From: Jeff Fabijanic (jeff@primordialsoft.com)
Date: Mon Mar 23 1998 - 13:25:18 MST
Warrl kyree Tale'sedrin" <warrl@mail.blarg.net> writes:
> > From: Jeff Fabijanic <jeff@primordialsoft.com>
>
> > So if one company has more money than the others, it should be
> > allowed to charge less than cost for it's product?
>
> Jeff, if somebody gives you a gift, do you return it and scold them
> for this horribly immoral and anti-competitive act?
Huh? If they gave me that gift in order that other people would not
be in a position to give me any gifts in the future, I guess I
would. But that's the point - a single enlightened consumer is still
at a disadvantage when dealing with disengenuous practices like this
- I may not fall for it, you may not fall for it, but if most folks
fall for the trick, it's been played on you and me as well.
> > Doesn't this
> > leads to a situation where, in order to compete in the short run,
> > other companies are forced to do the same or lose customers?
>
> If my competitor is selling at a loss, I need to maintain enough of a
> presence in the market that people don't forget about me; and I need
> to keep up my *capacity* for production. But it's an excellent time
> to improve my *quality* and my *cost effectiveness*, because if some
> of that capacity is temporarily shut down for renovation it's no big
> problem: I *expect* my sales to temporarily drop.
How do you manage to maintain any of those things when you have no
money coming in? How do you pay rent on your facilities or pay your
engineers to design you that better, cheaper widget? If you and Mr.
Money-bags have similar factories, and they each cost $1M a month to
run, and you have $6M reserves, and he has $60M, and he dumps his
widgets on the market at a loss price that no short-term increase in
productivity can match - you will run out of money quickly. He can
sacrifice $10M so that you go out of business, and he now has the
total market and makes up his losses in a year or two. Your improved
widget that was slated for next year will never make it to market,
not because you didn't run a tight ship, or pay your workers enough,
or have a good product, but simply because your competitor dumped.
Mr. Bags will continue to sell his old-style, inefficient widget to
a mostly unknowing market.
Happens with OSes all the time.
> The only question is: do I have the reserves to survive the slow
> period -- or, failing that, can I convince bankers and venture
> capitalists to provide those reserves? Most likely this will be a
> *lot* easier if I can convince them that my competitor is indeed
> selling at a loss.
Why? Why would they care? If he has 50% share now, but by dumping
can get 100% soon, why wouldn't some VCs and bankers just side with
him? Maybe you get some VC/bank money too, but this just prolongs
the game, it doesn't modify the strategy in any real sense. And by
the way, you don't get loans from venture capital firms - you sell
off pieces of your company. So soliciting VC money in a situation
like this just means you're choosing which shark will eat you.
> > Wouldn't that just mean that the company with the most money to burn
> > at the start of this cycle will probably last longest? And after the
> > other competitors starve, the consumers are left with fewer choices
> > in the long run.
>
> The long run is precisely why this sort of predatory pricing doesn't
> work.
History does not bear you out. Diamond industry is a good example.
South African Cos did the dumping strategy for many decades, forced
other big players out, then leveraged their overwhelming mkt share
into strong agreements with intl buyers. New players, even with
advantage of better tech and deep supply and *much* cheaper prices,
were unable to break into mkt, which now sells precious gems for
many multiples of their production cost. Russians got let in on the
scheme only after making it obvious that they would use *state*
power to get in on the gravy. Rather than have the whole house of
cards tumble, SAs let Russians in on the deal. Competitors without
benefit of world's second largest armed forces are not so
fortunate.
> Suppose that a company manages, by selling at a loss, to become a
> monopoly (it has never [sic] happened, but let's suppose). This is only
> beneficial if it can make up that loss through later extraordinary
> profits
Untrue. If I sell at a 50% loss for a year, force competitors out,
and then simply keep the prices the same while my costs decrease,
it'll take me little time to make up my original losses - and I
don't have worry about mature competitors, excessive marketing, etc.
The consumers think they're getting a deal because the price has dropped
over time, but most won't realize that it's still higher than it could have
been, and they're stuck using version 1.0 when a faster, better, even
cheaper Mk II could have been to mkt in the meantime.
> > And that sucks - monocultures are prone to atrophy
> > and catastrophic failure.
>
> Fortunately, they don't survive without government intervention to
> prevent capitalism.
But when they fail, the catastrophe point is more profound.
Company stores were not protected by law, but rather enabled by the
lack of it's presence. When that system finally failed, it was
bloody and difficult - and involved *direct* and *physically
coercive* interference by the state. Having a system of law that
prevents abuses like that today has seemed to lead to more freedom
and security with *less* bloodshed.
> Reportedly, Japan was selling RAM at a loss, government subsidized,
> in order to take over the semiconductor business. And you read
> reports that Japan managed to force all US companies out of the
> commodity RAM business.
Of course, a big reason that the Japanese companies eventually
backed off their dumping strategies was because of the trade
sanctions threatened/carried out by the US gvt. in retaliation. I'd
rather have rules of engagement that stopped the economic warfare
from escalating in this manner.
> The truth is that Japan has yet to surpass the United States in terms
> of total RAM capacity produced. IBM's US production for its own use
> has always been more by itself than any two Japanese manufacturers'
> total output.
This doesn't jibe with what I know of semiconductor industry
history. Can you give a couple pointers to support?
> What Japan forced a bunch of US companies to do, was to stop
> producing RAM for the wholesale market. But those companies did not
> shut down their production facilities -- they diverted the facilities
> to more valuable processes, increasing their profitability.
If you are stating this as a universal, then it's just not true. I
am aware of several major RAM production facilities in TX that were
shutdown, then sold and reconfigured to other industrial purposes
altogether. The line engineers went to work for other co's (TI - >
Analog, in one case that I am personally familiar with, to
Gillette(!) in another).
> Remember that when Japan started this effort, RAM was selling at
> hundreds of dollars per megabyte, wholesale.
No, more like one hundred/meg, retail. I was alive in the early 80s too.
>Today it sells at dollars per megabyte, retail.
How many years later than it would have been? And how much economic
disruption was caused therefrom? And there's far fewer small players
in this mkt now not because of high production costs, but because
it's generally accepted that you need deep pockets/govt help to
survive in this industry of dirty tricks. You haven't made the case
that this is an example of the market producing best outcomes by
"allowing" dumping.
> > I'm not for excessive gubbamint regulation, but likewise, I wouldn't
> > be in favor of any completely unregulated market scheme which didn't
> > serve the ultimate interests of *individual humans* (ie consumers
> > and business people, not just the few richest businesses). I believe
> > that the goal of any market system should be to get the maximum
> > sustainable level of individual economic freedom and power for
> > *humans*, not corporations.
>
> Hm... start by eliminating the government interference in the free
> market that makes "corporations" possible...
So you're saying that we need to get rid of the idea of corporations
first? OK. I'd be up for that. How should we go about it?
- jeff
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