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Why companies make their products worse

Why companies make their products worse

And why that’s a good thing for their customers. Richard Davies explains

And why that’s a good thing for their customers. Richard Davies explains

Richard Davies | September 15th 2016

There is much about computing to make the blood boil – the badly timed crashes and the endless software updates are frustrating. Yet most annoying of all is the fact that some products seem needlessly bad. Anyone setting up a home office, for example, will find that Microsoft has made the cheap version of its software worse by stripping away its email tool, Outlook. New versions of free-to-download apps can be slower and clunkier as they bombard the user with ever more adverts. These frustrations are all by design: microeconomics explains why, in the digital economy, firms work hard to make their products worse.

For many companies price and quality move in sync. Take guitars. A top of the range Martin or Gibson starts at around $3,000 and will be made from solid wood, in America. Cut the cost of the inputs (use plywood instead of spruce) or the labour (make it in Mexico) and you lower quality but can sell at a lower price (from $500). This natural relationship means there are a range of qualities and prices and allows the firm to serve various different customer types. 

In the world of tech, budget options arise from a more disturbing process – product sabotage, otherwise known as “crimping”. Take printers. In the late 1980s IBM’s LaserPrinter, retailing at $2,395, printed ten pages per minute. In 1990 it launched the LaserPrinter E. At $1,495 the economy model offered a big discount and printed at half the speed of its pricier sibling. But the new printer was not made using cheaper parts, or assembled by workers on lower wages. In fact it was just the original printer with extra inputs: microchips has been added to slow it down. IBM had not designed a low-cost printer, they had spent time and money making their original product worse. 

The roots of this bizarre behaviour lie in a headache all firms face: how to set prices. If a firm knew its customers’ income and willingness to pay it could tailor prices carefully to extract the maximum profit from each punter. Sometimes obvious signals help tailor prices. Since full-time study is likely to be correlated with low incomes, newspapers and magazines offer a student discount. And since flying between London and New York and back midweek suggests a business trip, carriers charge more for this than for a trip including a weekend. But often there is no easy way to distinguish between your customers, so the bargain hunter and the high roller (who could afford much more) get charged the same price.

This is where product sabotage helps. The reason was first spotted by Jules Dupuit, a French engineer, in 1849. French railways offered three classes of travel with the lowest tier pretty rough: the carriages had no roofs, and the seats were wooden benches with no covers. Surely, people complained, the discomfort was unnecessary. Dupuit pointed out the value in the inconvenience: by making third class really bad, only the truly threadbare would use it. Those with a little more cash would reveal their preference for comfort and stump up for a second-class ticket. 

Today Eurostar offers a ticket that uses Dupuit’s logic. It offers ultra-cheap tickets that do not specify the time of travel (this is revealed two days before the trip takes place). Adding uncertainty to a traveller’s itinerary is a reduction in quality. But it is useful because it forces business travellers – who must be in London or Paris at a specific time – away from this bargain option.

It might seem like product sabotage should be banned. But as research by Preston McAfee – now chief economist at Microsoft – has shown, it can make customers better off. The key test is whether the practice means more goods are sold. Suppose the French had regulated trains so that all carriages had roofs. All those in second class might have switched to third class, potentially rendering both uneconomical to provide. Altering quality, even if that means damaging goods, can make total supply rise. So the fact that apps are rammed with annoying adverts is actually a sign of good economics. If that is little comfort, perhaps it is time for an upgrade.