“The real world in which most businesses live is one with high fixed costs and low marginal costs.”
Is not two-thirds of the US economy services? I do not see services having the above characteristics, so are you really characterizing all sectors?
I see services as having those characteristics. The biggest service industry is health care. Why do hospitals charge $15 for a carton of orange juice? Because their prices have nothing to do with variable cost. They are trying to cover fixed cost. Doctors’ offices have the same issue.
Another major service industry is education. Why do colleges have such high list prices, and then offer discounts to those prices? Again, they are trying to cover fixed cost.
Yet another service industry is entertainment. The costs of creating a movie or covering a football game are fixed costs. The marginal cost of reaching an additional person in the audience is close to zero.
When UPS delivers a package, the marginal cost is nearly zero. They are allocating fixed cost.
If your business is financial services, the marginal cost of an additional customer is close to zero.
I have to think hard to come up with a service industry that has low fixed costs relative to marginal costs. Maybe day care, or home health care. Or haircuts.
If you count the accumulation of human capital as a fixed cost, even haircuts qualify because of occupational licensing.
Leaving aside the absurdity of OL for ear candling, a software dev has invested 25 years in human capital (since birth) in basic learning, and then (typically) several years more in experience in whatever technology you hired her for. It’s blurry because you may’ve paid her $100 an hour as a junior programmer while she picked up those advanced skills.
The marginal cost (opportunity cost) of an additional hour to the programmer is definitely not zero, but if anyone could do it, or if it were nearly costless to accumulate the human capital to do it (which is the same thing), it wouldn’t cost $200 an hour for a strong tech.
One large service industry with low pay and high capital costs is the hotel industry.
Professional services such as consulting, law, architecture. Restaurants are mostly variable cost ( food, labour, utilities,) , car repair, construction
In both you examples (education and healthcare) you also have the added dynamic that different pay different amounts for those services (Medicaid or scholarship students) which means that in the “full price” payers are bearing the fixed costs of others as well…
In services, one thing that changes the allocation between fixed/marginal cost is salary vs. hourly. (fixed hourly contracts being somewhat more like salary) Business with lots of flexible hourly employees can adjust employment to meet demand more quickly, with associated marginal costs, than a situation which requires hiring and firing. For example, UPS hires a lot more temporary drivers in December and starts renting trucks from Ryder, Penske, or U-haul.
Daycares are a bear to start- largely due to regulation. People will work extra hard to keep one open because it is so hard to re-open.
The difficulty of this exercise to me implies the primacy of capital or the urgency of regulation streamlining.
Investors don’t really think of most services as low marginal cost (high operating leverage) businesses. A classic services business is Accenture. For each additional assignment, Accenture has to hire new consultants. That’s high marginal cost. UPS is another high marginal cost business. More packages means more planes, trucks, drivers, jet fuel and gasoline. That is very high marginal cost. You may think of the planes and trucks as fixed cost, but it’s really a marginal cost. There isn’t much operating leverage at UPS.
Hospitals have to be divided between the real estate business (high fixed cost) and the medical services side (doctors). So hospitals are only high fixed cost businesses to the extent they are really hotels with generally low occupancy. Otherwise they are probably like any other business that hires bodies out by the hour. More bodies, more cost.
Financial services is, again, a high marginal cost business. When Goldman Sachs has a rash of new deals, it has to hire new bankers. New clients means new bankers. That’s a high marginal cost business. If banking were a low marginal cost business, there would be advantages to scale. There mostly aren’t. A local savings and loan can generate the same ROE as Bank of America.
The internet brokerages are one of the few high operating leverage businesses in banking. That’s the classic new economy high operating leverage business: a web site plus a database. That describes Uber, Amazon, Netflix, and most of the new economy, high operating leverage businesses.