It’s kind of unclear what a marginal unit is for a software company like Reddit, but let’s just say it’s one user of their software
Profit maximizing firms produce until marginal cost = marginal benefit
Marginal benefit is 50 times higher
Therefore firms will accept 50 times higher marginal cost
Let’s suppose that the percentage of this additional marginal cost which goes to labor remains unchanged, resulting in 50 times more employees per user
30 seconds of thought can identify a bunch of problems with this model, but I think the underlying insight that firms would hire more labor is broadly correct. I would be interested to hear if people think this is wildly off though!
Is it correct that this assumes that the marginal cost of supporting a user doesn’t change depending on the firm’s scale? It seems like some amount of the 50x difference between EAF and reddit could be explained by the EAF having fewer benefits of scale since it is a smaller forum (though should this be counter balanced by it being a higher quality forum?)
Continuing the discussion since I am pretty curious how significant the 50x is, in case there is a powerful predictive model here
My model was:
It’s kind of unclear what a marginal unit is for a software company like Reddit, but let’s just say it’s one user of their software
Profit maximizing firms produce until marginal cost = marginal benefit
Marginal benefit is 50 times higher
Therefore firms will accept 50 times higher marginal cost
Let’s suppose that the percentage of this additional marginal cost which goes to labor remains unchanged, resulting in 50 times more employees per user
30 seconds of thought can identify a bunch of problems with this model, but I think the underlying insight that firms would hire more labor is broadly correct. I would be interested to hear if people think this is wildly off though!
Thanks!
Is it correct that this assumes that the marginal cost of supporting a user doesn’t change depending on the firm’s scale? It seems like some amount of the 50x difference between EAF and reddit could be explained by the EAF having fewer benefits of scale since it is a smaller forum (though should this be counter balanced by it being a higher quality forum?)
Continuing the discussion since I am pretty curious how significant the 50x is, in case there is a powerful predictive model here