price discrimination

Let’s call it “copytheft”

PNRJ core principles, critique of neoclassical economics, public policy , , , , , , , , ,

Feb 11 JDN 2460353

I have written previously about how ridiculous it is that we refer to the unauthorized copying of media such as music and video games as “piracy” as though it were somehow equivalent to capturing ships on the high seas.

In that post a few years ago I suggested calling it simply “unauthorized copying”, but that clearly isn’t catching on, perhaps because it’s simply too much of a mouthful. So today I offer a compromise:

Let’s call it “copytheft”.

That takes no longer to say than “piracy” (and only slightly longer to write), and far more clearly states what’s actually going on. No ships have been seized on the high seas; there has been no murder, arson, or slavery.

Yes, it’s debatable whether copytheft really constitutes theft—and I would generally argue that it does not—but just from hearing that word, you would probably infer that the following process took place:

  1. I took a thing.
  2. I made a copy of that thing that I wasn’t supposed to.
  3. I put the original thing back where it was, unharmed.

The paradigmatic example of this theft-copy-replace sequence would be a key, of course: You take someone’s key, copy it, then put the key back where it was, so you now can unlock their locks but they are none the wiser.

With unauthorized copying of media, you’re not exactly doing steps 1 and 3; the copier often has the media completely legitimately before they make the copy, and it may not even have a clear physical location to be put back to (it must be physically stored somewhere, but particularly if it’s streamed from the cloud it hardly matters where).

But you’re definitely doing step 2, and that was the only part that had a permanent effect; so I think that the nomenclature still seems to work well enough.

Copytheft also has a similar sound to copyleft, the use of alternative intellectual property mechanisms by the authors to grand broader licensing than is ordinarily afforded by copyright, and also to copyfraud, the crime of claiming exclusive copyright to content that is in fact public domain. Hopefully that common structure will help the term get some purchase.

Of course, I can hardly bring a word into widespread use on my own. Others like you have to not only read it, but like it enough that you’re willing to actually use it—and then we need a certain critical mass of people using it in order to make it actually catch on.

So, I’d like to take a moment to offer you some justification why it’s worth changing to this new word.

First, it is admittedly imperfect; by containing the word “theft”, it already feels like we’re conceding something to the defenders of copyright.

But by including the word “copy” in the term, we can draw attention to the most important aspect that distinguishes copytheft from, well, theft:

The original owner still has the thing.

That’s the part that they want us to forget, that the harsh word “piracy” leads you towards. A ship that is captured by pirates is a ship that may never again sail for your own navy. A song that is “pirated”—copythefted—is one that not only the original owners, but also everyone who bought it, still have in exactly the same state they did before.

Thus it simply cannot be that copytheft takes money out of the hands of artists. At worst, it fails to give money to artists.

That could still be a bad thing: Artists need to pay bills too, and a world where nobody pays for any art is surely a world with a lot fewer artists—and the ones who remain far more miserable. But it’s clearly a different sort of thing than ordinary theft, as nothing has been lost.

Moreover, it’s not clear that in most cases copytheft even does fail to give money that would otherwise have been given. Maybe sometimes it does—a certain proportion of people who copytheft a given song, film, or video game might have been willing to pay the original price if the copythefted version had not been available. But typically I suspect that people who’d be willing to pay full price… do pay full price. Thus, the people who are copythefting the media wouldn’t have bought it at full price anyway.

They might have bought it at some lower price, in which case that is foregone payment; but it’s surely considerably less than the “losses” often reported by the film and music industries, which seem to be based on the assumption that everyone who copythefts would have otherwise paid full price. And in fact many people might have been unwilling to buy at any nonzero price, and were only willing to copytheft the media precisely because it didn’t cost them any money or a great deal of effort to do so.

And in fact if you think about it, what about people who would have been willing to pay more than the original price? Surely there were many of them as well, yet we don’t grant media corporations the right to that money. That is also money that they could have been given but weren’t—and we decided, as a society, that they didn’t deserve to have it. It’s not that it would be impossible to do so: We could give corporations the authority to price-discriminate on all of their media. (They probably couldn’t do it perfectly, but they could surely do it quite well.) But we made the policy choice to live in a world where media is sold by single-price monopolies rather than one where it is sold by price-discriminating monopolies.

The mere fact that someone might have been willing to pay you more money if the market were different does not entitle you to receive that money. It has not been stolen from you. Indeed, typically it’s more that you have not been allowed to exploit them. It’s usually the presence of competition that prevents corporations from receiving the absolute maximum profit they might potentially have received if they had full control over the market. Corporations making less profit than they otherwise would have is generally a sign of good economic policy—a sign that things are reasonably fair.

Why else is “copytheft” a good word to use?

Above all, we do not allow our terms to be defined by our opponents.

We don’t allow them insinuate that our technically violating draconian regulations designed to maximize the profits of Disney and Viacom somehow constitutes a terrible crime against other human beings.

“Piracy is not a victimless crime”, they will say.

Well, actual piracy isn’t. But copytheft? Yeah, uh, it kinda is.

Maybe not quite as victimless as, say, marijuana or psilocybin, which no one even has any rational reason to prefer you not do. But still, you’re not really making anyone else worse off—that sounds pretty victimless.

Of course, it does give us less reason to wear tricorn hats and eyepatches.

But guess what? You can still do that anyway!

Asymmetric nominal rigidity, or why everything is always “on sale”

PNRJ critique of neoclassical economics, heuristics and biases, macroeconomics, market failure , , , , , , , , , , , , ,

July 9, JDN 2457579

The next time you’re watching television or shopping, I want you to count the number of items that are listed as “on sale” versus the number that aren’t. (Also, be careful to distinguish labels like “Low Price!” and “Great Value!” that are dressed up like “on sale” labels but actually indicate the usual price.) While “on sale” is presented as though it’s something rare and special, in reality anywhere from a third to half of all products are on sale at any given time. At some retailers (such as Art Van Furniture and Jos. A. Bank clothing), literally almost everything is almost always on sale.

There is a very good explanation for this in terms of cognitive economics. It is a special case of a more general phenomenon of asymmetric nominal rigidity. Asymmetric nominal rigidity is the tendency of human beings to be highly resistant to (rigidity) changes in actual (nominal) dollar prices, but only in the direction that hurts them (asymmetric). Ultimately this is an expression of the far deeper phenomenon of loss aversion, where losses are felt much more than gains.

Usually we actually talk about downward nominal wage rigidity, which is often cited as a reason why depressions can get so bad. People are extremely resistant to having their wages cut, even if there is a perfectly good reason to do so, and even if the economy is under deflation so that their real wage is not actually falling. It doesn’t just feel unpleasant; it feels unjust. People feel betrayed when they see the numbers on their paycheck go down, and they are willing to bear substantial costs to retaliate against that injustice—typically, they quit or go on strike. This reduces spending, which then exacerbates the deflation, which requires more wage cuts—and down we go into the spiral of depression, unless the government intervenes with monetary and fiscal policy.

But what does this have to do with everything being on sale? Well, for every downward wage rigidity, there is an upward price rigidity. When things become more expensive, people stop buying them—even if they could still afford them, and often even if the price increase is quite small. Again, they feel in some sense betrayed by the rising price (though not to the same degree as they feel betrayed by falling wages, due to their closer relationship to their employer). Responses to price increases are about twice as strong as responses to price decreases, just as losses are felt about twice as much as gains.

Businesses have figured this out—in some ways faster than economists did—and use it to their advantage; and thus so many things are “on sale”.

Actually, “on sale” serves two functions, which can be distinguished according to their marketing strategies. Businesses like Jos. A. Bank where almost everything is on sale are primarily exploiting anchoring—they want people to think of the listed “retail price” as the default price, and then the “sale price” that everyone actually pays feels lower as a result. If they “drop” the price of something from $300 to $150 feels like the company is doing you a favor; whereas if they had just priced it at $150 to begin with, you wouldn’t get any warm fuzzy feelings from that. This works especially well for products that people don’t purchase very often and aren’t accustomed to comparing—which is why you see it in furniture stores and high-end clothing retailers, not in grocery stores and pharmacies.

But even when people are accustomed to shopping around and are familiar with what the price ordinarily would be, sales serve a second function, because of asymmetric nominal rigidity: They escape that feeling of betrayal that comes from raising prices.

Here’s how it works: Due to the thousand natural shocks that flesh is heir to, there will always be some uncertainty in the prices you will want to set in the future. Future prices may go up, they may go down; and people spend their lives trying to predict this sort of thing and rarely outperform chance. But if you just raise and lower your prices as the winds blow (as most neoclassical economists generally assume you will), you will alienate your customers. Just as a ratchet works by turning the bolt more in one direction than the other, this sort of roller-coaster pricing would attract a small number of customers with each price decrease, then repel a larger number with each increase, until after a few cycles of rise and fall you would run out of customers. This is the real source of price rigidities, not that silly nonsense about “menu costs”. Especially in the Information Age, it costs almost nothing to change the number on the label—but change it wrong and it may cost you the customer.

One response would simply be to set your price at a reasonable estimate of the long-term optimal average price, but this leaves a lot of money on the table, as some times it will be too low (your inventory sells out and you make less profit than you could have), and even worse, other times it will be too high (customers refuse to buy your product). If only there were a way to change prices without customers feeling so betrayed!

Well, it turns out, there is, and it’s called “on sale”. You have a new product that you want to sell. You start by setting the price of the product at about the highest price you would ever need to sell it in the foreseeable future. Then, unless right now happens to be a time where demand is high and prices should also be high, you immediately put it on sale, and have the marketing team drum up some excuse about wanting to draw attention to your exciting new product. You put a deadline on that sale, which may be explicit (“Ends July 30”) or vague (“For a Limited Time!” which is technically always true—you merely promise that your sale will not last until the heat death of the universe), but clearly indicates to customers that you are not promising to keep this price forever.

Then, when demand picks up and you want to raise the price, you can! All you have to do is end the sale, which if you left the deadline vague can be done whenever you like. Even if you set explicit deadlines (which will make customers even more comfortable with the changes, and also give them a sense of urgency that may lead to more impulse buying), you can just implement a new sale each time the last one runs out, varying the discount according to market conditions. Customers won’t retaliate, because they won’t feel betrayed; you said fair and square the sale wouldn’t last forever. They will still buy somewhat less, of course; that’s the Law of Demand. But they won’t overcompensate out of spite and outrage; they’ll just buy the amount that is their new optimal purchase amount at this new price.

Coupons are a lot like sales, but they’re actually even more devious; they allow for a perfectly legal form of price discrimination. Businesses know that only certain types of people clip coupons; roughly speaking, people who are either very poor or very frugal—either way, people who are very responsive to prices. Coupons allow them to set a lower price for those groups of people, while setting a higher price for other people whose demand is more inelastic. A similar phenomenon is going on with student and senior discounts; students and seniors get lower prices because they typically have less income than other adults (though why there is so rarely a youth discount, only a student discount, I’m actually not sure—controlling for demographics, students are in general richer than non-students).

Once you realize this is what’s happening, what should you do as a customer? Basically, try to ignore whether or not a label says “on sale”. Look at the actual number of the price, and try to compare it to prices you’ve paid in the past for that product, as well as of course how much value the product is worth to you. If indeed this is a particularly low price and the product is durable, you may well be wise to purchase more and stock up for the future. But you should try to train yourself to react the same way to “On sale, now $49.99” as you would to simply “$49.99”. (Making your reaction exactly the same is probably impossible, but the closer you can get the better off you are likely to be.) Always compare prices from multiple sources for any major purchase (Amazon makes this easier than ever before), and compare actual prices you would pay—with discounts, after taxes, including shipping. The rest is window dressing.

If you get coupons or special discounts, of course use them—but only if you were going to make the purchase anyway, or were just barely on the fence about it. Rarely is it actually rational for you to buy something you wouldn’t have bought just because it’s on sale for 50% off, let alone 10% off. It’s far more likely that you’d either want to buy it anyway, or still have no reason to buy it even at the new price. Businesses are of course hoping you’ll overcompensate for the discount and buy more than you would have otherwise. Foil their plans, and thereby make your life better and our economy more efficient.