Windows 7 and Movie DVDs: Examples of Price Discrimination
Apparently Windows 7 (like its predecessors Vista and XP) will give users a choice of multiple versions. See "Windows 7 SKUs announced: your worst nightmare has come to pass" for information about the versions and their distinguishing features.
On the surface, this "choice" gives users the ability to pay only for the features they want. But, what it actually represents, is an example of what economists call "price discrimination". Now, this term sounds bad, but conceptually it's not necessarily a "bad thing". The point I'm trying to make is that the reason for the different versions is not so much to give consumers greater choice, but more simply to maximise the profits of the producer.
In particular, Microsoft is employing a premium pricing strategy. The cost of developing Windows 7 is essentially sunk, and so can be spread out over all the versions (refer: "Pricing Information Goods, Price Discrimination, Pricing Digital Goods"). Therefore, the cost of supplying an additional copy of "Windows 7 Starter" is essentially the same as the cost of supplying an additional copy of "Windows 7 Ultimate" (I'm assuming minimal differences is packaging and number of discs). From the Wikipedia article on price discrimination: "by providing a choice between a regular and premium product, consumers are being asked to reveal their degree of price sensitivity (or willingness to pay) for comparable products." Other examples include bewildering choice of drinks at coffee chains and the pricing of business class airline tickets.
[An aside: "Hey, your an Apple fanboy - what about the two versions of Mac OS X: Client and Server?" The comparison is not really applicable, as these variations are clearly aimed at different types of installation. The Client version actually corresponds to all six flavours of Windows 7: it is intended for an individual's workstation. The Server version is intended to drive backend (i.e. server) systems, and corresponds to the separate Windows 200x Server products.]
For a detailed explanation of how price discrimination increases profits, I suggest you consult Wikipedia or an introductory economics book (e.g. The Undercover Economist or Naked Economics). I'll try giving the gist. In a free market for a product, there is a single price that applies for all units sold. This price represents the point where demand equals supply. Suppliers will continue to sell units of the good as long as the price matches or exceeds the (marginal) cost of producing that additional unit. Now, different consumers value the benefits of the product differently, so some would actually be willing to pay more than the market price if they had to. Those who aren't willing to pay the price miss out altogether. If the seller could charge different prices according to the class of consumers (e.g. by marketing a premium version), it could increase its revenue on the same total volume of sales. This in turn increase profits.
The case of "Windows 7 Home Basic", which is only available in emerging markets, is an example of third degree price discrimination, where "price varies by location or by customer segment, or in the most extreme case, by individual customer".
Those familiar with region coding of movie DVDs should recognise a similarity here. According to Wikipedia: "Price discrimination is especially applicable to movies, because the marginal cost of selling one copy (or viewing) is quite small, giving the seller great flexibility in pricing. There is great disparity among the regions of the world in how much a person is willing to pay for a DVD, and region encoding allows a publisher to sell a DVD for less money in the regions where the demand is low and more where the demand is high."
Note: I haven't mentioned the more contentious issue of Microsoft's predatory pricing through OEM distribution. See "Predatory Pricing - Microsoft's Modus Operandi" for an interesting discussion.
[Adelaide's maximum temperature was only 33.0 degrees Celsius (91 degrees Fahrenheit) today. The temperature continues to fall, but the humidity is increasing.]
On the surface, this "choice" gives users the ability to pay only for the features they want. But, what it actually represents, is an example of what economists call "price discrimination". Now, this term sounds bad, but conceptually it's not necessarily a "bad thing". The point I'm trying to make is that the reason for the different versions is not so much to give consumers greater choice, but more simply to maximise the profits of the producer.
In particular, Microsoft is employing a premium pricing strategy. The cost of developing Windows 7 is essentially sunk, and so can be spread out over all the versions (refer: "Pricing Information Goods, Price Discrimination, Pricing Digital Goods"). Therefore, the cost of supplying an additional copy of "Windows 7 Starter" is essentially the same as the cost of supplying an additional copy of "Windows 7 Ultimate" (I'm assuming minimal differences is packaging and number of discs). From the Wikipedia article on price discrimination: "by providing a choice between a regular and premium product, consumers are being asked to reveal their degree of price sensitivity (or willingness to pay) for comparable products." Other examples include bewildering choice of drinks at coffee chains and the pricing of business class airline tickets.
[An aside: "Hey, your an Apple fanboy - what about the two versions of Mac OS X: Client and Server?" The comparison is not really applicable, as these variations are clearly aimed at different types of installation. The Client version actually corresponds to all six flavours of Windows 7: it is intended for an individual's workstation. The Server version is intended to drive backend (i.e. server) systems, and corresponds to the separate Windows 200x Server products.]
For a detailed explanation of how price discrimination increases profits, I suggest you consult Wikipedia or an introductory economics book (e.g. The Undercover Economist or Naked Economics). I'll try giving the gist. In a free market for a product, there is a single price that applies for all units sold. This price represents the point where demand equals supply. Suppliers will continue to sell units of the good as long as the price matches or exceeds the (marginal) cost of producing that additional unit. Now, different consumers value the benefits of the product differently, so some would actually be willing to pay more than the market price if they had to. Those who aren't willing to pay the price miss out altogether. If the seller could charge different prices according to the class of consumers (e.g. by marketing a premium version), it could increase its revenue on the same total volume of sales. This in turn increase profits.
The case of "Windows 7 Home Basic", which is only available in emerging markets, is an example of third degree price discrimination, where "price varies by location or by customer segment, or in the most extreme case, by individual customer".
Those familiar with region coding of movie DVDs should recognise a similarity here. According to Wikipedia: "Price discrimination is especially applicable to movies, because the marginal cost of selling one copy (or viewing) is quite small, giving the seller great flexibility in pricing. There is great disparity among the regions of the world in how much a person is willing to pay for a DVD, and region encoding allows a publisher to sell a DVD for less money in the regions where the demand is low and more where the demand is high."
Note: I haven't mentioned the more contentious issue of Microsoft's predatory pricing through OEM distribution. See "Predatory Pricing - Microsoft's Modus Operandi" for an interesting discussion.
[Adelaide's maximum temperature was only 33.0 degrees Celsius (91 degrees Fahrenheit) today. The temperature continues to fall, but the humidity is increasing.]
posted by Bruno at 11:55 PM [permalink]
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