Is market efficiency primary?

Serendipitious find: “How Not to Build an Online Market,” (.pdf) by Peter Kollock and E. Russell Braziel. (Thanks to Ross Mayfield, who first wrote about it.) Very relevant to what I do on a day-to-day basis.

I look at areas like lead generation and I see inefficiency – not enough specialization in the market. A broker or bank needs to know how to originate loans and go out there and get leads from a variety of providers. A lead generator needs to do exactly that while also putting together a sales force to sell. I immediately think ‘ugh – why doesn’t the bank stick to loan origination, the lead generator stick to getting the leads in the door, and a party in the middle paste the two together for less than the cost of the bank’s marketing or lead generator’s sales force?’ I’ve always viewed market models as inevitable, since to me advantages of an efficient, transparent market are just so bloody obvious.

Unless, of course, I’m missing some of the advantages of an inefficient and fragmented market. (Which still feels sacreligious to me when I write it.) Kollock and Brazier’s paper looked at the raft of failed B2B marketplaces from the late 1990s and draws lessons from them – and has listed a number of key assumptions these B2B marketplaces, all of which I’ve been guilty of making at some point:

The first assumption of note was the very optimistic belief that deep, radical changes could be instituted in the way industries did business…

A second assumption was that it made sense to bring together previously unconnected buyers and sellers in a single market. [...] Sellers, according to this logic, want to be where there are the greatest number of buyers, and buyers where there are the greatest number of sellers. [...] However, this effort assumes that sellers and buyers in fragmented markets are actually trading “the same stuff,” which raises the issue of when goods can truly be commoditized…

A third assumption related to this point was that the appropriate goal for B2B exchanges was to model mature markets for highly commoditized goods, as exists in financial exchanges such as the Chicago Board of Trade or the New York Stock Exchange…

The idea of bringing together buyers and sellers in a single efficient market driven by price in anonymous exchange reveals an implied fourth assumption: that identity and the network of social relationships are unimportant to the functioning of a market. This runs counter to one of the defining themes in economic sociology: that networks of personal relationships are not simply empirically ubiquitous, but also often important for the healthy functioning of a market.

I’d already learned that a number of the assumptions above were false (and had adjusted plans accordingly) by the time I read Kollock and Brazier, but I’d never seen them put so succinctly. These days, I’ve been paying much more attention to the market as is, recognizing that a nascent market needs a different design than a mature stock exchange and making sure – as Kollock and Brazier suggest – that whatever market we develop reflects existing market sociology. Which is why I’m especially interested in transactions in the lead generation market that aren’t optimal economically, but are important socially. I know they occur, but I wish I had a better handle on the prevalence of the “I’ll buy your purchase leads on weekends even though I can’t do much with them, because we’ve got a good relationship” and the “I’ll sell you these leads for less than market rate because you’re a good customer and I want to keep you coming back” transactions – the ones that aren’t handled as well by an exchange model.