Article Analysis of Supply and Demand Essay

The software business a few years back was at its peak and the growing demand for software gave software companies the leverage to raise prices. When firms bought software it was in the form of a perpetual license and was costly for them. In this context, a perpetual license gave the consumers unlimited access to the software and usually tried to utilize the software more efficiently. Thus lowering the demand for software, prices were also lowered because fewer consumers were willing to pay for something they could not effectively use. With a decrease in demand, supply also decreased. This paper is based on the article Supply and Demand: Software Pricing by Jeffrey Rothfeder, which was published in PC Magazine (2004). This paper presents an analysis of the article using the economic theories of supply and demand. Demand is comprised of the desire of the consumer to buy something, the consumer’s ability to pay and willingness to pay. Thus, in the peak years of the software industry, business and firms, both multimillion companies and smaller ones bought software like pancakes because of their desire for efficiency, which the software companies promised them. Then, business firms had the ability to pay for it since it was seen as an investment and would help them reap more profits. Which also made them more willing to pay for it. When companies bought additional software to complement what they already had resulted to marginal utility of the software, then as companies bought more software that the software company told them to use but could not effectively maximize it contributed to a diminishing marginal utility. Thus, the demand for software begun to decrease, coupled with this the dot.com crash came, the supply of software in the market was high, but the demand was low which eventually resulted into a lowering of the prices of the software license. This cycle meant that the software industry is dependent on what the consumer is willing to pay for. On the other hand, the changes in the supply and demand and prices of software can also be brought about by a number of factors, like the rapid technological advancements in IT, the operational costs of using software and even the attitude of managers towards the usefulness and effectiveness of the software. In the past, software companies offered perpetual licenses to its consumers, this meant that consumers would have unlimited access to the software but because of the technological advancements in the information technology, most of the software bought in the past could not run and its usefulness diminished. This entailed getting an upgrade or replacing the software entirely, but because of the past experience of mangers with the huge expenditure in buying software, it made them unwilling to pay for it the second time. A new breed of software companies also capitalized on the existing business environment, wherein they knew that consumers were looking for alternatives and options. This is what they gave the consumers, instead of making software that would replace the original software, they developed a program that would enhance their existing programs, and they could buy it by subscription, which they can renew for the time they want to use it. This gave consumers the psychological feeling of being in control, instead of being at the mercy of the software companies. Thus, demand for this kind of software and this approach in licensing also spurned the increase in supply and also in prices. But since many vendors offer this alternative, and the losses of software companies made them more careful in their business strategies, they have to remain competitive in their prices. Consumers generally would want to pay less for what they need, which the subscription approach answers. Then with the development of the new way of delivering software through the internet (ASP) which reduces operational costs of software companies again moved the prices of the product. At first, the public was hesitant in using this technology because of security and quality issues. However, big companies utilized it and therefore led to the belief that the risks associated with using this form is low and since them it has gained acceptance in the consumers. This again demonstrates how the growth in one aspect of the product can lead to an increase in demand and supply. More and more consumers have also become intelligent in what they want and need out of softwares, thus the idea of paying for a software like a utility commodity has not gained much credence. The use for softwares in business firms are numerous and a pay as you use approach is not viable since people nowadays depend on technology to become efficient in their jobs. On the other hand, the software industry have also responded with a few measures that would somehow change the quantity demanded of their products by going after software piracy and misuse of software licenses, thus effecting changes in the demand of the products like when a pirated software is confiscated or shut down and since people rely on it for their business they would probably go out and buy the real one. In conclusion, the software industry still has power over the market of their programs, but with the increasing knowledge of consumers on the intricacies of using a software, their power over the supply, demand and prices of their products would slowly wane. References Articles Rothfeder, J. (2004). Supply and Demand: Software Pricing. PC Magazine (February).Retrieved May 10, 2006 from http://www. eweek. com/article2/0,1759,1539611,00. asp Pombriant, D. 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