I bring good news: Slop isn’t going to win. Sure, the Reddit Regressions spew it on demand, cheaply and at scale, but sheer volume isn’t enough to be competitive.
It’ll lose—at least in software—for an Economics 101 reason: saving on the fixed costs of production does not give you more pricing power, and when higher levels of fixed cost purchase quality, a high quality entrant can survive an endless sea of low-cost entrants.
Slop can only come to dominate those industries where it reduces variable costs. It still might not. But there’s a chance…
To simplify the problem: suppose there are two potential firms that can choose their product quality, their prices, and whether to enter the industry at all. We want to understand when the whole industry can devolve into Slop.
Let’s start with the bad case.
If firms can create higher quality products by increasing their variable costs, then (Slop, Slop) is plausible because low-cost Slop allows you to charge lower prices that a high-quality product can’t match, potentially excluding the high-quality entrant.
Firm profits are, for a quality choice u, where c(u) gives constant variable costs, q(*) is demand, and f is the fixed cost of entry:
If the slope of c is steep enough, then higher quality entrants will have to maintain higher prices to have the positive margins needed to overcome fixed costs. This leaves room for a low-cost product to enter and acquire price-sensitive customers, further driving down margins—possibly to such an extent that high-quality entry becomes unable to overcome the fixed costs of entry (f) and we get (Slop, Slop).
This model doesn’t describe the Software industry though. The variable costs of software don’t increase with product quality (well, except the newfangled token-powered LLMs). The vast majority of quality-relevant costs are fixed costs: the engineers writing the code.
So, now suppose c does not depend on quality but instead product quality is financed by spending fixed costs (costs that do not increase with scale) so that we have:
Where S is market size, scaling up the size of demand.
Now, margins cannot be squeezed by a low-quality entrant because the pricing decision does not depend on fixed costs. So, (Slop, Slop) becomes untenable in a sufficiently large market.
To see this… Suppose there exists a non-Slop u* such that monopoly profits are positive. Now, say a Slop entrant comes in. At equal prices, everyone will buy the non-Slop product and the non-Slop product has the same marginal cost as the Slop entrant, so there will exist a way in the second-stage pricing game for the non-Slop product to make positive variable profits. Then, in a sufficiently large market, the non-Slop entrant will be able to earn enough variable profits to offset the cost of entry, preventing (Slop, Slop).
Because pricing is untethered from the cost of quality, high-quality firms have strictly more pricing flexibility and better demand curves, so they cannot be forced out by Slop entrants.
Okay, but what if there are a lot of Slop entrants. We might think that the sheer number of Slops must be able to take enough share away from the high-quality firm that it can no longer remain viable.
This turns out to not be true. The high quality entrant can maintain its share above a floor level in the face of endless cheap, low-quality competitors. I won’t spoil the model. You’ll have to read it from the source because it’s a delightful read:
This analysis actually shows one industry where Slop might win. LLMs themselves.
Because for LLMs there is a significant variable cost to product quality, so low-quality LLMs can offer prices that the high-quality Reddit Regressions can’t match.
The Creators of Slop being consumed by their Creation… It’s poetic and will, therefore, happen. The universe conspires to make good stories come true.
Thanks for reading!
Zach
Connect at: https://linkedin.com/in/zlflynn