Tesla’s Damaged Goods Problem

by on September 10, 2017 at 3:28 pm in Current Affairs, Economics | Permalink

TechCrunch: Tesla has pushed an over-the-air update to some of its vehicles in Florida that lets those cars go just a liiiittle bit farther, thus helping their owners get that much farther away from the devastation of Hurricane Irma.

Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The answer to the second question is price discrimination! Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.

The classic paper in this literature is Damaged Goods by Deneckere and  McAfee who write:

Manufacturers may intentionally damage a portion of their goods in order to
price discriminate. Many instances of this phenomenon are observed. It may
result in a Pareto improvement.

Note the last sentence–damaging goods can be beneficial to everyone! Consider: Without selling to the high willingness-to-pay customers at the high price the good might not be produced at all because the profit from customers who are only willing to buy at a discount aren’t enough to support the R&D. Thus, the high willingness-to-pay customers aren’t worse off from the existence of a discounted version and the low willingness to pay customers and the firm are clearly better off.

Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”

Hat tip: Monique van Hoek.

1 A Truth Seeker September 10, 2017 at 3:40 pm

This is our world now… the world of the electron and the switch, the
beauty of the baud.

2 Hack September 10, 2017 at 7:52 pm

~~ZeroCool

3 RussellL September 10, 2017 at 10:22 pm

Alex is an ass hat.

Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.
Those 60kWh cars have the performance of the more expensive 75kWh car. Since the battery is only allowed to charge to 80% (60/75=.8), there will also be little to no degradation.

4 Larry Siegel September 11, 2017 at 4:17 am

Can you disagree with somebody without calling them an ass. Please.

5 The Cuckmeister-General September 11, 2017 at 4:36 am

No what is wrong with you, cuck, this is the Internet. Man you’re a cuck even by the standards of this cuck blog.

6 Hazel Meade September 11, 2017 at 11:46 am

That makes no sense. If they have the same battery, it costs Tesla just as much to produce the 60kWh cars as the 75 kWh cars. Unless the demand curve is very flat, they should be able to sell more cars at the 60 kWh price point, and the increased volume ought to compensate for the lower price point. There must be some technical reason why the battery is not allowed to charge to 100%, and they are offering this “upgrade” only to people who really care more about driving distance than battery life.

7 JWatts September 11, 2017 at 1:54 pm

The batteries degrade over time. Furthermore, the X is a bigger and heavier vehicle than the S. So, Tesla can reasonably expect a higher amount of warranty covered battery replacements from the X than the S.

It legitimately costs more money for Tesla to allow the full use of the battery. Hence, charging the customer more if they want access immediate access to the higher capacity.

8 Jamesb September 12, 2017 at 8:05 am

Fanboi? No need to be so aggressive defending business practices of a welfare dependent “corporatist” enterprise.

9 Ray Lopez September 10, 2017 at 3:45 pm

Yawn. Another AlexT textbook problem crammed into the real world, with a moral at the end, “Unfortunately, I fear that Tesla may have made a marketing faux-pas”

Ever heard of the 386-SX microchip, Alex? It had the co-processor crippled. And it was price discrimination. And Intel never looked back, bigger than ever today.

When will these college professors ever learn: monopoly = progress. The textbook free market competition model means Malthusian death.

10 Mark Thorson September 10, 2017 at 5:04 pm

Almost nobody has heard of the 376SX, for which I prepared the programmer’s reference manual. It was a 386SX with the segmentation architecture disabled, so it couldn’t run Windows. Same chip, just a little hardware tweak. It was a price-reduced version intended for embedded applications. It would have been possible to develop a version of Linux for it. If it had been wildly successful, it would have been possible to remove the segmentation circuitry from the chip (about 16% of the chip) and make a chip that was truly cheaper to produce. It was a flop, both because demand was low and all of the low-value chips in the product line were sapping production capacity away from high-value chips as Intel entered a long period when it was spinning straw into gold.

11 Ian September 10, 2017 at 8:49 pm

LOL. Because AT&T was such an amazing innovator before they were broken up. Decade after decade of the same product. Progress!

12 Mark Thorson September 10, 2017 at 9:46 pm

Transistor. Maser. Background radiation. Telstar. Unix. Cellphones.

13 Borjigid September 10, 2017 at 10:30 pm

Yes, AT&T was an amazing innovator. But lets think about opportunity cost for a minute- how much more innovation would there have been if free competition had been allowed? How many innovations did AT&T come up with and then kill off in order to protect their monopoly?

14 Mark Thorson September 10, 2017 at 10:35 pm

Kill off? I can’t think of a thing.

15 Joe Torben September 11, 2017 at 3:55 am

@Mark Thorson: You can’t come up with a single thing that was killed off? Could that just possibly be because they were killed off?

Can we agree that the rate of innovation exploded after the monopoly was broken up? Is that only a coincidence?

16 Borjigid September 11, 2017 at 8:25 am

I can- magnetic recording tape.

17 Mark Thorson September 10, 2017 at 10:33 pm

C. Flip-chip. Gray codes.

18 Dan Lavatan-Jeltz September 11, 2017 at 1:29 am

That is not true, the SX had a physical 16bit data bus. Thus the motherboard needed less gold. The math coprocessor was the 80387, and there was an sx version, although nobody ever used them.

19 DF September 11, 2017 at 8:10 am

I think that was actually the i486sx

20 Brett September 10, 2017 at 3:45 pm

All electronics are built this way. Your computer’s processor, your video card, often your RAM and hard drive/SSD too. And I’m pretty sure things like microwaves and fridges are the same.

I’m not sure how surprised Tesla owners will be, there are several upgrades you can purchase after the fact already.

21 Haggy September 10, 2017 at 5:00 pm

If you aren’t sure, let me clear it up for you. They would not be surprised at all. They had the option to pay for the 75, at the same price that Tesla used to charge for the 60, or they could save money and get the 60 at a discount knowing that it is software upgradable.

22 Confused September 10, 2017 at 5:06 pm

Can’t they still upgrade for a fee?

23 Jarrett R Woods September 10, 2017 at 5:14 pm

Yes. I bought a 60 with full knowledge that I could upgrade it to a 75 at a later date with an over the air software update. I was very happy to have a cheaper option to help justify the car to myself.

24 C. Scott Ananian September 10, 2017 at 7:00 pm

I also have a Model X 60D and love it. I got a steep discount, plus better battery life because Tesla decided to build it with a larger-than-necessary battery pack. Win win.

This article would never have been written if the author had bothered to talk to an owner of a 60kW vehicle first.

25 Michael Cain September 10, 2017 at 5:40 pm

Yeah, used to be common practice in many lines of stereo equipment. The difference between the model 100 and the more expensive model 200 would be a few more labeled holes in the front panel and plastic buttons and knobs sticking through the holes. The circuit boards were all fully-functional model 200 boards, just that you couldn’t push the button that activated (for example) noise cancellation on the lower-priced box.

I knew a guy back in the day who tried to make a little business out of selling the drilling templates and plastic buttons/knobs so hobbyists could “upgrade” their gear.

26 Unanimous September 10, 2017 at 6:29 pm

A friend of mine in the 80s drilled two holes in the front of his non-programable scientific calculator in the same place as the buttons were for the programable model. He could press the little buttons on the circuit board through the holes with a pen.

I imagine this type of thing was going on from the 60s and into the 90s.

27 apoptosis September 11, 2017 at 2:44 pm

Remember punching a hold in a 720k floppy to turn it into 1.44mb ?

28 Hazel Meade September 11, 2017 at 11:48 am

When I bought my new stereo and my new phone, I immediately downloaded a firmware upgrade for it over the net.
it’s totally normal for companies to offer software upgrades for existing products.

29 ABV September 10, 2017 at 3:53 pm

Alex,

They already discontinued the 60 kW models, so there are no longer any software limited batteries for sale.

They do have other features that can be unlocked anytime through over the air updates like adaptive cruise control and lane following, branded as “AutoPilot”.

30 Pylot September 10, 2017 at 4:07 pm

Do your research. These vehicles were marketed as software limited 75kw vehicles. At anytime the owners could pay to use the “extra” 15kw. There’s no mystery, Tesla isn’t scamming customers. All it is is that you don’t know what you’re talking about.

31 Jonny DGTL September 10, 2017 at 5:10 pm

Why?!?

Because you haven’t paid for it!!!!
🤦🏻‍♂️

(Think about going to Best Buy– there’s all those unused electronics there! Why can’t we just take them? 🤔)

Just be thankful that you got the larger battery since it charges so much faster…
Smh

32 Massimo September 10, 2017 at 5:10 pm

Nobody said that Tesla was scamming customers. Tabarrok clearly stated that price discrimination is legal and it can even bring to the market products that could not without it. Said that, I agree with him that it will get a lot of bad publicity if it doesn’t manage this correctly. For my part, I would have simply sent a reminder to the potential clients that the upgrade was available, together with a coupon of 10$ if they did it in the next couple of hours 🙂

33 Trump Fan September 10, 2017 at 5:14 pm

He never said otherwise, dumbass.

34 BC September 10, 2017 at 4:15 pm

I guess it’s not surprising that a tech company like Tesla decided to price discriminate this way. As Alex points out, it’s standard practice in software culture for the high-priced “enterprise” version to share the same code as the cheaper “student” and “individual” versions. Certain features are just intentionally disabled in the cheaper versions.

Johnson & Johnson actually lost a class action lawsuit for selling the same contact lenses as daily wear and extended wear [http://www.nytimes.com/2001/04/18/business/johnson-johnson-settles-lawsuits-over-contact-lenses.html]. In that case, features weren’t actually “turned off”. Consumers could have worn the daily lenses for longer periods had they known.

In terms of outcry, it’s interesting that some of the same people that complain about price discrimination may look favorably upon need-based college financial aid, which is just price discrimination by another name. The genius of college price discrimination is that colleges *can* just ask their customers for their willingness to pay. People just voluntarily disclose their financial information in their willingness-to-pay disclosures, I mean “financial aid applications”. The kicker is that colleges have convinced everyone that they are actually “helping” students to afford college, instead of maximizing each student’s (net-of-aid) tuition, and gotten taxpayers to subsidize it! Instead of selling a 60-kWh version, Tesla should have just started Tesla Foundation to “help” people afford its 70-kWh version by offering need-based financial aid. Who knows, some gullible types might even have advocated that taxpayers contribute to such financial aid (beyond the $7500 tax credit that already exists). Bernie Sanders could make “free” Teslas for all part of his platform.

35 Curt September 10, 2017 at 4:17 pm

The fact that 60 kW models had a larger battery was not a secret. It was actually cheaper to give the 60 kW models a 75 kW battery than add 60 kW battery packs to the production line. Anyone interested enough in Tesla to buy a 60 kW model most likely had already heard about the software limitation, but the 75 kW version was out of their price range.

36 Haggy September 10, 2017 at 5:09 pm

Furthermore, Tesla was giving them something better than an actual 60kWh battery. Tesla used to make such a battery but they gave customers a software limited battery instead.

That means that users could charge to 100% every day since the battery has a reserve. With a standard 60kWh battery, they would want to charge to 90% on a daily basis, except on days when they will need extra range, to maximize the battery life by leaving a reserve.

In other words Tesla gave them a battery that would last longer and could always be charged for maximum range.

37 mulp September 10, 2017 at 5:57 pm

How was long the battery lasts is marginally unimportant to the customer because if it fails to deliver the rated maximum degradation performance, Tesla had to pay to get it to meet its warranty. By limiting the stress on the battery and then allowing a higher degradation in performance, Tesla saves money long term on product and customer support.

When Tesla was flying service technicians to handle cars needing repair, a reduced chance of battery problems saves lots of money.

38 Dan September 10, 2017 at 7:40 pm

Except that Tesla dosnt have a warranty to cover degradation, only an 8 year unlimited mileage warranty which covers totalk failure.

39 J September 10, 2017 at 9:48 pm

They actually announced last week from Tesla that the preferred daily charge is ONLY 70%. Which seems pretty extreme.

40 A Truth Seeker September 10, 2017 at 4:23 pm

“Why are you making MY car worse than it has to be?”
Such is life in America.

41 Steve September 10, 2017 at 4:25 pm

That’s actually not what they did, most likely. They have software designed to protect the battery from being overworked and drained too far, to extend the life of the battery. I’d put money on it that all they did was relax those restrictions for people so that they could use their full charge. Long term it would cause damage which is why they limit it, but for a short term thing like running from a hurricane, it would be worth it.

42 Anonymous September 10, 2017 at 5:08 pm

+1 for battery life being the secret.

All these batteries, hybrid and electric, operate an a much narrower range than true “0-100%” charge. Why? Running down toward true 0 would destroy them. And so “empty” is mostly full, for reasons of battery life. Here the low end was moved for an emergency, but it would not be good for the long run.

Perhaps some would prefer that these factors be in the consumer control, but how would a manufacturer warranty the product?

43 Confused September 10, 2017 at 5:08 pm

You would lose money then.

44 Anonymous September 10, 2017 at 5:18 pm

It is a complex engineering question when to quit and tell the consumer “you are empty, can’t drive.”

Even if the 60 and 75 kw batteries are “the same” the parameters for full and empty may not be separated by all that much. And early in electric car evolution they may both be right, or they may both be wrong.

45 RussellL September 11, 2017 at 12:28 am

serve “I’d put money on it that all they did was relax those restrictions for people so that they could use their full charge”

No you would have lost that bet.
Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.
Tesla unlocked that 15kWh to allow them to evacuate easier.

46 Anonymous September 11, 2017 at 10:33 am

Out of curiosity, 60 and 75 kWh over what life, in miles and years? The same for both?

I had a Prius that was running great, 50 mpg at 170k miles and 12 years, so I know batteries run near full can last. Rumor is the non-plug-in Prius battery spends its whole life between 60% and 80% of charge. It shows 60% as empty and 80% as full. That’s why you can’t leave them set for more than a week or two. They fall below 60% and suffer damage. Too much and they may need replacement.

47 Anonymous September 11, 2017 at 10:38 am

Emphasizing here for people who may not know that “60 or 75 kWh” is not a capacity, it is a promise.

Very different from an internal combustion engine, where a 3 liter engine is 3 liters, or a 15 gallon fuel tank is 15 gallons.

48 E-lectric September 10, 2017 at 4:28 pm

Kudos to Tesla for helping get some folks out of harm’s way. Unless it’s all #fakenews.

49 dearieme September 10, 2017 at 6:51 pm

No good turn goes unstoned.

50 A clockwork orange September 10, 2017 at 8:39 pm

o () O 0 8

51 RussellL September 11, 2017 at 12:28 am

This article is fake news.

52 Jason September 10, 2017 at 4:38 pm

Wow. Tesla does something, the only thing, they can do to directly help victim’s and you write a long article berating them. Some person. The vehicles were marketed as software limited, customers got what they paid for, are discontinued, and they have no plans to do this again, yet here we go with the unnecessary opinion articles instead of just a heartfelt thanks to them for helping out victims. Another website to tell Google to stop relaying news from.

53 Alex Tabarrok September 10, 2017 at 4:44 pm

Odd. The article is neither long nor does it berate Tesla.

54 Anonymous September 10, 2017 at 5:22 pm

I for one don’t like “damaged goods,” because from my understanding *all* automotive batteries “lie” about “empty.” From my understanding they must, in order to survive X thousand (or million if you consider every regenerative braking event?) charge cycles.

55 RussellL September 10, 2017 at 11:06 pm

The article wasn’t accurate, that’s for sure.

Tesla did not sell ‘damaged goods’.
Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.

56 RussellL September 11, 2017 at 12:58 am

Alex “Odd. The article is neither long nor does it berate Tesla.”

Oh really?

“Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect….”

“Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”

57 dan1111 September 11, 2017 at 5:39 am

I’m mystified as to how you see these sentences as “berating” Tesla.

58 A Truth Seeker September 10, 2017 at 5:02 pm

Ass famous Slav-American philosopher Ayn Rand famously pointed out, businessmen are a persecuted minority in America.

59 A Truth Seeker September 10, 2017 at 5:02 pm

As famous Slav-American philosopher Ayn Rand famously pointed out, businessmen are a persecuted minority in America.

60 djw September 10, 2017 at 5:30 pm

I liked your first version better.

61 Axa September 11, 2017 at 8:04 am

@Jason: how much do you get payed for every comment in a newspaper site? Your comment would have worked great in newspaper, but this is a blog and this is not an opinion article.

Now I’m starting to think Tesla has funded a little army of people to berate posts that analyze the Tesla’s actions…….nice approach to “No marketing”. People that can afford 70-80K cars are intelligent enough to understand damaged goods and price discrimination have specific meanings in the economics context.

This is what Alex is talking about, Damaged Goods: http://onlinelibrary.wiley.com/doi/10.1111/j.1430-9134.1996.00149.x/abstract

“The 486SX processor of Intel Corporation was initially produced in a curious way. Intel began with a fully functioning 486DX processor, then disabled the math coprocessor, to produce a chip that is strictly inferior to the 486DX but more expensive to produce. Nevertheless, in 1991, the 486DX sold for $588, and the 486SX for $333, a little over half the price of the chip that is less expensive to produce………..By producing an inferior substitute, the manufacturer can sell to customers who do not value the superior product so much, without
decreasing demand for the superior product very much………….damaging a high quality good may be a less expensive way to produce a low quality good than directly manufacturing
the low quality good. Indeed, we presume that damaging the superior product is the least expensive way to produce the inferior product. Our insight is that this may be a strict Pareto improvement: the manufacturer and all types of consumers strictly benefit from the price discrimination.”

62 Malunda September 13, 2017 at 1:09 pm

I was worried people would berate Alex for damaged goods. I felt they would take it literally rather than economically..thanks

63 Alrenous September 16, 2017 at 8:03 am

Should have sold the 486DX for around $440 instead, unless the DX is a Veblen good.

64 Steve C September 10, 2017 at 4:42 pm

This is not new. Back in the early 1990s, the manufacturers of commercial diesels (Cummins, Cat, Detroit Diesel) introduced computer electronic controls. That resulted in product lines where just a few engine models replaced many of the old styles. The difference between a 350hp Cummins and a 500hp Cumins was a few tweaks to the software with a proprietary software tool. As the saying goes, “You want more horsepower, bring more money.”

65 londenio September 11, 2017 at 9:04 am

+1. This is not new.
Many of the internal combustion cars being sold are managed by software. Many brands have a “S” for “sporty” version that is nothing but software, and a couple of design elements. I don’t think all the different engine sizes in Mercedes are actually different engines (some are, of course). What is new in this case is that the update was done remotely, reinforcing the perception that there is no cost involved in improving the car.

66 Matthew Young September 10, 2017 at 4:53 pm

There is a whole class of buyers who would never allow any CEO, especially Elon, to mess with their car after buying it. Imaging our surprise in 1970 if the CEO of GM could touch tone a code into his phone and add or remove horsepower from my Pontiac.

Having discovered that using touch tones to manipulate remote automobiles is a bad idea we now discover that using Internet tones to do the same is good.

What happened?

67 dan1111 September 11, 2017 at 5:54 am

I’m willing to bet that if in 1970, the CEO could actually remotely increase your car’s gas mileage, most people would have liked it.

68 Haggy September 10, 2017 at 4:54 pm

This is such incredible nonsense. Tesla used to market a car with a 60kWh battery. They increased the size to 75kWh AT NO EXTRA CHARGE! That’s right. People who went for the 75 didn’t pay a penny extra. Tesla then started offering a software limited 60kWh battery AT A BIG DISCOUNT TO CUSTOMERS WHO KNEW THAT THEY COULD PAY FOR AN UPGRADE! Then Tesla stopped selling the 60kWh battery and reduced the price of the upgrade BY THOUSANDS OF DOLLARS. A person getting the upgrade will still end up with a 75kWh battery for FAR LESS than the 60 used to cost.

That’s right, even if they pay the upgrade, it still comes out cheaper than what the car used to cost with a 60kWh battery.

69 Gary Taylor September 10, 2017 at 4:57 pm

Loss aversion

70 Scott September 10, 2017 at 5:23 pm

Alex T, you should probably do a little research on things before you make an idiot of yourself, which is exactly hat you just did. Are you really that lazy of a “journalist” or just a moron?
Tesla sold these cars openly telling the buyers that the mileage was software limited. In otherwords, the buyers knew the car was that way. It also had several other things limited software wise. But the buyers decided to pay less and get less. They are not damaged at all.
Pathetic, misleading, idiotic, moronic reporting.
You sir, Alex T are FAKE NEWS

71 Tim September 10, 2017 at 6:12 pm

Nothing you said is inconsistent with what Tabarrok said. A lot of hatred here from Tesla fanboys.

72 Borjigid September 10, 2017 at 10:34 pm

+1

73 RussellL September 10, 2017 at 10:52 pm

What Tesla did by limiting the battery was not ‘damaged goods’.
Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.

74 derek September 10, 2017 at 5:32 pm

I know little about electric cars, but the barrier to even consider them is range.

So an electric car company purposely limits the range of their vehicles.

Oddly I am even less interested in wasting my time finding out about them.

75 mulp September 10, 2017 at 6:19 pm

Gas vehicle makers limit their range. They could build your car with a hundred gallon fuel tank, but instead they range limit it to typically 6 hours of driving for cars, less for trucks.

I bought a used import truck and almost got stranded on the road when I realized in the middle of nowhere I had used 3/4th tank after less than three hours. White knuckles driving 30 miles trying to remember where the exits on I-80 were and which had gas stations.

76 Mark Thorson September 10, 2017 at 6:31 pm

You say that now, but you will not have a choice after gasoline and diesel cars are banned. UK, France, and China have plans to do so.

http://www.taipeitimes.com/News/biz/archives/2017/09/11/2003678200

77 Moishe Pipik September 10, 2017 at 6:28 pm

One point in their favor (though I’m no Tesla “fanboy”) is you’re paying for a better “warranty”. So the likelihood that the battery will fail if you’re depending on getting 75KWh on it instead of 60 is higher, so they need to charge more to cover the risk.

Face it, anyone why buys anything other than the largest battery (the 100D?) can’t really afford a Tesla and shouldn’t have gotten one.

Worse off are the LEAF people. I heard that there are hundreds of them stuck 65 miles north of Miami.

78 Fred September 10, 2017 at 6:57 pm

What assign absolute arsehole this ‘journalist’ is.

Go and take your head for a shit.

79 Fred September 10, 2017 at 7:00 pm

Ideally, all of them would have 100KW batteries installed, but with low price options to suit every budget.

Being able to pay to add range to a Tesla that I buy in 10 years would be marvellous.

It also addresses issues with battery deterioration. If there’s more capacity to begin with, then it’ll take a long time to drop below 60KW.

80 Alex Tabarrok is a fucking RETARD September 10, 2017 at 7:22 pm

Tesla hasn’t “damaged” anything, jackass.

81 Bill September 10, 2017 at 7:54 pm

Ever pay a higher price for a direct flight than for one through a connecting city when there is capacity on the direct flight.

You never consider that a marketing four paw, so to speak.

Businesses have always been disabling or changing products to separate markets so they can price discriminate ever since they started added salt to “cooking” wine even in states which permit wine sales in grocery stores.

82 Normal September 10, 2017 at 8:22 pm

Oscilloscopes have been sold this way for decades, and may be the first products to use this strategy. In the old days, you could buy an extra feature for your ‘scope that would come on a little PC board with a memory chip. At some point – 20-30 years ago – they realized that it would add near zero cost to simply put all of these features into the internal memory. Now, if you want an upgrade, you pay for a code. It’s quite possible to buy a $2000.00 oscilloscope and pay another $10,000.00 to enable built-in features.

At first blush it seems unfair, but keep in mind that each of these features is a piece of software. The manufacturer may have spent millions developing the software for that feature.

83 Dale September 10, 2017 at 8:56 pm

How many trolls think it is worthwhile to submit the same argument over and over again? Yes, the article is mistaken and poorly researched. So, why do so many people feel like they need to point out the same thing? Are you getting paid by the post?

84 Mic F September 10, 2017 at 9:09 pm

You’re an idiot. Tesla has become the worldwide leader in their industry in less than 15 years. Their vehiclea have built-in ability to upgrade (future-proof some would say) WITHOUT HAVING TO PAY FOR THOSE FEATURES UPFRONT. You cannot claim that Tesla “damaged” their product because the owner never paid for that extra range. They knew exactly what they were buying and what could be unlocked if they choose to upgrade their vehicle later. The truth is, most products take so long to produce and deliver that they’re already years behind what consumers want. Tesla has already proven to have the most satisfied customers (98%) in the world, myself being one. I imagine their customers are extremely grateful to have a little extra range in this time of need.

85 Craig Simmerman September 10, 2017 at 9:25 pm

Just replace Tesla with GM and read the article again.
How many come to the same conclusion?
I’m thinking not many…

GM fan boy.

86 Tom West September 10, 2017 at 9:28 pm

Funny, I just came from a forum excoriating Tesla for *exactly* this.

Now this may be irrational, but if a large enough segment of your potential customer base is irrational, then failure to cater to their irrationality, even if it reduces consumer welfare, *is* a marketing problem, which is exactly what Alex claimed.

If you are claiming that Tesla should only care about selling to rational customers, you are doing them no favors.

87 Dan Hanson September 10, 2017 at 10:56 pm

Yeah, the software upgradeability thing isn’t a problem. A bigger marketing problem might be the realization that an electric vehicle is a poor choice for getting you away from a disaster. That 220 mile range with no possibility of emergency refueling enroute adds a whole new level of ‘range anxiety’ stress. If your electric car runs out of juice on the interstate, it’s a lump of metal.

How many people could have evacuated the area of the storm if they were all driving electric cars?

88 Eric H September 10, 2017 at 11:42 pm

AT: “the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles? The answer … is price discrimination! …Note the last sentence–damaging goods can be beneficial to everyone! Consider: Without selling to the high willingness-to-pay customers at the high price the good might not be produced at all because the profit from customers who are only willing to buy at a discount aren’t enough to support the R&D. Thus, the high willingness-to-pay customers aren’t worse off from the existence of a discounted version and the low willingness to pay customers and the firm are clearly better off.”

Detractor 1: “Alex is an ass hat. Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.” And they were happy to get the 60 kWh car at a lower price, like it was “beneficial to everyone” and they were “clearly better off”.

Detractor 2: “Another AlexT textbook problem crammed into the real world, … Ever heard of the 386-SX microchip, Alex? It had the co-processor crippled. And it was price discrimination” And look, another example of a the same textbook problem crammed into the real world. Almost like it’s a real world problem.

Commenter: “Yes. I bought a 60 with full knowledge that I could upgrade it to a 75 at a later date with an over the air software update. I was very happy to have a cheaper option to help justify the car to myself.”

Detractor 4: “I also have a Model X 60D and love it. I got a steep discount, plus better battery life because Tesla decided to build it with a larger-than-necessary battery pack. Win win. This article would never have been written if the author had bothered to talk to an owner of a 60kW vehicle first.” How is “beneficial to everyone” and “clearly better off” different from “win win”?

Detractor 5: “Do your research. These vehicles were marketed as software limited 75kw vehicles. At anytime the owners could pay to use the “extra” 15kw. There’s no mystery, Tesla isn’t scamming customers. All it is is that you don’t know what you’re talking about.” How is “beneficial to everyone” and “clearly better off” the same as scamming? Perhaps you should follow your own advice.

Detractor 6: “Tesla hasn’t “damaged” anything, jackass.” Um, perhaps you didn’t read the part about intentionally restricting the performance, or the explanation of how this relates to a category of goods known as “damaged”?

Wow. Some people are so eager to call Alex names that they overlook the simple truth of what he wrote. Even though Alex points out that this is win-win (alas, without saying that exact phrase), supported by the testimony of Tesla owners admitting that they understood that they were buying artificially limited (“damaged”) goods and preferred it that way for the reasons Alex stated. Commenters confused “monopoly” with price discriminators, misunderstood what is meant by “damaged”, confused price discrimination with scamming, defined price discrimination and then denied it, and insist that there is no damage in the face of buyers acknowledging that there is. Why is this?

I think Alex may be right about the faux pas, from a marketing standpoint. Not because it’s a sudden revelation, but because people sometimes react irrationally to facts they already knew but had not openly admitted. Fortunately for Musk, his fanbase is Jobsian and they’ll take any bad news in stride.

89 RussellL September 11, 2017 at 12:43 am

Detractor 1: “Alex is an ass hat. Buyers of the 60kWh cars were told they are getting a 75kWh battery but restricted to 60kWh. They were told they can pay an additional fee to unlock the extra 15kWh.” And they were happy to get the 60 kWh car at a lower price, like it was “beneficial to everyone” and they were “clearly better off”.

Yes, yes and yes.
And at a time of emergency, they got full use of the 75kWh battery without having to pay for it.

90 ChrisA September 11, 2017 at 2:23 am

+1

I didn’t realize just how fanatical the Musk fanbase was, thanks Alex for this very interesting post.

91 Larry Siegel September 11, 2017 at 4:42 am

You don’t have to be a fanatic to think that the Tesla is a great car and that Elon Musk is an inventive, interesting guy. Companies should be free to do what they want and charge what they want and that is what Tesla did.

Nevertheless, there may be negative reputational effects from people whose innate sense of fairness leads them to think that if a company charges less for a version of a product, it’s because that version costs them less to produce. End of story as far as I’m concerned.

92 Saint-Frusquin September 11, 2017 at 12:05 am

Tesla owners are rich enough to understand what discrimination is. They want discrimination, they have it. Teslas aren’t Wolkswagen

93 RussellL September 11, 2017 at 12:23 am

If I want, or can only afford, a 6 cylinder Mustang, am I being discriminated against because I didn’t buy the V8?

94 Dan Lavatan-Jeltz September 11, 2017 at 1:43 am

I wonder why the owners haven’t replaced the OS with their own open source version that allows them to do whatever they want with the battery, including replace it with a diesel generator. Has anyone tried this yet?

95 Fuffler September 11, 2017 at 6:21 am

Imagine if the limited portion of the battery was visually in your face 24/7. If I were Tesla, I would do that to push cheapo owners to man up and pay.

It’s so interesting that it is cheaper to make just one battery pack instead of a 65 and 75 version. I would be a little pissed.

96 chuck martel September 11, 2017 at 8:12 am

If Tesla can remotely extend the range of its vehicles then it must also be able to shut them off entirely. And that must mean that entities other than Tesla would be able to do so as well.

97 Eric H September 12, 2017 at 8:48 pm

+1

All the more reason to be concerned when St. Obama’s administration pursues a legal decision to force Apple to open up to Uncle Sam.

98 Joshua Gans September 11, 2017 at 8:54 am

The goods aren’t damaged in the classical sense. It is more like you have to pay extra for more services. In other words, it is like ordering a cable box that can have HBO but not paying for HBO. Importantly, it is not costing Tesla more to damage the goods as happens in the classic price discrimination problem.

There is another BIG advantage to price discrimination this way. You do not force people who don’t value range to buy it because they are worried their car will have less value in the future. In other words, there is no ‘unused sunroof’ effect. The same is true of autonomous capabilities in Teslas. This strikes me as a much more efficient way of carrying out price discrimination than straight out versioning.

That said, I wonder if Tesla may be better off, offering a subscription for range. That way, if you are going on a long-trip you can pay to have the service activated (as you might do with Satellite radio). This would make the car more valuable and it would take out the sting of price discrimination for those who pay upfront for the capability.

99 Axa September 11, 2017 at 9:03 am

It’s an economics blog, it’s not the classical sense. Alex provided a link to the Deneckere and McAfee article where they define “damaged goods”.

Reading is underrated =(

100 londenio September 11, 2017 at 9:10 am

I believe the original proverbial story about “damaged goods” was salespeople making small dings and scratches on white products to sell them at a discount to the price sensitive and charging more to the rich. So the damage was real. Also in some electronic products, the low-end version had some cables literally cut-off, to disable some of the high-performance components.

101 Eric H September 12, 2017 at 8:52 pm

Welcome to the 21st century, in which most devices are controlled by software instead of physical wires and switches. Actually building a 75 kWh battery, and then limiting it to 60 by means of software limits is no different that building 5 x 15 W batteries, but only wiring 4 of them. Or building a V8 but not putting headers and 4 barrel carbs and a blower on it (but making those available by upcharge). Except, of course, that the software wire/switch/upgrade is easier to do remotely.

102 A Definite Beta Guy September 11, 2017 at 9:25 am

God, what’s with all the Tesla fan-boys? Can you guys at least admire companies that don’t lose a billion dollars a year?

103 TMC September 11, 2017 at 10:55 am

+1 God help us when the new iPhone comes out and someone writes that it isn’t really the best thing ever.

104 Null September 11, 2017 at 9:54 am

So many people write articles w/o doing basic research.

No this not a case of damaged product. Rather a product that can be enhanced w/o a trip to a dealer.

Only damaged goods here is the author.

105 advisr September 11, 2017 at 10:32 am

It’s a shame so many people fail to understand that “damaged goods” is economic jargon.

106 ChrisA September 11, 2017 at 11:48 am

They are all so insulting as well, I wonder if it is the same guy posting under multiple aliases.

107 athEIst September 11, 2017 at 8:33 pm

I used to use two aliases. Do it more than three or four times and inquiries will be made.

108 Albigensian September 11, 2017 at 11:04 am

It’s hard to be upset about this, but easier to be upset that Tesla can “upgrade” your car whenever it wishes to do so.

Everyone seems to accept “damaged goods” as the freeware part of a freemium software offering, where upgrading to the pay version may consist of paying to obtain a password which, when you type it in, enables the premium features.

I don’t see why it would or should be different for physical goods. In any case,it doesn’t seem to be new. At least, there are apocryphal stories of IBM techs enabling premium features on ancient mainframes by cutting a wire somewhere in the bowels of these physically huge machines.

If you paid for the 60kwh battery then you get the 60kwh battery, so what’s the problem?

On the other hand, if Tesla motors ever goes bankrupt, or if some rogue disgruntled employee retains access to the upgrade servers, what’s to prevent an over-the-air “upgrade” from disabling (perhaps permantently, if software causes physical damage to something, perhaps by causing it to overheat) your vehicle?

109 Hazel Meade September 11, 2017 at 11:40 am

I suspect that the update is a software fix of the sort of thing that Tesla delivers regularly, but in this case delivered it early in order to get it to users before the storm hit.
They are probably updating software to optimize fuel efficiency and extend driving distance all the time. They are probably using some pretty advanced machine learning techniques to optimize fuel efficiency, on the cutting edge of ML, so it’s hardly a surprise that better software might be released after the cars are sold.

110 Hazel Meade September 11, 2017 at 11:56 am

Ok, I think the real reason for this is this:
Updating firmware requires someone to do some work of some sort to hook the vehicle up to a thumbdrive or whatever via a USB port, and reboot it.
Since vehicle production is not necessarily lined up with software production, this means that sometimes vehicles get shipped without the latest and greatest firmware, or without firmaware that matches their hardware (i.e. a 75kWh battery with software designed for the 60 kWh battery)
It’s too costly for Tesla to make the dealers go through the process of updating each and every vehicle with the latest software delivery every time the software is upgrades, so instead, they offer consumers a discount for buying the vehicle with the old firmware and then pay a fee to get the latest software release and install it themselves.

111 Anonymous September 11, 2017 at 4:47 pm

Welcome to the markets of digital goods. The situation is logically equivalent to sales of any copyrighted digital products. For example, you can get a trial version of software for free, but it stops functioning after 30 days or is missing some freatures unless you pay. Of course giving a fully functional version of the software to the users would cost the company nothing, but also they wouldn’t make any money this way. Thus they offer a “damaged” trial version of the software for free in hope that it would increase the amount of people who are willing to pay the premium price for non-damaged version.

If we don’t want to make any structural changes to our system for funding the creation of informational goods, we have to accept that price of things does not approach their marginal production costs anymore.

112 Thanatos Savehn September 11, 2017 at 8:18 pm

Maybe NVidia will take mercy on crypto miners in Texas and Florida and unlock more CUDA cores on cheaper GPUs.

113 evjuice September 11, 2017 at 10:31 pm

It’s also marketing brilliance.
Tesla once had a woman call them to ask where she could charge her car on a long distance trip to see her mother up the east coast. Since she did not have Supercharging the Tesla support person told her he would turn it on for her for one week so she could do the drive. She drove up to see her mother using the fast convenient Superchargers along the way. Two weeks later she drove back home finding lower power slow speed chargers and had to stop at more sites and for longer times. When she got home she called Tesla and bought the upgrade. Nothing like free samples to sell your product. Plus Tesla gets the goodwill of helping out others in a time of need. Boom!

114 RagnarD September 13, 2017 at 2:56 pm

This partly explains why Tesla is a peculiarly unprofitable carmaker. Batteries are very expensive. But offering different supply inputs with a smaller, cheaper, lighter battery would have been more expensive overall for them given their low volumes. So they sold a car with the same cost at a lower price, software limited.
As the super-sensitive Tesla-lovers in the comments section pointed out, they already knew about the intentional gimping, and like Musk, have convinced themselves to consider this production-line limitation a virtue.
A similar issue exists with the “autopilot” hardware. This expensive hardware is installed in all cars, but only a portion of owners are activating it and monetizing it. So buyers of Teslas who don’t intend to use autopilot are buying a more costly car than they need to. Given that the marginal cost of activating autopilot is minimal (basically entailing a customer service and potential lawsuit expense), one wonders whether Tesla will someday drop the price to get more marginal revenue. But then they would risk the ire of existing autopilot customers who paid more to flip the switch on.

115 lots September 14, 2017 at 12:18 am

Thank you for exposing the Tesla fan boy club I never could imagine existed. Makes me chuckle at the defensiveness.

So incredible that a software restriction being lifted was seen as charity. Talk about suckers
I laughed pretty hard envisioning the tesla owner caught in traffic using the free give away to run AC sweating evacuation.

Too funny people trying to be different

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