October 12, 2009
In a perfect market economy, the price we pay equals the marginal cost of producing that last piece of product put out on the market. Profits are created where there is an inbalance between supply and demand in the market. In theory, supply will increase as long as there are profits to be made.
In reality however, this has not been a likely scenario as the perfect market needs complete information. In a world where there has been a lack of information, profits have been possible as demand or supply has not been transparent.
Now watch this video:
The long tail theory that Clay Shirky is talking about in his video above would incur that we should expect that the future will bring a next to perfect supply of information about both supply and demand. Thus, profits that are constructed from non-transparent institutions, or producing business models, will diminish over time.
The cost of transparency
Cause what has kept the market economy from fully functioning has been a monopoly in the access to information. With full transparency, we can begin to fully evaluate different options in contrast to others.
Regardless of whether or not a company is transparent or not, they will be anyhow. There is no room to hide in a world where information sharing and unboundary collaboration is possible. The surplus value of non-transparent business structures will be marginalized as you cannot say something and yet do another. You cannot charge a customer twice than what your competitor charges, if your product is known to be similar to the one of your competitor. You cannot even charge people a cent more. If you do, then demand will shift to your competitors product.
Long tail distribution of consumption and production
In a long tail world, where I connect to other people who like the same thing as me, a companys competitor becomes the customer herself. If a company doesn’t satisfy the needs of one person, and that person is one in a million, then that person have a statistical probability of finding 300 people with a similar demand on Facebook alone.
300 people is a large enough group to produce large enough of a demand for at least one of the people involved in the group to live of the surplus value it creates to satisfy the extra utility that is produced from producing the good that the people in the group wants to buy.
Misplacement of utility
The world before social media only allowed for dominant marketers to enlighten the utility of their products. A group of sowing Chinese production workers could not reach the 300 people in Sweden eager to buy their purple colored shirts. The Swedes had to go to the big retailer who sold the garment to its production price + distribution price + profit margin. They also had to obide to the supply given by the big retailer.
If the retailer said red was the color for spring, then red was what was in their stores. There was thus a misplacement of utility as the people really wanting purple could not get that shirt, but they had to buy a red shirt instead for the same price, but at a lesser perceived utility.
In a world of tribes this status quo changes as I can find someone who wants to produce the shit I want, and I can definitively find a group of people with the same demand as myself to bulk up enough buying power to make someone want to produce it. Perhaps production will not be any cheaper than it was before, and excessive profits will dissappear as a result, but I will get the shirt that I really want, that brings me the best utility, and someone will get to produce the shirt that they really want, and be able to have an ok life from that production.
So what does this mean
Well, we have allready seen this shift in digital products. Demand and supply has made business models next to non profitable for an institution, but still profitable enough for collaborative groups supported by the demand from passionate tribes. The most evident case being the music industry.
I believe we will see more industries walking down the same path as the music industry. Not only because social media allows for communication, but also because I think the speed of which social media is evolving is faster than the speed of change in large institutions that now have the production possibilities and supply power of the offline retail trade.
I’m simply asking… who wants to pay for the profits, when we know we don’t have to?