For 1, pricing in these scenarios assumes a portfolio effect on the total cost of production for all units sold. Premium features are built into every car, which enables customers to enable them at a later date, but the cost isn’t passed on. Instead the premium feature is marked up to cover costs plus profit for all cars sold with that build. As mentioned elsewhere there are mass production efficiencies involved as well, reducing the unit cost for all cars as there aren’t N variants being built but a single mass production line that’s invariant. The residual costs are covered by the minority who buy the premium features for every unit, enabled or not, and it’s priced that way. This translates into overall cheaper cars for people without the feature enabled, and cars with a better resale value because those features can be still enabled in a secondary market sale. It also translates into cheaper cars for the premium car purchaser as well even though they subsidize the feature build in all cars enabled or not.

> Pardon my ignorance, but if the cost of the hardware is already baked into the cost of the cheapest options, which means they are paying for all of the hardware they have in their cars, including the hardware they can't use, how do they benefit?

The idea is that the “cheaper” models are getting the hardware at a discount. Very simply: are getting $30,000 of hardware for $25,000 because features aren’t active. Others are willing to pay $35,000 for the same hardware with the features active. Obviously this example is over simplification of pricing and value, but that’s the general idea.

It may actually be even better than that.

If the manufacturer hadn't done this, they would have to produce at least 2 versions of the car: one without any extra hardware, and one with all the extra hardware.

It may turn out that doing separate versions of the car could cost $5,000 more per car over its entire lifetime, including production (extra design, assembly lines, etc) and support, rather than simply making one version of the car.

So if the car company hadn't done this, the car might have cost $30,000 anyway without the extra features, and $35,000 with the extra features, so the poorer customers would lose while the rich customers would pay the same.

This works more or less the same if these costs are comparable or higher than the costs of the extra hardware. And I suspect they are higher, as it seems highly likely that the price for these premium features in cars are a lot higher than the actual costs of the hardware itself.

Sure, the company could still engage in the same wealth redistribution / subsidization / price differentiation in the 2-car scenario (and they likely already do), but everyone could still lose anyway because the total costs of all the cars could still be higher in total.

I don't think I understand your question.

The customer can be receiving extra hardware and still be paying a cheaper price due to the assembly line efficiencies you mentioned, as well as the support costs of having just one new car model every year instead of 10 slightly different car models every year.

In other words, the additional hardware costs might be lower than the other cost reductions due to the increased efficiency.

Furthermore, even if the customer is paying exactly the same as before for the car (but now they are getting additional hardware which they can't use), it would be cheaper and much easier for these customers to upgrade their car if they so choose.

This would also mean higher profits for the car manufacturers, which allows them to reduce the initial purchase price of the cars to compete more effectively in the market.

And if it turns out that the car is more expensive due to having to buy the additional hardware, since these customers are price-sensitive they can just go to a competitor who would sell them a car without the additional hardware, therefore cheaper.

EDIT:

> Again, pardon my ignorance, but it feels disingenuous to call it "an upgrade" if the car already has the equipment, especially to be charged more to use what you've already paid for.

Perhaps that's because you're only considering the cost of the hardware and not all the other costs of producing and supporting all the different car models for every combination of hardware features each customer would choose?

I mean, yeah, sure, car companies could just sell a car with all the hardware features enabled and charge all customers the same, but then the price of the cars would be higher for those who don't need all those features, as the company wouldn't be able to charge higher prices for premium customers to subsidize the cars for the "poorer" customers.

> if the cost of the hardware is already baked into the cost of the cheapest options, which means they are paying for all of the hardware they have in their cars ...

The way to think about it is that the people paying for these extra features / buying the premium model with software-unlocked features are paying to add these features (locked) to every car sold. Because this is cheaper than making a different physical model.

For example imagine that 1/5 people want heated seats. Assume that adding these seats costs $100 to the manufacturing costs of a single car. There are two options here:

1. Create a new model. This makes the base model cost more (because you are making 1/5 less units so the overhead of design, validation and setting up the production line is spread across less cars) and makes the premium model cost much more (because you are only making 1/5 of the units). So maybe now you add $10 to the cost of the base model and $1000 to the cost of the premium model.

2. Add the seats to all models. This raises the cost of the car by $100.

Let's imagine that the base model price shouldn't be affected by the addition of the premium model. So we want all of this extra cost to be passed to the premium model. In scenario 1 this is effectively $1040 extra per car ($1k for premium + $10x4 base models). In scenario 2 this is effectively $500 per car ($100 x 5).

So option 1 doesn't make sense. It costs more for no real benefit.

> I can't see how the consumer benefits in that scenario by paying for something they can't use.

This is the thing. In theory the base model doesn't need to pay extra. Yes, their car was more expensive to make, but this cost was paid for by those who bought the premium model.

I don't know if I would argue that the consumer of the base model "benefits". Their model could be subsidized, or it could cost more, money is fungible in that way. But there is no reason why having this hardware installed but locked should increase the price that they pay. Without further evidence one would hope that the price of the car is unaffected by the premium model. Or maybe even cheaper because of benefits of the economy of scale (especially if the ratio of people buying the expensive model is higher).

I wrote a post about this a while ago with very simple examples of how the math works out https://kevincox.ca/2023/05/14/ethics-of-locked-hardware/