Incredibly Late First Draft- Ready for Editing etc.

The Internet Marketplace and the Real Economy

-- By MeharJagota - 14 Jan 2012

The marketplace for real goods and services born on the internet continues to become a ritualized mode of consumer behavior in 21st century Western economies. The more salient issues in this subject, many of which we discussed in class, concern the role of the internet platform and its bottleneck gatekeepers in establishing a structure which that enhances profits while ostensibly serving to augment consumer surplus. Nonetheless, forFor simplicity, I will analyze a hypothetical marketplace in which there is little collusion between producers and suppliers and therefore ideal conditions for rigorous reverse auctioning. I hope to determine the form and incidence of any efficiency gains engendered by this hypothetical new model, trends and predictions regarding the new market, and finally the role of the barriers to freedom discussed in class in negating such gains.

A Hypothetical Marketplace

This hypothetical market environment is primarily shaped by an abundance of consumer choice. Through the internet, a single consumer has access to multiple purveyors of the same good or service, and therefore avoids becoming a price taker. More importantly, the ability of a consumer to harness market information is most limited by the person’s capability to process and analyze such information. (There likely exists a critical point, for each specific consumer, tailored to their preferences and means, which most enhances individual welfare. Beyond this point, the consumer likely experiences drag from the costs of surveying the information. These are all dynamic processes, so it would be tough to arrive at a model to pinpoint this optimal level of information. Additionally, these processes are likely to change considerably even in a short term time horizon. ) Information symmetry is enhanced by the internet’s powerful communication network. Similarly, better information creates a more diversified set of discrete bundles available to each consumer for any given array of constraints. This enhances overall utility. (Better allocation capital to welfare enhancing aka NPV positive projects). (This is not necessarily Pareto Optimal, even before the complications discussed below, because this will expose certain markets to new people, which may diminish utility for some. For example, some people likely buy Lotus automobiles because no one has heard of them and they appear to be more expensive than they really are. If more people are aware of Lotus cars, perhaps certain people will refrain from purchasing.)

Need to expand here on what such a market would look like, and what this means for the real economy. Intuition is that after the dissemination, implementation, and proper ritualization of free software and its extensions, the online marketplace will be one of continuous auctioning, reverse auctioning, product differentiation, price segmentation, and amplified preference curves. This would be subject to constraints of law and politics.

Real World Deviations from the Hypothetical Market

The hypothetical market does not exist: Even without collusion among sellers, the internet provides the means for price discrimination, as Eben explained in class. First, the seller must identify market segments by price elasticity of demand. Second, the seller must be able to enforce the scheme and prevent arbitrage. The former task is facilitated by data aggregation. This data has the curious property of being worthless as individual data points to each respective consumer, while being extremely valuable once it is aggregated beyond a critical point. The latter is enabled by the leverage of most prominent sellers, consumer ignorance (maybe this is where to insert Eben’s thesis that the elimination of privacy has inhibited the ability of the consumer) , and limited means, all of which creates the friction necessary to prevent clean arbitrage. For the consumer to have sanction power, there must be alternate suppliers available from which to select, or there must be a mechanism for unencumbered negative feedback. Although both of these things ostensibly exist in many internet goods markets, efficacy is undermined by the market segmentation paradigm, through which firms are able to market their products directly to precisely those consumers who will provide positive feedback.

Where are we headed

Because of the dynamic discussed above, in which increased information leads to enhanced consumer choice, dominant market players which have colluded to establish the current regime can claim that they have brought an abundance of choice to consumers. They can make the argument, to counter proponents of free software, that they have established a “second-best” regime, as a world of free software and freedom of information is not feasible. This false pretense might perpetuate the current regime of consumerism as it gains the tacit compliance of policymakers and other stakeholders.

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