The Theory of Competition vs. Pricing in a Seller’s Market

In a recent episode of “This Week in Startups” (TWiSt), Jason Calacanis and Molly Wood discussed Google’s business model (see, e.g. “The #Future of #Retard #Media in 4:20″ [ http://nooblogs.com/activity/p/5321/ ]).

One aspect of where traditional economics does not seem very good at dealing with the online economy is in the pricing of information and/or informative content. Please don’t try to nail down these concepts as referring to something very specific, because this is actually more of a sweeping generalization. One of the many ways this generalization has manifested in reality is via so-called “auction” markets (and/or “auction pricing” models).

You might think that over many centuries of stock market trading there might be more knowledge about how such markets work, but my hunch is that a big part of the reason why there isn’t much knowledge about this is that these markets were very closed off (ironically, in economics one of the defining characteristics of a market is infinitesimally small — “low” — barriers to entry). Traditional stock markets are anything but that!

In the example cited above (go ahead and follow they link / watch the video segment, so that you can better understand what I am referring to), Jason mentions the string “used iphone”. Naive users of such “retard media” platforms believe the results for such a search display a plethora of competing sellers. In fact — as Jason noted — pretty much the entire page is plastered with offers from Google advertising partners. In other words: Google has essentially become what it replaced only about 10 years ago: the “yellow pages”. Such a page has no magic algorithm brought to you by a web of links behind it — it is 100% “paid media”.

Normally, competition refers to a market in which an individual buyers can peruse offers from a wide variety of competing sellers — i.e. a beverage aisle with dozens or even hundreds of different kinds of beverages.

In contrast, Google faces a very different situation. It is widely seen as a monopolist, owning such vast market share that it is in a position where it could virtually dictate the market price. Its marketing department tells the vast population of hungry buyers that the company has developed sophisticated algorithms for something like “fair pricing” is such auctions… — apparently the auctioneer is a very trustworthy seller and would never steal anyone’s shirt.

Over the past several years, I have been noticing that Google’s marketplace has become increasingly populated by novices — more well versed users have increasingly migrated to other platforms for specific queries in which they have already acquired some expertise. This development is quite probably one of the main reasons why a company like Amazon would acquire the domain name “diapers.com”. I am often reminded of a television ad where the voice-over said (of a clothing retailer’s offers): “an educated consumer is our best customer“.

Perhaps one of the most ironic aspects of the technological revolution we are currently experiencing is that the success and failure of any undertaking has much more to do with the limitations of “human technology” than with semiconductors, big data, etc. The very human psychology and the very human behavior of human actors seem to be often overlooked to the peril of the short-sighted. As Molly Wood aptly agreed (with Jason): “The core business is going to die”.