Thursday, December 22, 2005

Sometimes every problem looks just like a demand curve

Alex Tabarrok is a fine economist, but sometimes the smartest people let routine overtake them. You can not explain every economic problem or the behaviour of a corporation by guessing the shape of its products' demand curve. Not every company is maximizing its short-term profits, sometimes the management is simply after world domination.

Everybody in the business knows that MS is after the market share. XBox is a money loser, they know that.

But they have a 75-80% profit margin on Windows and Office and are sitting on billions of cash. They decided to do what every mature company does to keep growing: expand into other markets, whatever the costs may be. They pour money into several areas: gaming, home entertainment, etc.

If the Department of Justice allowed them, they would give the boxes away for free just to kill off the competition. But that would obviously mean the end of Microsoft, because their competitors would immediately sue their asses and the suit would result in a judge ordering an anti-trust breakup of MS.

So, Microsoft is doing the smart thing: sell the boxes at the lowest possible price that can be justified compared to what the competition does. The profits will come, once the competition's leadership has been weakened financially and falls behind in technology and quality.


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