Comment by imtringued
4 days ago
You completely missed the point.
AnthonyMouse gave you a overly lengthy rebuttal without getting to the point but the cost structure of IP is as follows: the marginal cost of making a copy is low enough to be negligible compared to the fixed cost of creating it.
This means the theoretical marginal cost is equal to the development cost divided by the number of paying customers. Where the development cost can either be a one time expense or an ongoing expense.
Companies make the fixed investment (or take someone else's fixed investment like an open source project) and they charge market rate pricing. The difference between the marginal cost (which is dropping with scale) and the market rate is economic rent or producer surplus. Competing companies pop up and work on their own product because they see the producer surplus and want a piece for themselves. This is how you get many companies wast the producer surplus on reinventing the same software over and over again.
Now with open source software you have the opposite problem. The marginal cost is zero, but the fixed cost still has to be paid. This means that the customer gets something that they would otherwise have to pay market rate pricing for free, this is consumer surplus. The marginal cost that the consumer would have to pay to keep the project alive becomes irrelevant the more consumers there are, which makes open source a financial tragedy because it fixed the cost structure problem at the expense of self sacrifice.
> You completely missed the point.
No, I get the argument they were trying to make.
The premise is, if you don't have some way of excluding competitors then you're in a competitive market and larger companies have the advantage of lower fixed costs per unit. There are fixed costs other than R&D, like the capital cost of buying manufacturing equipment or regulatory certifications or things like that. In the abstract a larger company can then use that to charge lower prices and out-compete anyone else.
But past a certain size that doesn't actually happen anymore. If you're so small that your costs are 100% higher then you're probably screwed, but if your costs are <1% higher then there are plenty of other ways to make up for that.
> which makes open source a financial tragedy because it fixed the cost structure problem at the expense of self sacrifice.
Except that it actually works fine. You have a piece of community-developed software that it would costs you a billion dollars to produce from scratch and it works except for a few issues that are costing you a million dollars and would take half a million in development resources to fix. Half a million is less than a million and is way less than a billion. So each company hires a small number of developers to make the contributions most relevant to their own business and get what they want, rather than one company hiring a large number of developers to introduce all the principal-agent problems inherent in central planning etc.
This even works where you have 20 companies that are each losing $100,000 for not having a feature that would cost a million dollars to develop, because then instead of one of them contributing a million dollars in resources, they each contribute $50,000. And you don't need there to be perfectly exact accounting here because the company has already hired a couple of developers to add the feature that costs $500k and gets them $1M and can have the same people collaborate with other users on the feature they all need. Or they make a financial contribution along with a feature request and multiple companies wanting the same feature collectively provide enough to develop it.
Where it actually breaks down is where you have companies whose management is too daft to realize that it does work and then doesn't make any contributions. So they lose a million dollars in value because they didn't want to contribute $500k, or they pay a million dollars to license some proprietary software from a company who keeps the other $500k as profit instead of paying half that much to get the existing open source project into the state where they can use it.