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Technology Stocks : Dell Technologies Inc.

DELL 121.05

+4.9%

Feb 6 9:30 AM EST

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To: jbn3 who wrote (46609)	6/7/1998 9:16:00 PM
From: Chuzzlewit	Read Replies (1) of 176388

Bachman, you asked where is the error? Answer: there is no error in your thinking. The problem with the declining ASP argument is that it is presented in a vacuum. It is always presented with two hidden assumptions: Hidden assumption #1: Demand is inelastic. Therefore, decreasing pricing to the consumer doesn't result in increased demand for the product. Hidden assumption #2: Gross margins are fixed. Therefore, decreased ASPs translate to decreased gross profits. Corrollary to hidden assumption #2. Prices are determined solely as a function of cost. Both of these assumptions are patently false. If we were dealing with a product like insulin it would be fair to point to assumption #1 as reasonable, and if we were dealing with a regulated commodity like utility rates assumption #2 would be reasonable. In the case of computers neither of these cases holds. Economics 101 teaches that optimal pricing is the result of the profit maximizing analysis. Dropping component costs increases the opportunity for profits. TTFN, CTC

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