Subject: Re: Open letter to those who believe in a right to free software
From: "Stephen J. Turnbull" <>
Date: Thu, 28 Oct 1999 15:00:27 +0900 (JST)

>>>>> "kms" == Karsten M Self <> writes:

    kms> wrote:

    >> - Software quality is frequently a market externality, indeed
    >> the developer *benefits* from a certain level of bugs - it
    >> gives consumers reasons to upgrade!

    kms> Stephen's challenged the conclusion, but I think Ben's got a
    kms> point, though a limited one.  It's fairly well borne out by a
    kms> number of analysis of Microsoft, and even gets hinted at by
    kms> the Bill itself in some interviews.


    >> Please explain for each of the above properties why it does not
    >> violate "the usual assumptions"...

    kms> Ben, it would help us all if you could state what you think
    kms> "the usual assumptions" are.  I sense a disconnect.

That's unfair; "usual assumptions" is my phrase.  AFAICT, Ben is happy
to accept my list, he just wanted to know what it is.

    kms> A natural monopoly, in the classic definition, arises where
    kms> marginal costs are falling over the entire range of
    kms> production (output).

That's an oops.  _Average costs_ need to fall to give natural
monopoly.  You don't need marginal costs also to fall; decreasing
average cost is enough to guarantee that (a) any given amount of
output is produced by one firm at lower cost than by a greater number, 
and (b) the firm with the larger sales (quantity) can charge a lower
price without taking a loss.

Note that in practice both the telephone company and the electric
company are increasing marginal cost per line (you start in dense
population at 5 meters of line per new customer, work out to the
suburbs at 30 meters of line per new customer, and then to rural areas
at 5km of line per new customer) and per service unit (otherwise peak
load pricing wouldn't be an issue).

That is something I hadn't bothered to notice before.  Software
(information goods) are not a natural monopoly!  Since it is costless
(close enough) to transfer the product to a second firm, you now
have two firms with no fixed cost and constant marginal cost.  Whoa,
Nelly!  This requires some careful thought.

The development costs are sunk, and thus not properly accounted part
of the fixed cost here.  OK, Ben, you're right; this is not analogous
to any of the standards cases in applied economic theory.

That doesn't mean we don't have to _cover_ the development costs
somehow; we do.  The free rider problem still is central.  But the
standard static definition of natural monopoly does not apply to a
software product in the obvious way.

    kms> If a rival good can be produced for lower cost or
    kms> significantly higher quality, and the switching costs are
    kms> sufficiently low, then the competitve advantages of the first
    kms> proprietary program is lost (this should sound familiar: MS
    kms> WinXX vs. Linux or xBSD).

This is irrelevant to the issue of natural monopoly or not, though.
The natural incumbent has changed, that's all.

University of Tsukuba                Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
Institute of Policy and Planning Sciences       Tel/fax: +81 (298) 53-5091
What are those two straight lines for?  "Free software rules."