Finally putting that econ class to use

Via TeleRead I see that the One Laptop Per Child (OLPC) project is inching ever closer to reality. For those that haven’t been keeping up, OLPC is a non-profit headed by Nicholas Negroponte, the founder of M.I.T.’s Media Lab. Originally known (at least colloquially) as the “M.I.T. $100 laptop project”, the OLPC’s goal is to produce cheap laptops to sell to third-world governments so that they can give them to poor kids.

Which is a fine idea. The American public schools are a joke, but American kids still have a leg up on third world kids in that they’re familiar and comfortable with computers and networks. Since such familiarity is an absolute necessity for success in the modern marketplace, giving third world kids computers ought to be an excellent way to prepare them to succeed in that marketplace. Of course, one could certainly make the argument that there are more pressing priorities in the third world which could be solved more cheaply and straightforwardly. Maybe so, but M.I.T. computer geeks probably ought to stick to their area of specialty rather than trying to tell people how to produce potable water or whatever Moreover, if that’s your goal, laptops are better than desktops because kids can take them to school and bring them home at the end of the day, rather than having to (perhaps fancifully) hope that their favorite desktop in the computer lab will still be there and functional the next day. Also, since electricity tends to be iffy in the third world, something that can run on battery at least part of the time is a necessity.

Anyway, the point is that I am, more or less, a fan of the OLPC project and wish them well. One aspect I’m not a fan of, though, is that they seem only to be interested in producing cheap laptops to sell to third-world (and therefore, practically by definition, corrupt) governments on the wishful premise that those governments will then give the laptops to malnourished but cute and bright-eyed kids. The key word in the above sentence being “only”. The OLPC doesn’t seem to have much interest in selling their laptops (current expectation is that they’ll cost about $130) to consumers, either in the first or the third world.

Which is, I submit, not very bright. Now, I understand they want to primarily devote production to third-world kids, but why not mark the things up to $150 or so, There is some talk on the OLPC website about selling their laptops to the first world for three times the price, but that’s a non-starter: for $400 one can buy either (a) a real computer with a hard drive, four times as much RAM and a bigger monitor or (b) a Nokia 770 which is in the same performance ballpark but a fifth as big. sell ’em to people like myself who’d be willing to spend $150 for an essentially disposable laptop and apply the profits towards giving computers to kids in countries which can’t even afford $130 computers? Actually, to put it more strongly, this isn’t a case of “Why not?” so much as “How could you not?” because if you don’t there are plenty of opportunistic types who will recognize an arbitrage opportunity and divert these laptops from their intended recipients to the grey market (to re-iterate: the plan is to sell cheap laptops to third-world governments which are, practically by definition, corrupt. What could possibly go wrong?). So if you don’t sell the laptops to the first world directly, the first world will just buy the laptops off the poor kids you’re making them for.

The OLPC recognizes that this could be a problem, but doesn’t seem to have figured out that the (rather simple) solution is to sell to consumers at a markup which is big enough to make it worthwhile financially while small enough to make buying on the grey market from corrupt governments unattractive. Econ 101, one would think.

Speaking of economic fallacies, I meant to post a while ago about Warner video competing with pirates by offering “The Aviator” DVDs in China for $1.50. Well, that’s not the economic fallacy. In fact, it’s a pretty intelligent business strategy, almost certain to be more effective than trying to get China to enforce any semblance of copyright law.

No, the fallacy lies with how the digerati responded to this news. You can see a sampling at the bottom of the above article in the “Blog community responds” section, but Real Tech News’ Michael Santo gives a typical reaction:

Hey, if it’s a question of the plastic DVD case costing me the extra $10 – 20 that I would pay for this video in the U.S. (depending on where I get it), sell it to me without it. I mean, half the time I replace the case with a better one (aftermarket) anyway. As far as the quote in the article of “a move likely to anger consumers in developed markets?, they’ve already got one such angry consumer — me.

Don’t hold your breath, buddy. DVDs are expensive because the studio has to recoup its expenses incurred from (a) making the movie (i.e. actor salaries, production costs, etc.) and (b) promoting the movie. The cost of the actual, physical DVD and its packaging is negligible. That being the case, by the time the studio is selling DVDs of a movie, all of its major expenses are sunk costs, meaning that it’s worthwhile for the studio to sell DVDs for any price above manufacturing and distribution cost. Obviously, the studio wants to charge as a high a price as possible, but the phrase “as possible” has different meanings in China and in the U.S. In China, where high-quality pirated versions of popular movies are readily and cheaply available, $1.50 is apparently as much as the market will bear. Here in the U.S., there are obviously a lot of people willing to spend $20 for a DVD. Thus, differential pricing.

Which is fine for a couple of reasons. First, it may be worthwhile for Warner to sell “The Aviator” in cheap cardboard cases for $1.50 (since the manufacturing and distributing costs are less than that), but a buck and a half a pop isn’t going to make much of a dent in Leonardo DiCaprio’s salary. It’s only because people here are willing to spend $20 for the same DVD that the studio could afford Also, let’s not forget that a successful movie like “The Aviator” has to subsidize all the less successful movies produced by the same studio. to hire DiCaprio as the star and Martin Scorcese as the director in the first place (I won’t argue whether having DiCaprio and Scorcese involved is desirable or not, but obviously a lot of people thought it was).

Second, people in the U.S. are way the hell more affluent than Chinese people. Chinese people can’t afford $20 DVDs; we can. Bitching about having to pay ten times as much for a DVD when you make ten times as much is pretty crass. I know, I know, it’s pretty harmless in this case. Who cares about Leonardo DiCaprio DVDs? But this same crassness is killing people in the third world, so I think it’s still worthwhile to point out.

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