antikoan

 |::| Saturday, July 27, 2002

 |::| The Real New Economy (Or: The Marginal Economics of Scale)  11:47:44 AM 

From Daypop Top News Stories, Cringely opines [direct link] on the real nature of the new economy, via eBay.

The second important social aspect of eBay is just who is doing all that buying and selling. It can be just about anybody, of course, but our freezer salesman from Utah is a guy who, for reasons I won't go into, probably wouldn't be economically productive at all if it weren't for eBay. This is true for many eBay professionals, who are generally new businesspeople doing new business. Hey this isn't Wal-Mart coming to town and killing the storekeepers on Main Street, nor is it Amazon.com killing the local book store. This is brand new economic activity evenly distributed in terms of geography and demography. And in that way, eBay means real economic growth. [emphasis added]

And there are economies of scale to be garnered, as well.

....[T]here is a technological secret to eBay....in the auction site's scalability. The idea behind almost every Internet retail business plan (and I have read hundreds) is to use technology to gain economies of scale. "We'll serve a million users with a staff of five!" the plans all claim.... But usually there aren't a million users for the product or service, yet the business plan nearly always requires building a commerce engine from scratch. EBay scalability stretches in two dimensions, bringing in both more consumers and more suppliers. At some point, the marginal costs really do drop to almost nothing, which they might do at another e-retailer if it could grow to $20 billion, though I doubt that will ever happen.

The "technological" secret is really an economic fact: eBay doesn't have to look for customers or sell product; all it has to do is rent space and facilities. And once you've built a highly-scalable building, that gets cheaper and cheaper all the time, until the marginal tau approaches zero. (And we all know what happens as tau approaches zero...)

One key thing to keep in mind here, IMO (and Cringely doesn't miss this) is that the impetus here is not from a large corporation; it's from individual buyers and sellers, negotiating in a bazaar. That's the strength, but it's also the great weakness. Some people function well in bazaars, and others don't; that's the major reason that bazaars have been largely supplanted by fixed-price retail. The highly subjective and ill-supported opinions of some new economy and free market zealots to the contrary, most people are not interested in haggling for every aspect of their lives. The success of eBay is probably largely due to the fact that they've been able to commodify haggling.

Another key area in which eBay has thrived is in paying attention to the needs of its buyers. Thay may have more to do with attention to their roots as old flea-market hounds than any high-end business savvy. Look at their willingness to accomodate anyone who can do a lot of volume. Look at their willingness to promote ideas like the "BuyItNow" button, that puts a close-the-bidding price onto an item. Flea markets and bazaars have always worked that way; if a buyer was willing to pay top dollar, they could get the item with no haggling required. eBay adds the unplanned innovation of driving that "top dollar" down to a more reasonable level. (Note the the volume sellers are much more amenable to "BuyItNow" prices than the small sellers.)

eBay may point a way, but it does not point the way, as Cringely seems to assume. Sure, "Bob Cringely" could become a Lavender merchant on eBay; but what would stop someone from using similar technology to achieve an economy of scale that cuts him out? Economies of scale will still exist, and will still prevail, and will do so even more ruthlessly as improvements in information technology make agile management of large scales more and more practical.

That's the key point that the advocates of "universal freelancing" and their ilk miss: What gets better for individuals also gets better for corporations, and the corporations still have more resources at their disposal to exploit that fact. A few eBay-like entities can now exist, and will even make a ton of money making competitive business possible for small-timers in ways (or at least, at margins) that weren't previously possible. But that will still only happen on the margins, where the profit isn't of enough magnitude to draw the attention of truly big players. To paraphrase the novelist Richard ben Sapir, if there's enough money involved, you'll always find a big guy who's faster than the small guy.