Re: Cause and Effect Reversed?

[Pete Hall <pbhall@xxxxxxxxxx>]

At 10:10 09/28/2000 , Leif Svalgaard wrote:
>the potential market depends on the final price, so you have an infinite
>regress
>here. Anyway, that is NOT how mass-market software is priced.

It's not really all that mysterious, although it does intuitively seem 
backward, there is a unique product specific function, determined by market 
potential and probably the phase of the moon too, but regardless, there is 
a function that correlates price and number of units sold. Since the goal 
is to make money, you're interested in potential profit when you plan 
production quantities, and, neglecting minor little things like bulk 
ordering discounts, logistics, storage and carrying costs, optimal 
production quantity is determined by three factors:
   1. The pricing function n=f(p) where n is number of units and p is price
   2. Fixed cost K
   3. Variable cost per unit c
  Revenue is determined by R=np
  Cost is K+nc
  Profit = Revenue - Cost
  You can then calculate that profit is given by
  P = (p-c)*f(p)-K
  Once you have an approximation for f(p) (the hard part, often learned by 
trial and error), the whole thing generally simplifies to finding the 
maximum of a parabolic function. IOW, there is a finite price that will 
yield a maximum profit, and that determines the size of your production run.

Pete Hall
pbhall@execpc.com
http://www.execpc.com/~pbhall/
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