impacts Economics Design on the Internet

The Law of Scarcity When there are insufficient goods and services to satisfy all the human needs and wants of a society from: An Introduction to the Market System , by Kalman Goldberg !

When there are insufficient goods and services to satisfy all the human needs and wants of a society

from: An Introduction to the

Market System , by Kalman Goldberg

Demand Curve, or How Consumers Think

Supply Curve, or How Companies Think

How Do We Decide?

Markets “ A market is ... a process by which buyers and sellers are brought together so that they may exchange goods. The process may occur at a particular place or by any number of convenient methods ...” ... like, ahem, the internet from An Introduction to the Market System , by Kalman Goldberg !

“ A market is ... a process by which buyers and sellers are brought together so that they may exchange goods. The process may occur at a particular place or by any number of convenient methods ...”

... like, ahem, the internet

from An Introduction to the Market System , by Kalman Goldberg

What is a Good Market? Consumers (buyers) get what they want Companies (sellers) get what they want Nobody gets hurt Win-Win Situation from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

Consumers (buyers) get what they want

Companies (sellers) get what they want

Nobody gets hurt

Win-Win Situation

What Makes a Good Market: Property rights are protected from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

What Makes a Good Market: Competition is fostered from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

What Makes a Good Market: People can be trusted to live up to their promises from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

What Makes a Good Market: Side effects on third parties are curtailed from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

What Makes a Good Market: Information flows smoothly from: Reinventing the Bazaar, A Natural History of Markets ; by John McMillan

Market Transparency The more transparent a market is, the easier it is to find out things about it, including what types of products or services are traded, their prices, and where they can be purchased Generally speaking, the more transparent the better !

The more transparent a market is, the easier it is to find out things about it, including what types of products or services are traded, their prices, and where they can be purchased

Generally speaking, the more transparent the better

Disintermediation The removal of intermediaries in a supply chain i.e. cutting out the middle-man

The removal of intermediaries in a supply chain

i.e. cutting out the middle-man

Search is the main means of TRANSPARENCY on the internet But data is the source of it.

“Laser focus on search” “ We are laser focused on search. We are not doing valuations. We are not creating heat maps. We are doing high-performance search.” Alex Chang, CEO of Roost, a real estate search engine

“ We are laser focused on search. We are not doing valuations. We are not creating heat maps. We are doing high-performance search.”

Alex Chang, CEO of Roost, a real estate search engine

Before After

The Semantic Web An evolving extension of the World Wide Web in which web content can be expressed not only in natural language, but also in a format that can be read and used by software agents, thus permitting them to find, share and integrate information more easily

An evolving extension of the World Wide Web in which web content can be expressed not only in natural language, but also in a format that can be read and used by software agents, thus permitting them to find, share and integrate information more easily

Impact on Transparency “ Customers would benefit from the higher market transparency [engendered by the semantic web] and could make their buying decisions based on solid, computable information basis. Manufacturers ... are interested in informing as many potential buyers as possible about the existence of their products.” from: On the Move to Meaningful Internet Systems 2003 by R. Meersman, Zahir Tari

“ Customers would benefit from the higher market transparency [engendered by the semantic web] and could make their buying decisions based on solid, computable information basis. Manufacturers ... are interested in informing as many potential buyers as possible about the existence of their products.”

from: On the Move to Meaningful Internet Systems 2003 by R. Meersman, Zahir Tari

one day soon maybe ... Semantic linkages are the main means of TRANSPARENCY on the internet But data is the source of it.

Whatever can be TRANSPARENT will be TRANSPARENT Whatever can be DIGITAL will be DIGITAL

Search Good Goods or services that you already know the value of examples: iPod, airline flights, etc.

Goods or services that you already know the value of

examples: iPod, airline flights, etc.

Experience Good Goods that need to be experienced before you know the value examples: wine, doctor’s visit, trip to Antarctica, etc.

Goods that need to be experienced before you know the value

examples: wine, doctor’s visit, trip to Antarctica, etc.

Presenting Experience Goods Rating systems make experiences discrete Multivariate (more so than search goods) and multi-situational analysis

Rating systems make experiences discrete

Multivariate (more so than search goods) and multi-situational analysis

possible variables: Date movie, chick flick, “mindless fun,” keep the kids busy, viewer age, anchoring biases, etc.

Information Good Goods whose main value is derived from the information it contains, not the means of distribution examples: music, news, photos, etc.

Goods whose main value is derived from the information it contains, not the means of distribution

examples: music, news, photos, etc.

“ The internet is just one large copy machine”

Distribution costs are almost nill

Switching Costs Any impediment to a customer's changing of suppliers for example : switching from Verizon to ATT

Any impediment to a customer's changing of suppliers

for example : switching from Verizon to ATT

Commodification The transformation of goods and services into a commodity And a commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a given market

The transformation of goods and services into a commodity

And a commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a given market

Perfect (Commodity) Markets Assume Cost to Produce Increases with Quantity Supplied

Information Goods and Markets “ Markets ... for information goods aren’t viable, since the cost of incremental production is zero, your competition can sell for a lower cost and still make a profit.” from Information Rules by Hal Varian and Carl Shapiro

“ Markets ... for information goods aren’t viable, since the cost of incremental production is zero, your competition can sell for a lower cost and still make a profit.”

from Information Rules by Hal Varian and Carl Shapiro

In Information Markets Consumers Win! Cost to the Producer Does not Increase with Quantity Supplied

The Great, Ongoing Information Good FIRE SALE the price of many information goods will be driven to zero ... or the cost of looking at advertising

The Great, Ongoing Information Good FIRE SALE some caveats: intellectual property rights fixed costs of production complimentary goods fidelity paying for a hard copy no ads etc.

Lock-In Lock-in makes a customer dependent on a vendor for products and services, and unable to use another vendor without substantial switching costs

Lock-in makes a customer dependent on a vendor for products and services, and unable to use another vendor without substantial switching costs

“The Attention Economy” “ The Attention Economy is about the consumer having choice - they get to choose where their attention is 'spent'. Another key ingredient in the attention game is relevancy. As long as the consumer sees relevant content, he/she is going to stick around - and that creates more opportunities to sell.” Alex Iskold (Read Write Web) related concepts: experience economy, surprise economy, expectation economy

“ The Attention Economy is about the consumer having choice - they get to choose where their attention is 'spent'. Another key ingredient in the attention game is relevancy. As long as the consumer sees relevant content, he/she is going to stick around - and that creates more opportunities to sell.”

Alex Iskold (Read Write Web)

related concepts: experience economy, surprise economy, expectation economy

The GREAT “Experience-ization” companies want their (information) goods to be valuable

Digital features and functionality ... ... are also information goods ... ... and subject to the same economic rules ... ... namely that someone can do it cheaper.

Network Effect A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter

A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter

Network “Effect-scalation” Rapidly building (or attempting to build) network effects by asking users to import their networks from other social networking sites

Rapidly building (or attempting to build) network effects by asking users to import their networks from other social networking sites

Matching Problem How can groups of people (e.g. buyers and sellers) be brought together to create the most value

How can groups of people (e.g. buyers and sellers) be brought together to create the most value

“ Long tail” aggregation of desire

Aggregation of buying power

Microsoft And Yahoo Microsoft has “a long way to go, and Yahoo seems to be a way to accelerate that because of the critical mass that’s required to compete.” Steve Ballmer, CEO of Microsoft

Microsoft has “a long way to go, and Yahoo seems to be a way to accelerate that because of the critical mass that’s required to compete.”

Steve Ballmer, CEO of Microsoft

“Barriers to Entry” Obstacles in the path of a firm which wants to enter a given market

Obstacles in the path of a firm which wants to enter a given market

First Mover Advantage Being the first to enter a market or to introduce an innovation because the firm can erect barriers to entry and discourage potential rivals

Being the first to enter a market or to introduce an innovation because the firm can erect barriers to entry and discourage potential rivals

Transaction Costs (Risks) A cost incurred (or risk faced) in making an economic exchange Includes information costs, and managing risks (i.e. issues of trust, issues of price) The higher these costs (risks), the less likely a transaction will occur !

A cost incurred (or risk faced) in making an economic exchange

Includes information costs, and managing risks (i.e. issues of trust, issues of price)

The higher these costs (risks), the less likely a transaction will occur

Information Costs The costs of acquiring information on prices, product qualities, and product performance

The costs of acquiring information on prices, product qualities, and product performance

Asymmetric Information This situation is present when one party to a transaction has more or better information than the other party for example: I know I’m selling a fake, and the buyer does not

This situation is present when one party to a transaction has more or better information than the other party

for example: I know I’m selling a fake, and the buyer does not

Signaling The idea that one party in a transaction conveys some meaningful information about themselves to the other party for example: I tell you my real name

The idea that one party in a transaction conveys some meaningful information about themselves to the other party

for example: I tell you my real name

Creative Destruction The process of transformation that accompanies radical innovation (i.e. a lot of people go out of business)

The process of transformation that accompanies radical innovation

(i.e. a lot of people go out of business)

Top 10 Reasons Why Markets Love The Internet 10. Couchville 9. Kozmo 8. Audrey 7. iSmell 6. Flooz.com 5. CueCat 4. CyberRebate.com 3. iLoo 2. FuckedCompany 1. Microsoft ...?

10. Couchville

9. Kozmo

8. Audrey

7. iSmell

6. Flooz.com

5. CueCat

4. CyberRebate.com

3. iLoo

2. FuckedCompany

1. Microsoft ...?

Thank you for attending (and thanks to Wikipedia and The Economist for my MBA). Questions ...?