Pricing, Markets, and Demand, VRM style

Economists often talk of markets as price discovery mechanisms, and the freer the market, the more efficiently those prices can be discovered. In fact, in the absence of all transaction costs, free markets assure the efficient allocation of resources, regardless of initial distribution—that’s the core tenet of Law & Economics as proven by Coase ’60. Of course, we can’t ever actually get rid of transaction costs completely, but that’s ok. The lower they go, the more efficient the market, the better the overall utility of the economy.

But let’s not confuse making markets more efficient with making everything about pricing. Only in the simplest commodity markets is pricing ever the sole factor. Whether you focus on relationships and conversations or the 20^th century model of brand-driven differentiation, there are lots of factors that influence a transaction at least as much, if not more, than price.

I think it makes more sense to think of markets as “value” discovery mechanisms. It just happens that the industrial age conflated price and value, so the distinction was often ignored. When we have efficient markets, everyone has the simplest, fastest way to find the highest value we can, including price, quality, aspirational expressions, relationships, and moral or ethical congruence (such as being “green” or animal friendly).

So, there are at least two distinct ways VRM can help reinvent the market. First is providing a more efficient value discovery mechanism, in part by reducing transaction costs. That is, helping us find the good stuff more easily, more quickly, and more cheaply. Second is by helping to define new avenues for creating value, through richer, more meaningful relationships, better service, and greater customization in product and service offerings.

One particular false hope for VRM that I don’t want us to get distracted by is the illusion that by moving power from Vendors to Customers we can force better prices. That’s a win-lose game that is actually wasting resources trying to shift the line of marginal value towards the individual. It doesn’t result in any new value in the system and yet it increases transaction costs. This is clearly a net loss for the overall economy.

A related architecture with a much more satisfying win-win outcome is aggregating users to define & document demand in order to encourage vendors to fulfill that demand. This isn’t about market power, it is about market validation.

Eventful’s Demand service does this by letting people state their interest in having a particular event in their neighborhood. Like a petition, this demand is aggregated and presented to the event organizer to get them to actually bring the event to locations with the most demand. This not only helps bring the product to the individual, it helps the performers understand and meet market demand. This type of demand discovery actually creates value. There is more profit for the performers—or they wouldn’t bother doing the extra show—and end users get to go to an event they otherwise may have missed. This is such a VRM-style win-win that I have asked the founder of Eventful to join the conversation.

I’m looking forward to seeing how we might build on Eventful’s approach.