Competing Against Free
It’s pretty widely understood that the huge success of Craigslist has hurt big city daily papers badly by robbing them of precious classified advertising revenue. In part, that’s because Craigslist is really useful. But part of the picture, as Barron YoungSmith observes, is that Craigslist doesn’t try to maximize profits which makes it extremely difficult for a “normal” business to compete with:
Now, along comes Craigslist, which sees cutting these sorts of intermediaries out of the equation as a form of public service. It considers that mission so important that it is willing to forego huge potential profits and compete against classified pages everywhere while charging virtually nothing for what it offers. In that kind of environment, it’s pretty ludicrous to think that newspapers could survive.
I think this ultimately may wind up being an even bigger problem for efforts at commercial media on the content side than it is on the revenue side. After all, profit-maximization is not a natural form of human behavior. I think it’s best understood as a very idiosyncratic kind of pursuit. It happens to be one that’s economically rewarded because with money to invest tend to want to invest it with would-be profit-maximizers. Thus, in fields of endeavor where the ability to raise large sums of capital on reasonable terms is a huge advantage, a profit-maximization impulse winds up being a huge advantage.
But in the world of websites, it’s not clear that the ability to raise large sums of capital really is a huge advantage. The startup costs of a decent website are pretty small in the scheme of things. And there are lots of people and institutions—academics looking to bring their research to a wider public, think tanks and advocacy organizations looking to influence the public debate, corporations like Google looking to express their views on policy debates, students trying to get an edge in the job market, authors hoping to promote a book—with perfectly good incentives to run websites that don’t aspire to maximize profits.
Under the circumstances, I think it may prove very difficult for commerce-oriented enterprises to succeed over the long term. Someplace like a dry cleaner is able to make money because it doesn’t need to worry about being undercut by competitors who aren’t trying to earn a profit. If for some reason Bill Gates decided to pour $5 billion into a foundation dedicated to offering not-for-profit dry cleaning services to Washington, DC then the existing dry cleaners would be in huge trouble. They don’t have that problem because nobody wants to run non-profit dry cleaners. But lots of people want to write about political issues for reasons that have nothing to do with profit-maximization. And my sense is that organizations are increasingly doing this. CAP/AF was a think tank early adopter in terms of building robust in-house new media capacity, but to the best of my knowledge just about every think tank and advocacy shop in town would like to get in on the action. And ultimately, a proliferation of content that’s not supposed to make money is going to make it even harder than it already is for those trying to make profits to do so.
87 Responses to “Competing Against Free”
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June 4th, 2009 at 11:33 am
So, um, how does Yglesias expect to get paid in the future?
June 4th, 2009 at 11:37 am
So, um, how does Yglesias expect to get paid in the future?
Well, organizations like CAP don’t exactly pay (personal) “profit maximizing” salaries to their employees, either.
June 4th, 2009 at 11:38 am
Same way he’s being paid now- by an organization that exists to influence public discourse rather than to make a profit?
June 4th, 2009 at 11:38 am
As has already happened to Craigslist, look for a spate of harrassing legal actions against the non profits. There will be criminal complaints, allegations of intellectual monopoly infringement and miscellaneous other legal harrassments from the for profit enterprises.
June 4th, 2009 at 11:40 am
After all, profit-maximization is not a natural form of human behavior.
Uh… false.
And there are lots of people and institutions—academics looking to bring their research to a wider public, think tanks and advocacy organizations looking to influence the public debate, corporations like Google looking to express their views on policy debates, students trying to get an edge in the job market, authors hoping to promote a book—with perfectly good incentives to run websites that don’t aspire to maximize profits.
Are you trying to distinguish between the website maximizing profits and the website creator maximizing profits? I think it’s clear that the people behind every one of these examples are trying to maximize their own profits.
June 4th, 2009 at 11:40 am
One of the first things we learn in economics is that if there are “constant returns to scale”, then profit = 0. And for a business with as little overhead (fixed costs) as Craigslist, returns to scale are basically constant. So only nonprofits survive.
June 4th, 2009 at 11:41 am
What I found interesting was the quote’s author – Barron YoungSmith? – using the term “libertarian ideology” for Craigslist, meaning not pro-Business/pro-profits, but rather pro-open source. Genius! I’d like to see more of this.
June 4th, 2009 at 11:43 am
Same way he’s being paid now- by an organization that exists to influence public discourse rather than to make a profit?
CAP may not be profit-maximizing, but it’s donation-maximizing. There’s not really that big a difference. Check out the Ivy League schools.
June 4th, 2009 at 11:45 am
One of the first things we learn in economics is that if there are “constant returns to scale”, then profit = 0. And for a business with as little overhead (fixed costs) as Craigslist, returns to scale are basically constant.
I think the terminology is nonrival, nonexludable; which is actually the subtitle of a economic blogger.
June 4th, 2009 at 11:49 am
Yikes! Competition! Whatever will we do now?
Well, if cable can get people to pay for TV, and Coke can get people to pay for tap water, I’m sure the pundits here can find some way to produce added value for their opinions.
June 4th, 2009 at 11:52 am
And there are lots of people and institutions— … corporations like Google looking to express their views on policy debates,… —with perfectly good incentives to run websites that don’t aspire to maximize profits.
Google doesn’t want to maximize profits. Ha!
June 4th, 2009 at 11:55 am
This is also why I think Google will never lose its search-engine hegemony. Google’s apparently genuine interest in doing things besides turning a profit – all the way to the highest levels of the company – give it an edge that competitors like Microsoft can never truly ameliorate.
June 4th, 2009 at 11:57 am
“After all, profit-maximization is not a natural form of human behavior.”
Dumbest Matt statement ever? If it’s not, it’s high in the running…
June 4th, 2009 at 12:01 pm
Considering that lots of people could be making much more money by taking lots of side jobs or working extra hours, but in actuality they don’t take those opportunities because they want time to spend with their families/friends and on leisure pursuits, I would say Matt is exactly right that profit-maximization is not what most people ordinarily go for.
June 4th, 2009 at 12:04 pm
No, actually true. You’re way off base.
Profit-maximization (profit being the difference between your monetary revenues and your monetary expenses at the end of the day – net income to an accountant) is not a natural form of human behavior even in economic circles – except with your armchair economists who have no idea what they are talking about.
Utility maximization is a natural form of human behavior in all economic theory of which I am aware.
This may take the form of profit maximization. Or it could take the form of kicking back with a cold one and watching the game.
Or it could take the form of a business that only makes enough money to pay a decent salary to its small staff and pay its operating costs, while offering services that could earn it far greater profits.
Craigslist could make huge amounts of additional money if it charged a nominal fee in more markets just for real estate advertising (I haven’t used Craigslist in some time, but last I checked, they only charged for real estate ads in the New York and San Francisco markets – all ads everywhere else were free. Given the popularity of Craigslist in Chicago and Los Angeles and other big cities, there was a clear opportunity to extend that to other markets, but they had not done so – not that they haven’t done so since then).
Charge a nominal fee in a couple of other areas where they get huge numbers of ads posted on a regular basis, and then Craiglist could make massive amounts given it’s low cost structure and the fact that it wouldn’t require changing much of anything.
But Craigslists’ founder wants to maximize his utility. And his utility is maximized by giving away classified advertising and destroying newspaper revenue sources.
Bill Gates used to maximize his utility by maximizing his profits, it made him the wealthiest dude on earth.
Then he decided that giving away his money to worthy projects would do more to maximize his utility. So he dumped a bunch of money into the Bill & Melinda Gates Foundation, quit working at Microsoft, and took up philanthropy.
Which is kind of the exact opposite of profit maximization.
There are investment funds (mutual funds)out there that don’t strive to maximize profit, but instead to maximize utility – for example, there are “green” funds, funds which invest in companies that are producing green technologies. These aren’t maximizing profits in any sense. They are trying to generate some positive economic returns, while allowing people to capitalize green business ventures.
There are plenty of other niche investment fund areas out there which don’t strive to maximize profits, but strive to make some money while trying to acheive other objectives.
People who work for non-profits when they are plenty capable of working for a corporation and making a lot more money are another example of a group that is out for utility maximization rather than profit-maximization.
Profit maximization is not a normal state for humans. Utility maximization is. Some people maximize their Utility by maximizing their profits.
June 4th, 2009 at 12:05 pm
To clarify, I understand why CAP will continue to exist, and I even understand why CAP may want “in-house” media operations (for the sake of control). What I don’t quite understand is why CAP will need to pay much, if anything, for “in-house” blogging.
June 4th, 2009 at 12:06 pm
“After all, profit-maximization is not a natural form of human behavior.”
Dumbest Matt statement ever? If it’s not, it’s high in the running…
It’s correct. That people do things that are generally in their interests, construed broadly, in no way means that people
“naturally” engage in the much narrower set of practices of maximizing economic profit.
June 4th, 2009 at 12:07 pm
Dumbest Matt statement ever? If it’s not, it’s high in the running…
I think in this context you have to draw a line between “earning a profit” and “maximizing your profit.” The former is certainly a natural human economic tendency, but the latter suggests that all a person’s efforts are directed towards the singular objective of earning as much profit as possible, which is unrealistic.
Of course, it’s not like newspapers were ruthlessly maximizing profits – otherwise, they’d probably cut everything but the sports and classifieds. But Matt’s right in saying that part of the problem is that there are plenty of people out there even less interested in turning a profit.
June 4th, 2009 at 12:07 pm
Not sure how widely known this is, but academic journals get their content for free and use volunteers from the community to perform most of their editorial work.
In fact, academics usually have to pay to have their papers published. From Science, Nature, New England Journal of Medicine on down to the most obscure journals, there are typically several hundred dollars or more of “page charges” to be dealt with.
We’re willing to pay to play (as the journals know well), because getting our work out into the marketplace of ideas is fundamental to what we do.
June 4th, 2009 at 12:08 pm
You’re in no position to be disparaging Matt when you and “right” are too ignorant even to know how recent an invention in human history money is, let alone “profit”. (Hell, the proper accounting procedures to even accurately calculate profit are an even much more recent innovation- they weren’t fully developed until the medieval period.) No, profit- maximization is in no way “natural”, it’s a quite elaborate cultural construct.
June 4th, 2009 at 12:08 pm
Considering that lots of people could be making much more money by taking lots of side jobs or working extra hours, but in actuality they don’t take those opportunities because they want time to spend with their families/friends and on leisure pursuits, I would say Matt is exactly right that profit-maximization is not what most people ordinarily go for.
I think a lot of people in the financial industry thought they were engaged in “profit-maximizing” behavior when in fact their behavior caused the industry to lose billions and nearly wrecked the global economy causing Great Depression II.
June 4th, 2009 at 12:11 pm
And there are lots of people and institutions—academics looking to bring their research to a wider public, think tanks and advocacy organizations looking to influence the public debate, corporations like Google looking to express their views on policy debates, students trying to get an edge in the job market, authors hoping to promote a book—with perfectly good incentives to run websites that don’t aspire to maximize profits.
This suggests that content in the future will only exist to serve some promotional need or other. What a depressing prospect.
June 4th, 2009 at 12:11 pm
I agree with jerry’s post, but I would add that “utility maximization” is pretty meaningless in that sense. It simply states that the things that people do are the things that maximize some wholly undefined and speculative good, which the actor may or may not be fully aware of, which may or may not be defined in terms peculiar to a person or to a culture, and which may or may not be knowable to an outside observer.
June 4th, 2009 at 12:21 pm
“This suggests that content in the future will only exist to serve some promotional need or other. What a depressing prospect.”
No, the tendency of the argument would indicate that all content – in the past, now, and throughout the future – serves some promotional need or other. Newspapers aren’t different in that respect – they serve a promotional need by selling advertising. Book publishers aren’t different in that respect – they aim to sell books, and books are bought to fill some need (of course, that need may range from reading Aristotle’s De Anima to porn – but it’s all one form of need or another).
Socrates makes this explicit: Socrates searches out the young men of Athens because he loves them, and the young men of Athens sometimes listen to Socrates because they love and seek political power, and Socrates initially seems to be one of those Sophists who help you learn how to get power.
June 4th, 2009 at 12:22 pm
It’s not really clear to me that even if Craigslist were more interested in profits that newspapers would be able to compete with it. In the end it’s just that maximal profit income derived from printed classified ads is a form of economic rent that’s unsustainable in the current technological environment.
To the extent they depended on income from the classifieds, newspapers are merely another in the long line of economic actors flattened by technological change. (Kind of the way hand copyists were put out of business by the printing press.) It isn’t Craigslist’s non-profit attitude that destroyed newspaper classifieds; it’s the fact that the technology created a better alternative (cheaper and less labor intensive, more widely available, searchable) to the traditional ink-on-paper classified ad.
June 4th, 2009 at 12:23 pm
jerry seems to have gotten here pretty quickly and laid it out. what people miss when they mistake profit-maximization for utility-maximization is that profit, i.e. cash monies, is isn’t an end goal for most people; rather, it’s a convenient, fungible resource that can be leveraged or exchanged in order to acquire various ultimate utilities. And when an individual’s desired utilities are things like “time to spend with the family,” “ability to keep a flexible schedule,” etc. the pursuit of profits is often an inefficient way to achieve them (since quite a bit of money is required to protect these things) in comparison to striking an unprofitable arrangement that explicitly provides and protects these specific utilities.
Most of the “competing with free” situations that are increasingly appearing these days arise from this kind of utility focus, and working out how our capitalist economy should interact with them is going to be increasingly important as info technology becomes a bigger and bigger part of our daily lives.
June 4th, 2009 at 12:27 pm
“I agree with jerry’s post, but I would add that “utility maximization” is pretty meaningless in that sense. It simply states that the things that people do are the things that maximize some wholly undefined and speculative good, which the actor may or may not be fully aware of, which may or may not be defined in terms peculiar to a person or to a culture, and which may or may not be knowable to an outside observer.”
But the point is that utility maximization doesn’t look like (or rarely looks precisely like) profit maximization. We always knew that individuals very rarely operated on profit maximization, but the theory was that firms do generally profit-maximize and don’t utility maximize. If firms don’t profit-maximize, but instead utility-maximize, then a lot of neoclassical theory of the firm is simply invalid. Which means that the model of the marketplace neoclassical theory is using is simply irrelevant or a triviality.
June 4th, 2009 at 12:28 pm
It all comes down to one thing: is content-for-money sufficiently more attractive to consumers than content-for-free, to justify the price? Nobody thinks that Disney is going to be displaced by people doing animated movies for the sheer fun of it all. The pay content that’s at risk is pretty circumscribed, and what it has in common is that it’s relatively easy to do at a relatively high level of accomplishment, to the point where plenty of people will do it for non-economic gratification.
June 4th, 2009 at 12:31 pm
I think this ultimately may wind up being an even bigger problem for efforts at commercial media on the content side than it is on the revenue side. After all, profit-maximization is not a natural form of human behavior.
Right. Adam Smith never conceived of geeks who like to do code and build cool web shit just for the fun of it.
June 4th, 2009 at 12:32 pm
I agree with jerry’s post, but I would add that “utility maximization” is pretty meaningless in that sense. It simply states that the things that people do are the things that maximize some wholly undefined and speculative good, which the actor may or may not be fully aware of, which may or may not be defined in terms peculiar to a person or to a culture, and which may or may not be knowable to an outside observer.
Yeah. Unless you use a completely tautological definition of utility, people aren’t in general even utility maximizers, let alone profit maximizers. We often have just too poor an understanding of what actions or tradeoffs will actually give us satisfaction.
That’s in addition to the fact that people have lots of complicated motivations, including genuinely altruistic ones. Those sorts of preferences may factor into utility maximization, but they pretty much blows the idea that profit maximization is “natural” completely out of the water.
June 4th, 2009 at 12:32 pm
Craiglist’s factsheet says it is not a nonprofit and that “craigslist was incorporated as a for-profit in 1999.”
June 4th, 2009 at 12:35 pm
In fact, conventional newspapers often fairly conspicuously utility maximize, rather than profit maximize. Think of all the press baron dynasties – the Sulzbergers, Chandlers, Scripps, Hearsts, Pulitzers, Grahams, Binghams, and so on who often prefered to pursue opportunities to gain in prestige or political influence over opportunities for more profit.
June 4th, 2009 at 12:45 pm
“Nobody thinks that Disney is going to be displaced by people doing animated movies for the sheer fun of it all.”
Not only is this increasingly possible in the future, to some extent, it’s already happening. Many animated movies have been created by individuals for very little money: Lotte Reiniger animated The Adventures of Prince Achmed (1926) in her attic by using cutouts, and Starevich began animating in 1909 by using the dead insects in the museum he worked at as puppets.
June 4th, 2009 at 12:55 pm
“This suggests that content in the future will only exist to serve some promotional need or other. What a depressing prospect.”
No, the tendency of the argument would indicate that all content – in the past, now, and throughout the future – serves some promotional need or other.
James is easily depressed.
June 4th, 2009 at 1:01 pm
As game theorists and experimental economists will tell you, people aren’t reliably any kind of rational utility maximizer even when they have complete information about the available outcomes.
And on this foundation, on the assumption that humans are or should be rational utility maximizers, rests the entire Chicago Schooll of economic thought and the whole structure of libertarianixm.
June 4th, 2009 at 1:09 pm
This suggests that content in the future will only exist to serve some promotional need or other. What a depressing prospect.
I think that depends on how you define “promotional”, and whether you read it as an intrinsically dirty word.
I mean, you can certainly say that CAP and Matt are “promoting” something (a specific progressive policy agenda). But that’s not at all the same as shilling laundry detergent. They’re doing it for genuinely altruistic reasons – because they think it’s what the country needs (they might be wrong, of course, but that doesn’t mean they’re insincere). You can say the same thing for much of what Google is promoting politically.
And then I’m not sure you can even say that services like Craigslist (or Google) that are run in a public-spirited, possibly less-than-profit-maximizing way are “promoting” much of anything. They’re just providing a service.
June 4th, 2009 at 1:16 pm
My neighborhood used to have a not-for-profit dry cleaner. At least it ended up not-for-profit. Now I don’t have a dry cleaner within walking (and laundry-carrying) distance.
June 4th, 2009 at 1:17 pm
Absolutely true. Utility maximization is a personal thing. And, as Jack says at 30, people don’t even do a good job at utility maximization. People don’t really know what actions will result in greatest utility. That’s why we have opportunity costs. The cost of the action not taken when a choice was presented.
Forprofit – yes, craigslist is a for-profit. Anyone who thinks otherwise is mistaken.
However, it is not trying to maximize it’s profits. If it was, then there would be fewer ads in some areas due to fees being charged in the areas where Craigslist could charge and not lose too many advertisers. Real Estate/apartment rentals ads in every big market, for starters.
Steve @ 20: I would argue that although the concept of profit has been known for a number of centuries (and I would say that the sumerians came up with some concept of profit, given that a lot of those cuniform tablets that they’ve discovered seem to be counting things – which is fundamental to profit), the idea that profit can be accurately calculated is still very much up to debate.
Financial instruments, stock options, unrealized gains, historical value vs fair value, and more abstract concepts make it hard to determine what profit really is.
And companies are getting more and more inventive at creating things that generate “profit” in a more and more abstract sense. Be it the big banks, investment houses and others with funky securitized assets and CDO’s in 2008, or Enron’s off-balance sheet investments in the early 90’s, or the tech bubble with all the dot com millionaires instantly wiped out when their options went kaput, and a lot more things, the concept of profit is very abstract and not easily measurable.
Accountants and auditors try to keep up, but businesses keep finding new and better ways to create abstract profits.
June 4th, 2009 at 1:29 pm
Woo! A discusion on economics not controlled by the “greed as good” crowd.
The notion that people are rational economic actors never made any sense. Monetarism should have died of humiliation 35 years ago when Milton Friedman predicted there never would be an Arab oil embargo because it would cost the Saudis too much money. He proved you can win a Nobel Prize in economics while lacking a fundamental understanding of human nature outside of the market.
Neither utility nor profit need to be exactly defined to work as motivating forces. If a Sumerian villager traded a basket of grain for a Chaldean goat to make a good bride-price for a girl he fancied, no one was counting exact numbers. The same could be said for a account manager who takes up teaching to deal with his burn-out and spend more time with his children.
June 4th, 2009 at 1:43 pm
“After all, profit-maximization is not a natural form of human behavior.”
But it is a natural form of business behavior.
A couple of thoughts on this:
1) Craig is now charging for job postings, something he wasn’t doing a year ago, at least not in the Bay Area
2) I don’t know what his balance sheet looks like, but I read their revenues to be somewhere in excess of $150M and I doubt there costs are anywhere near that. With EBay owning a 25% stake, I would assume there’s some healthy profits there.
3) Lose leaders have always been a key Internet strategy. Getting people on the site is step one, making money step 2. Craig’s accomplished both.
June 4th, 2009 at 1:44 pm
Thanks for the economics 101 lectures, jerry and others.
Let’s return to Matt’s claim: “profit-maximization is not a natural form of human behavior.”
He did not say “profit-maximization is not the only form of self-interest” or “people are not profit-maximizing at all times,” both of which are obviously true. The claim he made is logically equivalent to “profit-maximization is an unnatural form of human behavior.” This is false.
I’m not sure what the relatively recent development of money has to do with anything. If caveman Thor is hunting for the village and he comes across two sleeping deer — one big and strong, the other small and scrawny — I think we all know which he’s going to kill. Just because it’s meat not money doesn’t make it not profit.
June 4th, 2009 at 1:45 pm
One other comment: how can an outsider really know if he is trying to maximize profits or not? Short term decisions often are made for long term gain.
June 4th, 2009 at 1:49 pm
`I don’t know what you mean by “glory”,’ Alice said.
Humpty Dumpty smiled contemptuously. `Of course you don’t — till I tell you. I meant “there’s a nice knock-down argument for you!”‘
`But “glory” doesn’t mean “a nice knock-down argument”,’ Alice objected.
`When I use a word,’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.’
`The question is,’ said Alice, `whether you can make words mean so many different things.’
`The question is,’ said Humpty Dumpty, `which is to be master — that’s all.’
June 4th, 2009 at 2:06 pm
Business itself recognizes that humans don’t profit maximize.
That’s why you see all those nubile young ladies hired as drug reps calling on doctor’s offices. Or all those fancy business lunches and golf outings.
June 4th, 2009 at 2:16 pm
Matt -
I am simply astounded that you fail to even mention FOSS (Free and Open Source Software) here. Actually, I’m continually astounded at how little progressives in general seem to be aware of the nature, scale, and significance of the FOSS movement. Even more surprising is how little attention economists in general have paid to FOSS, despite the fact that the very existence of the FOSS movement fundamentally challenges many of the basic underlying assumptions made by the classical economic model.
Are you aware that the software contained in the Debian or Red Hat repositories would be valued at tens of billions of dollars were they conventionally copyright protected assets? That FOSS software utterly dominates various sectors of the IT market many times larger than ones served by Microsoft and Apple? That the FOSS movement almost totally wiped out the entire enterprise big iron UNIX market with the notable exceptions of IBM and Oracle who manged to survive only by working with FOSS rather than competing directly against it?
As for user generated content, did you know that Stallman–annoying schmuck though he may be–was predicting almost thirty years ago that Free Software ethos (in the form of copyleft) would eventually migrate from software to other domains covered by copyright? That almost all of the “Web 2.0″ sites were created people who were at least tangentially connected with the FOSS movement?
But the most interesting migration of the FOSS ethos was the phenomenon of Groklaw. When SCO sued IBM over intellectual property rights claims for code, conventions, and practices contained in Linux the FOSS movement coalesced around the Groklaw site. At first it was just pj’s personal blog and interested individuals went there to learn about the case from someone who had a solid grasp on the legal matters involved. Then it quickly transformed into a place where engineers and computer scientists could educate and collaborate with lawyers, including some very prominent legal academics. Likewise the geeks could go to Groklaw to get a top notch education on how intellectual property law works. The end result was a collaborative community representing one of the largest and most impressive legal brain trusts ever assembled anywhere in the world. Additionally you had literally thousands of interested grassroots volunteers doing the yeoman’s work of paralegals and pouring over public documents covering a period of almost 40 years. I’m inclined to believe that it would be financially impossible for any private entity to have intentionally assembled the kind of resource which spontaneously grew around Groklaw.
I suppose all of what I’ve said is just a long way of saying that this posting induced a bit of deja vu. In the mid and late 90s the question of how to compete with or make money off of what is essentially given away for free was salient. Now it’s old hat.
June 4th, 2009 at 2:17 pm
`When I use a word,’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.’
Maybe this link will help you out, Humpty.
June 4th, 2009 at 2:22 pm
I’m not sure what the relatively recent development of money has to do with anything. If caveman Thor is hunting for the village and he comes across two sleeping deer — one big and strong, the other small and scrawny — I think we all know which he’s going to kill. Just because it’s meat not money doesn’t make it not profit.
It’s always dangerous to talk about what’s “natural” in a creature with brains and behavior as complicated as a human, but I’d hazard to say that what caveman Thor is doing is not maximizing meat either. Once he bags one of the deer, he’ll knock off for the day (or the week, depending on how long the meat lasts).
And it’s thought that hunter gatherers in general, by virtue of bountiful natural environment and extremely low population densities, had a relatively short “workday”. Once they’d gathered enough tubers for the day, they called it quits – they didn’t keep going until there were no more tubers to gather or deer to kill.
This is behavior like lions, not stockbrokers.
Inventions like surplus production for trade, specialization, currency, etc., are all important. They produced increases in efficiency vital for sustaining high levels of human population. But they’re really no more “natural” than transistors or atom bombs.
June 4th, 2009 at 2:30 pm
The premise of this post is false. Free IS the profit-maximizing price on the internet. Regardless of the business ideology of its founders, if craiglist tried to squeeze much more money out of the market than it did, someone else would start a copycat website and take all the competition. There is nothing that companies like craigslist that suggests they aren’t profit-maximizing. They are just competing in a different kind of market.
June 4th, 2009 at 2:32 pm
Brad -
Dumbest Matt statement ever? If it’s not, it’s high in the running…
Go read your Weber. The values and practices necessary to a functioning capitalist economy didn’t arrive on the scene until very late in game.
June 4th, 2009 at 2:41 pm
The premise of this post is false. Free IS the profit-maximizing price on the internet. Regardless of the business ideology of its founders, if craiglist tried to squeeze much more money out of the market than it did, someone else would start a copycat website and take all the competition. There is nothing that companies like craigslist that suggests they aren’t profit-maximizing. They are just competing in a different kind of market.
That’s assuming markets that are substantially more frictionless than even the internet.
Being free certainly helped it initially, but it’s brand is strong enough now that it’s opened a big exploitable gap from its competitors. As others have pointed out, Craigslist does charge for certain kinds of ads in certain markets, and I think there’s a strong case that it could be charging even more if it wanted to.
June 4th, 2009 at 2:46 pm
“After all, profit-maximization is not a natural form of human behavior.”
But it is a natural form of business behavior.
not a natural form of business behavior either. Really, you’d have to be incredibly ignorant of the real world not to get how unnatural profit maximization is for either individuals or organizations.
June 4th, 2009 at 2:53 pm
As has been no doubt variously noted newspapers cost a ton to print and going online exclusively means totally eliminating the cost of printing and distributing the things.
June 4th, 2009 at 2:56 pm
That’s assuming markets that are substantially more frictionless than even the internet.
Maybe they could make more money next month by charging, but it wouldn’t take long before they would be replaced. Free is the rule of the internet, not the exception–what major sites do charge for their services? Not youtube or facebook or google. And these sites have even stronger branding than craiglist. It’s very hard to believe that craigslist could get away with charging for ads for very long.
Plus, charging itself detracts from the branding. craiglist can’t raise prices now and then when the competitor arises lower them again, because it will lose more than it gains in reputation in the process. The expectation of freeness on the internet is too strong.
June 4th, 2009 at 3:03 pm
It’s very hard to believe that craigslist could get away with charging for ads for very long.
Craigslist has been charging for job ads in San Francisco for a very long time, possibly from the very beginning. And they’ve been charging for job ads in many other cities for a years. They also charge for brokered apartments in NYC.
June 4th, 2009 at 3:15 pm
Really, you’d have to be incredibly ignorant of the real world not to get how unnatural profit maximization is for either individuals or organizations.
This.
True profit maximizing firms (i.e., marginal revenue = marginal cost) are vanishingly rare. Other pricing methods are a LOT more common, usually just ad hoc formulas where price = average cost + some markup.
And that’s ignoring all of the numerous and conflicting instutional motives that are going on, such as the short-term non-monetary interests of managers.
June 4th, 2009 at 3:20 pm
As more newspapers go online exclusively too I think you might see the whole subscription model change with subscribers offered things like running discounts at local businesses (stores and service providers) and maybe direct access to querying experts on everything from finances/taxes to legal stuff, gardening, car repair, career, who knows. Increasingly, authorities on different things are starting to charge online to directly query them.
June 4th, 2009 at 3:21 pm
Craigslist has been charging for job ads in San Francisco for a very long time, possibly from the very beginning. And they’ve been charging for job ads in many other cities for a years. They also charge for brokered apartments in NYC.
That’s part of the windfall you get for not charging for most things. It certainly doesn’t support the premise that craigslist isn’t profit-maximizing.
June 4th, 2009 at 3:28 pm
MQ wrote:
“not a natural form of business behavior either. Really, you’d have to be incredibly ignorant of the real world not to get how unnatural profit maximization is for either individuals or organizations.”
I’m far from ignorant, being that I’ve been at this for 15 years. I’d be interested to see you expand on this.
June 4th, 2009 at 3:34 pm
“And there are lots of people and institutions—academics looking to bring their research to a wider public, think tanks and advocacy organizations looking to influence the public debate, corporations like Google looking to express their views on policy debates, students trying to get an edge in the job market, authors hoping to promote a book”
Matt-
These things can all be considered a form of profit and have value.
June 4th, 2009 at 3:35 pm
That’s part of the windfall you get for not charging for most things. It certainly doesn’t support the premise that craigslist isn’t profit-maximizing.
You’d obviously need to know some more details, but just look at the prices. It’s $75 for a job ad in SF, $25 in other cities. It’s not hard to imagine that they could sustainably raise prices to $35 or $40 in at least a few more markets (NYC, DC). That’s still substantially below newspapers and services like Monster, and it seems unlikely to affect craigslist dominance in the internet classifieds niche.
I’d say the reason they don’t is just as they say: they’re not out to scrape out every penny. It’s certainly not evidence that everything on the internet is $0.
June 4th, 2009 at 3:38 pm
Jack… I was actually posting jobs there for free in early ‘08, so I’m fairly certain charging for posting is relatively new.
Also, having learn the MR = MC rule in Micro, I’ve tried to apply it, but I’ve always found it harder than advertised,
June 4th, 2009 at 3:43 pm
Jack… I was actually posting jobs there for free in early ‘08, so I’m fairly certain charging for posting is relatively new.
Note that they still don’t charge in all cities.
But I know that they’ve been charging in DC for at least 2 years (placed a job ad early in ‘07). And I know charging in SF dates back a lot further. Neither practice seems to have affected their dominance in the least.
June 4th, 2009 at 3:45 pm
Wikipedia says they started charging $25 in NYC and LA in 2004.
June 4th, 2009 at 3:47 pm
Yglesias can get paid the same way musical groups do–go on tour. Also, book sales.
June 4th, 2009 at 3:50 pm
These things can all be considered a form of profit and have value.
Only if you define “profit” in a useless, all-inclusive way.
Spending time with your children has “value”, but nobody would call that value “profit”. The word you’re looking for is “utility”, but see the discussion above. If anything, humans are probably even worse at utility maximization than at profit maximization.
June 4th, 2009 at 3:51 pm
This isn’t the full picture. Even if Newmark did have the profit motive, the cost of web advertising is so cheap that there would virtually always be someone somewhere else able to undercut his price. So prices would end up close to cost of operation, which is pretty low. This didn’t happen to eBay because they got in the game early (pre-Google!) and captured the market. People are willing to pay to sell on eBay because it’s a captive market–eBay provides buyers with convenience and selection, just like Wal-Mart. But now with things like Google Product Search in the picture (another free service) that may change a bit.
June 4th, 2009 at 4:00 pm
Also, having learn the MR = MC rule in Micro, I’ve tried to apply it, but I’ve always found it harder than advertised,
And I daresay an awful lot of the world’s businesspeople feel the same way. If they’ve ever even heard of it.
Which is why they usually focus on maximizing something else, like net revenue. And, being human, they invariably fall short even at that. In real life MR almost never equals MC.
June 4th, 2009 at 5:48 pm
Very interesting post. I think the assumption at the root of it–that media creation takes a small capital investment–is wrong in many cases. Take a look at what is being cut: international reporting, investigative reporting. And video content is much more expensive especially in the long form like hour-long shows and films. I don’t think we’ve seen the downsides to Free come to total fruition yet. I’m not an old-media stalwart. But I worry a lot about Free moving us to dumbed-down single source content.
June 4th, 2009 at 6:29 pm
MR=MC is only profit maximizing equilibrium in perfect competition or perfect price discrimination. The vast majority of firms have monopolistic powers of some sort and substantial legal and technical barriers to price discrimination.
June 4th, 2009 at 6:31 pm
Actually, you are, once again, wrong.
If Mr. Thor the caveman comes across two sleeping deer (very unlikely for many reasons, by the way), one big and one small, he would have to make a decision, any one of which may maximize his utility, depending on his thought process and his beliefs.
Objectively, his best choice would probably be to kill the small, scrawny deer. The big strong deer is more likely to survive and reproduce, helping ensure Thor will have more deer to eat later on. Plus a big deer may provide more meat than Thor can eat, and since Thor lacks a refridgerator, that meat would go to waste. If Thor has other cavemen to feed, that likelihood may be reduced, but not eliminated.
Furthermore, the scrawny deer is detrimental to the overall gene pool of the deer. If it reproduces, then the offspring will be more likely to be scrawny as well.
Now, if he were really profit maximizing though, he’d say the hell with the long term outcome, and take the risk inherent in trying to kill both deer (that is, he fails to kill both deer and they run away). He’d look like supercaveman when he got home if brought back 2 deer, though. Big profit!
Of course, that may mean that all the excess meat rots, and his family goes hungry.
Or it might mean he totally blows it, and both deer escape, and Thor (and his theoretical family) go hungry.
Or, as a final alternative, Thor may just not like deer and decide to go forage for some nuts and berries.
And there are lots more outcomes. What if there’s a wolf down the road? It may be able to kill and eat the scrawny deer, but the strong deer may be too much. So the wolf could come kill Thor instead. Or, Thor could try to eat the leftover deer meat after its foul. And die. Thor could decide to go the berry and nut route, pick an almond, and die from cyanide poisoning.
The point is, none of these behaviors is “profit-maximizing” as you assert. There is no profit to be had. There is utility to be gained. Thor has to figure out what maximizes his utility, but he may yet choose an option that decreases his utility, like killing both deer, eating foul meat, and dying. But at least he felt like a mighty hunter.
Profit requires, at minimum, an economy. At least a barter economy. Someone has to end up with more stuff than others to have a profit. But a profit does not equal utility. For some people, or in some cases, it may be the most valuable outcome, but certainly not always. And it’s certainly not an intrinsic value built into the human mind.
June 4th, 2009 at 6:31 pm
I’d say the reason they don’t is just as they say: they’re not out to scrape out every penny. It’s certainly not evidence that everything on the internet is $0.
I don’t disagree with this at all. But it is still true that charging $0 for something on the internet is not evidence of a lack of profit maximization–sometimes, and very often on the internet, $0 really is the profit-maximizing price.
June 4th, 2009 at 6:39 pm
Objectively, his best choice would probably be to kill the small, scrawny deer. The big strong deer is more likely to survive and reproduce, helping ensure Thor will have more deer to eat later on.
This is the group selection problem in biology and the public goods problem in economics. Thor gets 100% of the benefit from killing the big deer over the small one, but the benefit from not killing it is shared with everyone else. So, no, it will almost always be utility maximizing to not consider the long term social costs and just get as much as you can right now.
June 4th, 2009 at 7:19 pm
Jerry… you’d never survive in the wild and Thor kills the big dear.
June 4th, 2009 at 7:20 pm
dear = deer
June 4th, 2009 at 8:48 pm
MR=MC is only profit maximizing equilibrium in perfect competition or perfect price discrimination. The vast majority of firms have monopolistic powers of some sort and substantial legal and technical barriers to price discrimination.
Um. Pretty much by definition the profit maximizing point is always where MR=MC: if marginal revenue is greater than marginal cost, you could be making more profit by producing some more units. If it’s less, you should be reducing output because you’re losing money on the marginal unit.
This goes for various degrees of monopoly and price discrimination too, the shapes of the demand functions are just different. (Thus with price discrimination, you have MR=MC at a different point in each segmented market.)
The problem is that in the real world companies and decision makers just don’t know all the data to determine these functions, or they use some other strategy out of habit, or because a certain pricing structure is built into all the institutions in a given industry, or because doing so conflicts with the idiosyncratic considerations of individual managers, etc. etc., and often all of the above together.
June 4th, 2009 at 10:01 pm
This suggests that content in the future will only exist to serve some promotional need or other. What a depressing prospect.
Welcome to the future of the music industry where songs will be given away as promo items to lure fans into buying tickets to see a band play live.
June 4th, 2009 at 10:25 pm
Welcome to the future of the music industry where songs will be given away as promo items to lure fans into buying tickets to see a band play live.
Yeah that worked out terribly for the Grateful Dead. It’s not like they were the biggest money making act of all time.
June 5th, 2009 at 12:06 am
I don’t disagree with this at all. But it is still true that charging $0 for something on the internet is not evidence of a lack of profit maximization–sometimes, and very often on the internet, $0 really is the profit-maximizing price.
Yeah. Which is why the evidence for Craigslist lack of profit maximization is not that they charge $0, it’s that they don’t. They charge more than $0.
And they charge more than $0 in such a way that it seems very likely they could be charging even more without changing the market dynamics.
June 5th, 2009 at 12:18 am
If you’re still not convinced, just consider the arbitrariness of the price structure for job ads: $75 in SF, $25 in a couple dozen other large markets, $0 everywhere else.
Now what are the chances that $25 is exactly what the market will bear in both NYC and Portland, but $0 in Toronto? More likely it should be something like, say, $26 in Portland, $37 in LA, $55 in NYC. Or whatever.
The point is there should clearly be more than three price tiers. Even 1 more price tier would obviously improve their profits a lot. 5 or 10 would be even better. Or they could just go ahead and figure an individualized price in each city.
But they don’t. They’re leaving a lot of money on the table.
(You might argue this would add complexity to the pricing, but I don’t really buy that. There’s already 3 tiers to keep track of. A few more is still going to be WAAAY less complicated than figuring out newspaper rate sheets, plus the online order form can show even complicated rate structures pretty clearly. Besides, most advertisers are only going to be interested in one or two cities anyway.)
June 5th, 2009 at 3:00 am
I have no confidence that craigslist is actually profit maximizing. All I’m saying is that Matt’s argument that craiglist’s free prices suggest a lack of profit maximization is false–another, better argument towards the same end may exist and be valid. That said, it’s hard to think of a non-profit-maximizing reason that craigslist would charge $75 in SF and $25 in NY either.
June 5th, 2009 at 3:07 am
Um. Pretty much by definition the profit maximizing point is always where MR=MC: if marginal revenue is greater than marginal cost, you could be making more profit by producing some more units. If it’s less, you should be reducing output because you’re losing money on the marginal unit.
Yeah, obviously. Don’t know what I was thinking.
June 5th, 2009 at 6:34 am
Matt’s argument that craiglist’s free prices suggest a lack of profit maximization is false
Well, technically the argument was in the quote, and said that Craigslist was willing to “forego huge potential profits” and charged “virtually nothing” (which seems a fair characterization of $0-$25 prices in a market where others charge more like $400).
That said, it’s hard to think of a non-profit-maximizing reason that craigslist would charge $75 in SF and $25 in NY either.
I think it’s the pricing of someone who isn’t really interested in pricing (or, to the extent they are, is deliberately and arbitrarily holding down prices in order to increase quantity sold). SF is higher for historical reasons, and the other for-pay cities are a round number that’s high enough to bring in a little revenue, but not high enough to be a burden.
It’s the garage sale model: you’re more interested in getting the stuff out the door quickly than in making the optimal amount off of it, and not interested in spending a lot of time thinking about what number to put on each tag – “Everything $5″.
June 5th, 2009 at 11:57 am
[...] local priest shortage continues. A former street vendor is running for City Council. Craigslist is too nice for newspapers to compete [...]
June 5th, 2009 at 3:36 pm
Perhaps, but the content they offer for free, regardless of their motive, still represents competition for those seeking to charge for content.
June 5th, 2009 at 4:01 pm
[...] Think Progress [...]
June 8th, 2009 at 3:29 am
Damn your readers are snarky. Online information is a buyer-driven market and the information gap is closing. I don’t think this spells the end for newspapers, which have become increasingly driven by the profit incentive. Newspapers still have the comparative advantage in advertising for goods that have more inelastic demands- cars or homes for example. I don’t have a model to prove this, I would be more comfortable going through the paper than craigslist.
June 8th, 2009 at 4:54 pm
[...] Matt Yglesias—who himself blogs politics for the Center for American Progress thinktank—wrote about this possibility last week. Tim Cavanaugh of Reason magazine argues that public-relations professionals could start [...]