[ILUG-BOM] FOSS profit

Binand Sethumadhavan binand at gmail.com
Fri Dec 31 08:55:41 IST 2010


2010/12/30 Rony <gnulinuxist at gmail.com>:
> taxiwala overcharges a few rupees during a taxi shortage, he is
> considered a criminal who should be severely punished. If airline
> companies form a cartel, create artificial shortage and extremely
> overcharge their customers, they are respectable blue collared
> businessmen who simply call it the laws of 'supply and demand'.

First of all, I think you mean "white collared businessmen". :-)

Secondly, the taxiwalla can do it because his friend, the next taxi in
line, is also going to do it. That is, they too are operating in a
cartel.

Third, the laws of supply and demand as taught in introductory
economics courses assume "many suppliers and consumers" that one or a
group of them cannot control the price - which obviously doesn't hold
true in the case of a cartel. The airline bosses are taking the
travelling public for a ride (pun intended) when they use these laws
to justify their actions.

The concept of profit goes through three distinct phases:

1. When you are the sole provider of something, you can charge pretty
much what the buyer is willing to pay for that. Basically, the buyer
will have an idea, "I'll pay $N for this, but if the price is beyond
that, I'll do without it". When you are the sole provider, you can try
to estimate what $N is and charge the customer precisely that. Think
of Indian Airlines in the eighties.

2. When you are one among a small group of providers for something,
you price your output at what Rony suggests - cost plus markup. The
cost would be different for different providers (and the markup too!),
so there will be variations in prices. But Since there are only few
providers, each one can find a buyer at his price. This is where
Indian aviation industry should be, today. But unfortunately, this is
the situation where cartelization is most appealing - sit around a
table and fix the price.

3. When the number of providers become large enough, the law of supply
and demand takes over, and you lose the ability to set the price. You
have to sell at the market price (and bring down your costs to make a
profit), or perish. The aviation industries in some mature markets
(Europe) is in this stage - so much so that air travel in Europe is
actually much cheaper than train travel, but still airlines make
profits year after year.

Binand


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