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Why don't people realize that 'high software profit margins' are fugazi?

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You're forgetting about copyright. Without copyright software would indeed be competed down to nothing, but with it you cannot run an open operation to zero out the price of software (or other information, such as fictional media or journal articles). You could, in theory, start a competing software company, but there are economies of scale and network effects that mostly prevent that (water has some of these too, but AIUI it's fairly tightly regulated and in practice even when it's not there's always the implicit threat of "if you play funny buggers with the water supply, much of the population will immediately drop everything to put your head on a pike and in a universal-franchise democracy they will get it").

If you want the price of software to crash to zero, therefore, making "people realise" that its equilibrium price is zero won't actually do anything. You need to revoke or at least massively rollback copyright law. Note that this will cause supply to drop significantly unless you do something about that.

This is mostly wrong. It's trivial to decompile a large share of contemporary software - the opportunity is there, but it is vanishingly uncommon for competitors to seize those opportunities. Similarly, my company had a large multinational client who availed themselves of the right to purchase our source code and walk after five years of business. They took the source code, then came back into the fold a few years later after throwing resources at their fork, being unhappy with the results, and missing our on all the great stuff we'd added in the same period.

The reason why is that most software is in a state of perpetual improvement.