Douwe Osinga's Blog: The Internet Micro Economy Revolution

Tuesday, May 11, 2004

The Internet Micro Economy Revolution

A perfect market is a market where all parties, producers and consumers, have perfect information. They know what is on offer, for how much and where. Of course real markets are seldom perfect and for the lack of information capitalism has come up with a less than perfect solution: advertising.

Advertising tends to be annoying, isn't actually very informative and is expensive; it adds a lot to prices of everyday articles. Sure, it does support a large portion of the entertainment industrty, which is nice, but hardly a sign of an efficient underlaying market.

Not only is advertising expensive and not very efficient, it is also not very granular. If you're a small company and you want to attract more business, it seems logical to contact a advertising agency. Of course they'll charge you a bundle, but they'll also tell you that you cannot just put one ad in a magazine, but that you have to build up some kind of recognition in your target group. It's hard to run a campaign all in all under 50.000 dollars.

Enters Google. My parents have a holiday home (yes, in Drenthe) they rent out sometimes. Unfortunately, they don't have to have their guest book directly online, but if they would have, then they could start advertising on Google with a budget starting at 50 bucks. They could micro-manage demand by advertising more when they don't have many reservations.

A similar thing is happening at EBay. Selling second hand stuff was a nice start, but the real revolution is the selling of new stuff. EBay is rapidly developing into a global market place for everything, but especially for smaller sellers. Mask carvers in Africa, small time importers of electronics in Austria and dog breeders in Australia all serve their specialized markets over the Internet in a way that was inconceivable ten years ago.

It's the small things like this that make economies as a whole fastly more efficient. Now when will it show up in productivity statistics.