Re: [OPE-L] Reliability of price channel - personal computer industry

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Fri Apr 27 2007 - 17:37:20 EDT

You have the history confused, your impression is a romantic myth that
reverses the actual historical process.

You had originally asked me about competition between IBM and microsoft
over operating systems, which did not occur until the release of
the IBM PC in 1981 - the competition then was not actually between
IBM and Microsoft, but between Digital Research who produced the CP/M
operating system, the University of California San Diego who produced
the UCSD operating system and Microsoft who were not in competition 
with IBM but were a subcontractor to IBM.

Now you raise the issue of Jobs and Wozniak who founded Apple.

In 1976 Jobs and Wozniak were two among many computer hackers building hardware
for themselves and other hobbyists. They initially were in competition with 
other small manufactures producing devices like the KIM, Altair and Imsai machines.
This was for their Apple I

The only significant company in the market was not IBM but Comodore, a calculator
firm whose PET was launched about the same time as the Apple II. However by the
time the apple 2 came out there were a host of other small companies of similar
size to Apple : Cromart, North Star, Ohio Scientific among others.

The micro computer market initially developed by these small companies with 
a variety of prices and functionalities being offered. It was not until 1981
that IBM entered the market. Their machine was slightly higher in price than
average price at the time of entry but was distinguished by having a 3rd generation
microprocessor unlike competitors whose machines had second generation chips.
IBM quickly came to dominate the market for microcomputers. Their dominance
was not shaken until Taiwanese competition entered the market in the late
1980s producing carbon copies of the IBM design at lower prices.

In the initial phase - up until the entry of Taiwan into the market, price
information was altogether secondary as a means of communication. The primary
mode of communication was magasinze like Byte and Dr Dobbs Journal. These disseminated
the large quantity of technical information that was needed to evaluate different
products. Price was altogether secondary since the products were not standardised
enough for price by itself to have much meaning.

After IBM had produced a standard design which was then copied by clone manufactures -
primarily in Asia but also US companies like Dell, price became important because
the technical differences between the machines were minor. By this stage technical
innovation had greatly slowed down. The standards became so well established that 
IBM was actually sued by some of its customers for allegedly introducing a 
DMA controller on some models in the early 90s that allegedly differed slightly from the
version they had incorporated in their 1981 prototype. ( I know this as I acted
as an expert witness for IBM in the litigation. )

However even in the late stage, a major information channel was constituted by
standardisation bodies  like VESA and the IEEE which specified the standards to
which the products could be built. It is the existence of such standards
that allows price to function as a communications medium at all. Without these
information channels in the form of technical specifications passing between
companies in the US and their suppliers in China, prices would be useless as
an indicator. However by this phase, the personal computer had become a 'commodity' 
product, closely governed by the law of value.

Paul Cockshott

-----Original Message-----
From: OPE-L on behalf of Alejandro Agafonow
Sent: Fri 4/27/2007 3:27 PM
Subject: [OPE-L] Reliability of price channel
Dear Friends:
There is an issue suggested by Cockshott that has worried me. I'm not especially skilled concerning the history of software/hardware markets but the intellectual exercise worth while.
A paradigmatic situation, evoking the entrepreneurship dynamic Austrians have in mind, is the emergence of Apple facing the computer giant IBM. Do you remember a known movie reporting the story? Two boys, Steve Jobs and Steve Wozniac, building a prototype in the Jobs' garage paving the way to overtaking IBM.
Cockshott seems to have evidence that prices at that time didn't suffer big changes. To extract some lesson from this event we would have to know the market concentration data measured, for example, by Herfindahl-Hirschman Index. But the question is whether the price channel could reliably report the revolutionary technological change emerging at that time.
Considering the accent putted by Hayek on prices as an information channel, there is the risk of concluding that Austrian theory is not able to explain this prices stability. Nevertheless, from a broader Austrian point of view is possible to conceive a situation like that one. The key is the relative scarcity of the software/hardware at that time in the light of demand. As I told you, we should check data, but if the technical facilities offered by Apple merely switch over the relative market power from one firm to another, it is expected that prices don't record the substantive technical change happening. The motivational source of the market power switch over has to be found in the extraordinary profits characterizing a monopoly, another characteristic of Austrian dynamic.
Best regards,
Alejandro Agafonow

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