I would like to get an Austrian perspective on "Damaged Goods."
I believe this is the original article on the topic (someone correct me if I'm wrong): http://onlinelibrary.wiley.com/doi/10.1111/j.1430-9134.1996.00149.x/abstract
Terms of contract?
I don't have my books with me (in the process of moving), but Reisman discusses this briefly in Capitalism. He argues that in a competitive market it doesn't make a lot of sense for a firm to sell "damaged goods", because ultimately it's like awarding business to the competitors.
That's interesting. I thought many firms sell their damaged and overstocked good to places like Big Lot
Read until you have something to write...Write until you have nothing to write...when you have nothing to write, read...read until you have something to write...Jeremiah
He argues that in a competitive market it doesn't make a lot of sense for a firm to sell "damaged goods", because ultimately it's like awarding business to the competitors.
You mean instead of the business selling the damaged goods to consumers by itself?
That's a slightly different issue. I think what the OP is referring to are goods which are purposefully designed to force the customer to replace them at a much earlier date than otherwise. For example, selling an Ipod which breaks in a year, forcing the customer to return in a year. If you sell literally damaged goods at a discount, and advertise them as such, then the person is buying them for the cheaper price, so it's not as much of an issue of purposefully setting the customer up to return at a later date.
No guys, I'm talking about this: http://en.wikipedia.org/wiki/Damaged_good
Goods that are purposefully made inferior, for product differentiation. For example, the XYZ company spends $10 a unit to build Product A; then they spend $5 per unit to mess up half of the units/stock of products A, to create a new (inferior) Product B. So, now they're left with 2 different products; A (the superior product) which costs $10 per unit to make, and B (the inferior product) which costs $15 per unit to make. It's all explained in the wikipedia link, along with specific examples.
Once again, what is there to say about them other than what is the term of contract within the legal framework they are liable to?
I don't think your numbers really make sense. It wouldn't cost that much to "damage" a product.
Anyway, this is like ISPs limiting bandwidth. You pay more, you get better bandwidth. You pay less, you get less. How much it cost to make it is irrelevant. In a round about way, you are using the labor theory of value to price goods. That is a mistake. "Damaging" quality goods into inferior goods is sometimes cheaper than inventing new inferior goods. You sell each unit closer to its true value to the consumer and maximize profits. That is a good thing right?
Goods that are purposefully made inferior, for product differentiation.
Are you talking about products intentionally designed with a failure point? It's not an inferior product, but for example a company might design the best product they can with a general life span, as to keep loyal customers coming back to buy newer, updated products. Technological advancements make some products inferior simply based on what's currently available. Products such as vehicles have life spans, there's a point where the vehicle may not be as reliable as before, and causes someone to buy a new (used or new) car, but these life spans keep it to where new vehicles will be made, as the older ones become obsolete, in a sense (this depends how well you take care of your vehicle, a lot of people don't).
Isn't this basically what Apple does whenever they release new products? For example, they released the iPad without quite a few features like a camera, despite the fact that they include cameras with all their iPhones (so they have the capability) and when the iPad was opened up, there was plenty of space left empty inside, with room for a camera and other stuff.
Apple can see early on that next year after the initial release, when they release the second generation iPad, they'll be able to add these purposefully missing features, and get customers to buy the new iPad despite the fact that their previous one is technically still working.
The result? I've stopped buying any new Apple products almost three years ago, and will probably never buy from them again. Android is doing a far better job.
I don't need to pay premium prices for nerfed products.
I think a classic case is this. BMW sells two versions of their six cylinder 3000cc diesel engine. One is branded with the 25d code, the other with the 30d code. The engine itself is exactly the same unit, as is the fuel injection system, the radiator etc. The only differences are the electronics management system and turbocharger rating. The 25d is 3000€ cheaper. Since both cars cost well in excess of 40 grands, have the same (declared, the 30d is actually a gas guzzler if you are not more than careful with the throttle) fuel consumption and are available with exactly the same level of trim it apparently makes very little sense. But if you look at the specs you'll see the 25d has (very) slightly lower CO2 emission levels and, more importantly, 40 hp less. In many countries that will translate into lower insurance costs and lower taxes, especially for executive car fleets. BMW did their homework and realized with minimal expense they could offer a second model that, although not much cheaper to buy, can be palatable to some buyers because of lower running costs.
By "detuning" a product you can offer more choice to consumers while actually leveraging on existing know-how, manufacturing facilities etc. In the end it can even help keep the price of the "full spec" model lower because you are increasing the output of common parts if there's enough demand for both models. Absolutely nothing wrong it in my book.
I'm not really seeing a problem with this concept. I mean, if Intel makes a certain CPU chip that runs at speed X and costs $300, I don't see any real problem if they streamline thier production process by simply nerfing the same chip to run slower but sells at $250. As a consumer who might only needed the slower-speed processor, I'd love that, because it saves me $50 from having to buy the full-speed chip with excess power I'm not going to use. At the same time, Intel will likely be able to offer lower overall costs for ALL thier chips, because they're able to satisfy a greater variety of customers with a streamlined production process.
I guess someone could object that it's "unfair" to sell the faster chip at $300 when it could still be profitable at $250, but so what? There is no "fair" rate of profit. If a comparable chip can be sold for less by a competitor, that will bring down the price. And this is precisely what has happened in consumer electronics despite the production of "Damaged Goods".
At the same time, Intel will likely be able to offer lower overall costs for ALL thier chips
Please explain that to me, I'm not sure if I follow your logic.
I'm not worried about it being unfair. What I wonder, is how applicable this model is to the real world, i.e. how often do we actually observe this sort of thing. The Austrian approach of thinking of the market as a process, seems to indicate (to me at least) that this strategy would be questionable in many cases. If you go out of your way to make Product B inferior, that indicates to me you might not be producing this inferior product very cheaply, in which case a competitor should be able to have an advantage in a niche market for Product B.
We are all "damaged goods".
All of us can try harder and work more hours to increase our productivity for the benefit of others. We are intentionally holding back and blocking "features". Most economists don't get subjective value theory. They observe things in human action they think are unique and begin to assert they are special cases, come up with ill defined terminology, and proceed to describe these things in mathematical terms.