When Do Price Cuts Shrink a Market?

Cliff Sosin says a market shrinks once further price cuts stop creating enough demand, and a price of zero takes the market size to zero. Jevons paradox is only a narrow spot on a U-shaped demand curve, and markets in general take that shape. When a product is terrible, there is no demand. As the product gets better, people will pay a lot but will not buy very much. As the price goes down, the market grows.

Moving information once cost a huge amount, and people moved very little of it. A series of innovations cut that cost a lot, the amount of information moved rose sharply, and the market grew for a long time. Growth then stopped. The cost kept falling and the market kept shrinking. Cogent Communications, by his estimate, routes 30 or 40 percent of all IP traffic across the internet through one division, and that division is not even its biggest. Cogent is a few billion dollar market cap company, which is not a very big industry.

Intelligence need not get quite that small. Jevons paradox describes one spot on the curve, and that spot does not have to hold.