It’s possible Zach’s point is already obvious to you, but the one-sentence rephrase is that unless you have perfect price discrimination, charging subscription fees for something with a marginal cost of zero would result in deadweight loss.
I don’t know how clear the one sentence version is, so I asked GPT-4 to explain the idea in more detail.[1]
Alright, let’s break this down with a simple example:
Imagine there’s a magical factory that produces unlimited cookies at no cost. Once the first cookie is made, every additional cookie after that is free to produce.
Now, let’s say the owner of the factory decides to sell unlimited access to these cookies through a subscription model. For a monthly fee of $10, you can get as many cookies as you want.
Here’s the catch: not everyone values these cookies the same way.
Alice values the unlimited cookie access at $15 a month.
Bob values it at $8 a month.
Charlie values it at $10 a month.
At the $10 subscription fee:
Alice subscribes and is happy.
Charlie subscribes and is neutral.
Bob doesn’t subscribe because he values it at only $8.
Now, remember the cookies cost nothing extra to produce. So, if Bob were able to pay his $8 and get the cookies, both he and the owner would be better off. But because the price is fixed at $10, Bob misses out, and the owner misses out on Bob’s $8.
This situation where Bob doesn’t get the cookies even though they cost nothing extra to produce is called a “deadweight loss”. It’s a loss to society because both Bob and the owner could’ve benefited, but they didn’t.
Price discrimination would be like the owner saying, “Alright, Alice, you pay $15; Charlie, you pay $10; and Bob, you pay $8.” Everyone gets cookies, the owner maximizes revenue, and there’s no deadweight loss.
Sure, that makes sense, I was just surprised because it didn’t seem relevant to the points raised in this article, which I would argue are more important
(I think knowing whether people still value me spending time writing vs where I should spend the time elsewhere is more useful than a wider audience having access to my EA-themed baby outfit roundup)
You know how many people value your paywalled content at your subscription price, but you don’t know how many people would value it at a lower amount.
Thus, the knowledge you get from subscription data almost certainly understates the total net value that would be unlocked for a fixed amount of work if your writing were free. (That’s not to suggest that you should feel any obligation to share your baby outfit insights with the world for free.)
That’s much less of a drawback where each marginal unit of production incurs a substantial resource cost.
Another point worth considering is consumer surplus: in the $10 subscription model, Alice actualizes $5 in benefits over what she paid. Merely counting subscription revenue doesn’t capture the surplus to the cookie-eater ecosystem.
So even if the EA service makes somewhat less revenue than the vendor would make on a non-EA gig, it could in some cases still be superior because the EA ecosystem captures the consumer surplus in the former case.
It’s possible Zach’s point is already obvious to you, but the one-sentence rephrase is that unless you have perfect price discrimination, charging subscription fees for something with a marginal cost of zero would result in deadweight loss.
I don’t know how clear the one sentence version is, so I asked GPT-4 to explain the idea in more detail.[1]
Incidentally, it’s spooky how good GPT-4 is at explaining concepts in detail from just a one-sentence summary.
Sure, that makes sense, I was just surprised because it didn’t seem relevant to the points raised in this article, which I would argue are more important
(I think knowing whether people still value me spending time writing vs where I should spend the time elsewhere is more useful than a wider audience having access to my EA-themed baby outfit roundup)
You know how many people value your paywalled content at your subscription price, but you don’t know how many people would value it at a lower amount.
Thus, the knowledge you get from subscription data almost certainly understates the total net value that would be unlocked for a fixed amount of work if your writing were free. (That’s not to suggest that you should feel any obligation to share your baby outfit insights with the world for free.)
That’s much less of a drawback where each marginal unit of production incurs a substantial resource cost.
Another point worth considering is consumer surplus: in the $10 subscription model, Alice actualizes $5 in benefits over what she paid. Merely counting subscription revenue doesn’t capture the surplus to the cookie-eater ecosystem.
So even if the EA service makes somewhat less revenue than the vendor would make on a non-EA gig, it could in some cases still be superior because the EA ecosystem captures the consumer surplus in the former case.