Comment by nanis
4 years ago
When I saw the title and the comments before reading the article, I thought to myself "what Joel wrote[1] and I read almost 20 years ago made a ton of sense"[^]. Then I looked at the article, and realize that it opens with a link to Joel's article and then lists a bunch of strained examples (editors vs IDEs).
I would recommend that everyone read Joel's article[1] first. Note that increase in demand means "the value to the consumers of each and every unit of your good increases" or "at each price more units will be sold" ... That is, demand curve shifts to the northeast. Which is different from an increase in quantity demanded in response to changes in the quantity demanded.
Note also that while we tend to think in terms of individual companies' products, the demand for the output of the entire industry tends to increase when the complements become cheaper.
A great example of this is indeed Windows. Glossing over the details (such as Epson's ESC/P etc), prior to Windows, you knew that if you wanted to produce hardcopies with bar charts etc, you knew you had to have printer that worked with Harvard Graphics[2]. Post-Windows, you could make a printer and a driver for Windows and all software could use it. Which led to increase demand for both printers and software that uses printers. Harvard Graphics' real advantage was in being able to produce output on paper or physical slides. Once again, having Windows meant projectors could be used without worry that you needed to use a special version of the software with special support for the particular projector you had. That helped grow the projector industry and cut the hassle of having to have hard copies of the presentation (which you could not correct if you noticed a problem at the last moment).
So, when I read the linked post, I thought it is best to be avoided in favor of reading Joel's post again. Joel's post is not without flaws either:
> If you can run your software anywhere, that makes hardware more of a commodity. As hardware prices go down, the market expands, driving more demand for software (and leaving customers with extra money to spend on software which can now be more expensive.)
As an economist, I would have noted that it is not just that consumers have more money and an individual firm can extract more of it ... it is that as a result of a complementary good becoming cheaper, they value the thing you are selling more and therefore they are willing and able to spend more on the thing you (or other firms in your industry are selling).
Next, we should think about monopoly power and availability of close substitutes. :-)
[1]: https://www.joelonsoftware.com/2002/06/12/strategy-letter-v/ [2]: https://en.wikipedia.org/wiki/Harvard_Graphics
[^] For background, I am a Ph.D. economist, and taught micro at various levels, and I develop software for a living
Do you feel like this article is straining at bringing monopolies into the explanation? I think the “commoditise your complements” holds regardless of whether the business is, or wants to be, a monopoly. Joel’s article and the Hal Varian work don’t seem to be talking about monopolies. (Caveat: I didn’t read all the sources in detail)
Things work in similar ways however the market is organized. But a monopoly will have a much easier time extracting value from the activity than companies in a competitive market.
Except that the definition of monopoly power is that the company is facing a downward sloping demand curve and that it is operating on the elastic portion of it.
In general, that provides an incentive for other firms to produce a close substitute at a slightly lower price and eat away at your profits unless the government is there to stop them. Monopoly power cannot be sustained without government intervention. In addition, monopoly pricing incentivizes consumers to look for substitutes.
If you look in real life, you will see that monopoly power is sustained through restrictions on who can sell stuff and from whom you are allowed to buy.
2 replies →
There would not be a monopoly if there was close substitutes.
At time t0, there may not be ... but the exercise of monopoly power incentivizes others to produce substitutes and consumers to seek them.
> In addition to the radio relay services, MCI soon made plans to offer voice, computer information, and data communication services for business customers unable to afford AT&T's TELPAK service
E.g. MCI vs AT&T[1]
[1]: https://en.wikipedia.org/wiki/MCI_Communications#Founding