Free Software == Dumping??
From: "Robert J. Chassell" <bob@gnu.ai.mit.edu>
Date: Tue, 27 Jun 1995 16:35:18 -0400

nelson@crynwr.com asks:

   ... (tell me again why this hurts society for someone to sell
   something at a price ruinous to them??)

Typical scenario at turn of century:

    Large company with large financial resources sets up shop in a
    small city to sell office equipment.  The city also possesses two
    small companies that sell office equipment.  The large company
    sells below cost, losing millions.  The small companies do not
    sell anything except to a few faithful customers until they, too,
    lower prices.  Small companies run out of money first and go out
    of business.

    The large company then raises its prices to just below the level
    at which local customers will travel out of town for purchases.
    The large company then makes more than enough to pay back its
    investment in putting the local competitors out of business.  No
    one new dares enter the business as a competitor since that
    requires too much startup capital to compete successfully.  (Or
    else large existing competitors agree formally or informally to
    avoid hurting each other; after all, the other companies are in
    business too, and do not want to fight other elephants.  This
    latter situation typified the US for many years.)

Second typical scenario:

    Company in country A sells at market price in country A, at more
    than average cost.  However, the product is one that has a low
    marginal cost of production -- that it, it is very cheap to
    produce more units compared to the first unit of output, as with
    copies of cars or software.  The company sells at less than
    average cost of production in country B, yet still increases its
    profit by doing so, since the extra cost of producing the extra
    output for country B is less than the revenue generated by selling
    at the lower price.

Both cases reduce competition in the long run, and enable some private
organizations to gain the same kind of price setting power that
governments had in centrally planned economies.  During periods of
slow, expensive, or controlled technological change, such monopolistic
or oligopolistic arrangements can last for generations.

There are good arguments that resources are least wasted, i.e., the
most material wealth is generated, when prices equal the cost of
producing one extra unit of the product.  If the price is higher, more
units can be sold by lowering the price, and more people are satisfied
because they can buy the product; if the price is lower, someone is
subsidizing the sale, meaning money is being taken from them.

(This is the argument for free market, competitive, capitalist
economics; of course, in a non-free-market economy, you may argue for
non-economic pricing for non-economic reasons.)

(Clearly, the cost of production must include environmental costs as
well as direct, internal business costs, such as wages.  Many
propagandists ignore this cost, which requires taxes; they also ignore
the implications for mass transit, public health care, and the like.)

Software is a product that has a high initial cost and a low cost for
producing extra copies.  This means that without government-imposed
restraints on market pricing (intellectual property laws), the market
price for software will fall.  In a competitive, free market, the
price will fall below the average cost.  Hence, in a free market,
first copies must be paid for by some mechanism other than by private
investment-for-profit.

Please note that this is what a competitive, free market capitalist
would argue: the case for `free' software is conservative and
orthodox.  It is the person who argues for copyrights and patents on
software who is arguing against competition and free market
capitalism.  Intellectual property laws are government-sponsored
anti-competitive regulatory mechanisms that partially enable some
companies to reduce market competition.

    Robert J. Chassell               bob@gnu.ai.mit.edu
    25 Rattlesnake Mountain Road     bob@rattlesnake.com
    Stockbridge, MA 01262-0693 USA   (413) 298-4725