Binning chips for yield is different from artificially crippling chips. There's nothing wrong with taking an 8-core CPU with a defect in one core and selling it as a 6-core part, or underclocking it until all 8 cores are stable and selling it as a slower part. The odious part happens when fab defect rates drop and yield improves, so basically all the dies can function as 8-core chips. When that happens, Intel et al. start disabling perfectly functional cores to artificially constrain the supply of high-end parts. That's a pretty clear cut market failure that's only possible because the barriers to entry are so high.
The most extreme instance of this that I'm aware of was when Intel sold a ~$50 piece of software that would unlock the rest of the L2 cache on a specific low-end processor model. They didn't say it might work on your chip; every instance of that model had apparently passed QA with the full cache enabled but shipped with a fourth of it (IIRC) disabled. So Intel wasn't saving any money or harvesting any otherwise-unusable parts with that model. They were just price fixing.
Product segmentation for software is also a different issue, because all the scarcity is artificial to begin with, with no natural underlying supply curves because there's no marginal cost to making another copy.
> Product segmentation for software is also a different issue, because all the scarcity is artificial to begin with, with no natural underlying supply curves because there's no marginal cost to making another copy.
What you're saying is that due to some irrelevant production related factor, it's totally fine for a software company to price their product based on what the market is willing to pay, but as soon as a piece of hardware is involved, that principle doesn't apply anymore.
What about selling software that comes with a hardware copyright protection dongle? Under which category does that fall? The marginal cost of producing that dongle is not zero after all.
> What you're saying is that due to some irrelevant production related factor, it's totally fine for a software company to price their product based on what the market is willing to pay,
I didn't say it's fine. It's off-topic, because it's a different issue with fundamentally different economic forces at play.
Marginal cost is not the only cost. It's disingenuous to treat it as such. It's also incorrect - making a copy for someone to access is most certainly not free.
And the economics is sound - partitioning markets allows sales at lower prices to many purchasers. There's simply no way around this, no matter how you feel about it.
>That's a pretty clear cut market failure
No, the same economics above apply - partitioning the market lets those less needs obtain product at a lower cost than those with more needs, no matter how the device/software is created.
Market segmentation replaces a single, ham handed consumer and producer surplus with a multi level one, allowing each side to capture more of the surplus for their benefit, leaving less of the summed surplus on the table.
Not every purchaser has the same surplus to trade. By splitting the market some purchasers that would not otherwise buy are now willing and able to do so, and the tighter or possible non-existent margins there are offset by selling to those accepting higher price points, almost always offset by extra capability.
And no matter how you slice it, commodity chips and software are so incredibly cheap compared to the value they provide it's hard to claim these prices are somehow not reasonable. For less than a week's pay I can purchase an incredible set of tools that I can then turn into orders of magnitude more value for me. Pretty much any professional making a living based on computers is in the same position.
> Marginal cost is not the only cost. It's disingenuous to treat it as such.
Well, it's a good thing I didn't do that. I just said that the lack of any real marginal cost means that artificial market segmentation for software should be analyzed separately from artificial market segmentation for physical goods. And only one of those two analyses is relevant to this thread. The software stuff you brought up is a red herring.
>that artificial market segmentation for software should be analyzed separately from artificial market segmentation for physical goods
This is akin to economic voodoo. There is no reason to do anything different for either one - they are products, customers buy them.
Once you want this artificial split, I guess based on your (incorrect) claim that there is no marginal cost (original claim) or lack of any real marginal cost (backpedaled claim) as the deciding factor, then when do you start to add a continuum of how you analyze based on a continuum of costs?
If there is a marginal cost 3/4 between your two cases, do we now need to interpolate your forms of analysis? All because you personally don't like how markets work?
Or why not simply use the same method, standard economics, to analyze them? And realize all these products have the same benefits to consumers via varied pricing?
>The software stuff you brought up is a red herring.
No, it shows how markets work. That you move your goalposts in the middle of a thread is the fallacious reasoning.
And you've failed to address that segmentation like this allows people to buy that could not have otherwise. Do you dispute that segmentation allows cheaper pricing for some consumers, and in some products, all consumers? Are you arguing for higher prices or just ignoring this empirical fact?
> That's a pretty clear cut market failure that's only possible because the barriers to entry are so high.
I see that as a market success. People with lighter needs can purchase a neutered chip at a lower price. While people with greater needs can purchase an unlocked chip for a premium.
An alternative is to only have one chip, which is priced higher than the neutered version. Because of lost sales, fewer people overall buy the chip, so the price per unit goes up. This is a net loss to the consumer.
Another idea is to build two chips for each market. This increases design and production costs. And is a net loss for the consumer.
Or they could always just avoid making the more powerful chip at all, and stick with the volume seller.
This is a really common strategy in consumer products because it makes so much market sense. It sounds unfair when you think of it as, "paying for a product which you can't access the full potential". But it sounds pretty nice when you frame it as, "getting a discount for not using a feature."
It's a market failure because in a market with proper competition it wouldn't be possible for Intel to do this without being undercut by someone else on the higher end parts.
If you're able to take e.g. an 8 core cpu, artificially disable 2 of the cores and sell the 8 core for $300 and the 6 core for $250, and still make a profit/break even on both of them then you could be selling the 8 core for $250 and your competition should be punishing you.
Intel are only able to offer a "discount" because their profit margins are so high because of lack of competition.
> sell the 8 core for $300 and the 6 core for $250, and still make a profit/break even on both of them then you could be selling the 8 core for $250 and your competition should be
It doesn't work that way. The $300 premium chips are where all of the margin is, and is what finances the whole operation. If they production costs of in your hypothetical chips is $235, then Intel would be making $15 on the cheap chips, but $65 on the premium ones. Which means that one premium chip is worth the 4.3x the margin of a cheap one.
Losing that premium segment is a big deal. Even if it is only 10% of the volume, because margins are so high, it ends up being like 40% of profits.
This isn't new. Just about every consumer goods market works like that, from peanut butter to cars. You need the middle tier to have enough volume to minimize production costs, but you need to find that premium offering to actually make money.
If your production cost is $235, then you need to make $235 to finance your operation. Anything more is inefficiency that competitors in a healthy market would eat away at.
Then there must not exist any markets that meet your definition of healthy, because basically every mature market works like I described. It's the most efficient strategy for minimizing costs and maximizing profits.
A fundamental principal of business is that a successful one needs to earn a profit. And that profit needs to be high enough to continue operation.
Indeed there are no theoretically perfect free markets. I'm just arguing that Intel is getting away with a lot more than they would if they had competition more like other businesses; as opposed to the current situation where they only have to compete against AMD, and own enough patents between the two of them that it's basically impossible for new competitors to enter the market.
No business needs to earn a profit. By definition profit is surplus to operating costs (and I include a reasonable emergency fund in the category of "operating costs").
The most extreme instance of this that I'm aware of was when Intel sold a ~$50 piece of software that would unlock the rest of the L2 cache on a specific low-end processor model. They didn't say it might work on your chip; every instance of that model had apparently passed QA with the full cache enabled but shipped with a fourth of it (IIRC) disabled. So Intel wasn't saving any money or harvesting any otherwise-unusable parts with that model. They were just price fixing.
Product segmentation for software is also a different issue, because all the scarcity is artificial to begin with, with no natural underlying supply curves because there's no marginal cost to making another copy.