Marginal cost of software

Posted Jul 9, 2024 15:12 UTC (Tue) by farnz (subscriber, #17727)
In reply to: Marginal cost of software by paulj
Parent article: Rosenthal: X Window System At 40

The engineering labour is not part of marginal costs, because it's a one-and-done situation; while it is spread out over time, it's not tied directly to the cost of producing a single unit, and only applicable to that unit.

In the marginal cost model, the cost of engineering labour is ignored - it's known to be there, but it's not part of the marginal costs; it's part of amortized costs, or total costs, but not marginal costs. And because marginal costs are relatively easy to account in physical goods (since it's basically the cost of the raw materials), most anti-competitive behaviour laws are written in terms of "selling below marginal cost plus some reasonable margin to cover other costs", not "selling below amortized cost".

Marginal cost of software

Posted Jul 9, 2024 16:04 UTC (Tue) by Wol (subscriber, #4433) [Link] (1 responses)

>The engineering labour is not part of marginal costs, because it's a one-and-done situation; while it is spread out over time, it's not tied directly to the cost of producing a single unit, and only applicable to that unit.

But if it's an ongoing cost, it's not a capital cost, either. Maintenance *should* be paid for out of revenue, which makes it part of the marginal cost.

True the original engineering cost is an investment paid for out of capital, which is your argument.

But there's certainly a case to be had that if it's an ongoing cost, therefore should be paid for out of revenue, then it's a marginal cost that should be subject to unfair competition law.

Cheers,
Wol

Amortized costs, marginal costs, and capital costs

Posted Jul 9, 2024 16:23 UTC (Tue) by farnz (subscriber, #17727) [Link]

It's part of amortized costs and total costs, but not marginal costs. Paying for it out of revenue does not make it part of the marginal cost; if it's paid out of revenue, it's an amortized cost, but not necessarily a marginal cost. Marginal costs of production are not total costs minus capital costs; rather, they're the costs that are directly attributed to a single unit of production, and that cannot be shared with other units of production.

Unfair competition law has historically liked this as the baseline for "is this anti-competitive" (with a requirement that you charge at least some percentage more than the marginal cost of production), since unlike amortized costs (where the precise amount of engineering effort attributed to a single unit of something is an accounting decision), there's very little wiggle room - the costs of producing this one item, given that you have everything you need to produce N items, can be reduced down to the materials cost of that item for physical goods plus some percentage to reflect the amortized costs of producing the item, which makes it very simple to avoid accidentally using competition law to protect an inefficient producer from a more efficient producer.

But this is what breaks down for software - software's marginal cost is tiny (the Linux kernel's marginal cost is under 1¢ per copy), and most of the cost is amortized costs at best. Which means that competition law is basically useless in most jurisdictions, since you'd have to show that I'm paying customers to take my software to show that I'm selling below my marginal cost.