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PhiNotPi's avatar

In economics, what is it called when reduced demand cause prices to go up?

Asked by PhiNotPi (12198 points ) August 3rd, 2012

The well-known idea of supply and demand tells us that prices are likely to go up when there is a limited supply and an increase in demand. This question deals with the opposite case, when prices are high when there is a low demand.

In the field of software development, there is only the one-time cost of developing the software. Once the software is developed, an unlimited number of copies can be made.

Finale and Sibelius are competing companies in the music composition software business. Both of their main products cost around $600. Microsoft has a near-monopoly on operating systems, yet its main product (Windows 7 professional) costs $200. As far as I can tell, windows probably spends a lot more money on software development (per each piece of software) than Finale, but most of it’s products are cheaper.

I think that I understand the general reason for this- when a company sells fewer copies, it has to raise the price to make more money off of each copy. The opposite strategy is to lower the price to attract more buyers.

What is this phenomenon called, and when does it occur?

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9 Answers

fremen_warrior's avatar

They could be trying to “re-brand” the commodity into a veblen good, angling for more affluent customers who care more about status than overpaying. Hope this helps.

wundayatta's avatar

In this example, supply and demand are still working. Microsoft and Sibelius and Finale are not competing with each other. Microsoft is in an entirely different market.

The music software market contains many different packages, but those two are the most famous and the most complete. Thus, when someone wants a name brand, that’s what you buy, and you can’t go to the other name brand for a cheaper price, because there is no cheaper price.

If you want, you can find cheaper (free) music software, but it won’t do as much. Still, you may not need all those bells and whistles.

But essentially, there is no competition on price between those two items. If you want music software, you pay $600. In fact, they may not even compete on features, if they both do pretty much the same thing. So there is no competition.

There could be competition, if one wanted to improve the product or reduce the price. But probably there is a limited market for the software, so they know they can stay in business at that price, and keep on making enough sales to stay in business.

This might be called collusion or suppression of the market. Or a cartel.

fremen_warrior's avatar

@wundayatta it does not necessarily need to involve illegal activity. While a duopoly may invite such behaviour – especially if antitrust laws are lax – it does not mean it has to turn out that way, and there might still actually be competition between the two parties.

PhiNotPi's avatar

@wundayatta One of my points is that Microsoft pretty much does have a monopoly in operating systems, but they have a lower price. When it comes to non-mobile devices, Microsoft Windows is pretty much always used. Yet even with a monopoly and a much wider use, Windows is cheaper than other software products.

CWOTUS's avatar

Some of your facts are wrong, and aside from that you seem not to understand how software development really works in the real world.

In the first place, Microsoft certainly does not have a monopoly on operating systems. Granted it has a monopoly on Windows, since they own the franchise, but there are competing operating systems that will (and frequently do) run on Intel machines. So that’s the incorrect “fact”.

In the real world, software is very seldom developed and issued as a “finished product, all we have to do now is copy it exactly”. Else why would we have Windows 7, and Windows 8 on the way? Even with the major releases, there are always service packs, driver updates, security and other patches developed and applied all through the development and marketing of the product. In fact, support for Windows 7 will probably exist until Windows 9 (or higher) is introduced to the market.

In any case, the term you’re searching for is “economies of scale”. The music software that you mentioned is sold to a much smaller base of consumers. The developer obviously has to recoup his development costs and all other costs related to marketing and sales – with fewer overall sales of the product – and Microsoft has a much broader base of consumers willing to buy its product.

PhiNotPi's avatar

@CWOTUS To be honest, I’ve never taken a class in economics, business, or computer science ever.

zenvelo's avatar

What you are talking about is called economies of scale. It’s not more expensive because of limited demand, it is that there are less units to spread the costs over.

LostInParadise's avatar

It could be that the product is so specialized that there is a limited demand for it regardless of price. In economic terms that is expressed by saying that the demand is inelastic or, alternatively, that the demand curve is fairly flat, meaning that lowering the price will not result in increased sales.

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