The game of business strategy

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Greg Lewis says,

Sellers on eBay don’t quite know what gets them to the top of the search results in response to a query, but as they discovered when they made free shipping something that pushed you way up the rankings, suddenly everybody started offering free shipping. People figured it out.

The algorithm itself, the exposure, the possibility of being exposed to a customer might buy a product, very powerful and if you just start up-weighting certain features of the seller, what the seller is offering, then pretty soon, sellers will either figure it out or will die, in the sense that they won’t be on the platform and selling there much longer.

Pointer from Tyler Cowen. Tyler and I both find economists who work in business often to be more fascinating than pure academics.

I found that this wide-ranging interview reinforced many themes of mine. Business is turning into a strategy game. Price discrimination explains everything. Economic models tend to be too simple, and instead we need trial-and-error learning in many situations.

6 thoughts on “The game of business strategy”

  1. Search results become a congested queue, queue size and price are one in the same.
    I think the concept is much more universal than just trade, and applies across the board, ultimately, in physics and biology.

    What is fascinating is that if the search queue is structured into a certain minimal form, then queues can be homomorphic, and be compared with a ratio function. This is the principle of of a market making function, a pit boss can automatically perform pricing between structure buy and sell queues.

  2. The truth is that automated price discrimination explains nothing. It degrades the flow of information via price to customers.

    Vendors serve as an intermediary. We want them to solve a problem for us, and deliver a rational value proposition. Price discrimination is really the process of a vendor attempting to shift some of those problems back to the customer. The result is an obfuscation of the value proposition. A few companies can get away with this. A world where lots of companies do it turns markets into a mess. The mindspace of the average consumer is not unlimited.

  3. “we need trial-and-error learning in many situations”

    Actually, I think what we might call “learning forced by evolution like selection functions” is what actually happens, whether anybody needs it or not.

    So business people must be searching (by whatever means) for the best “evolved” position – and if they succeed will survive to the next round.

    I think there is some minimum failure rate these evolutionary functions impose. (That is, some number of ventures must fail.)

  4. Price discrimination is part of every buying decision, thus explains little of interest. (somewhat different than the point of Tom D). The pricing decision maker wants to set the “right price”, which maximizes the firms profits (in the firm’s desired mix of short – long term).

    It’s hard to get the price elasticities of buyers. Plus, many buyers have an internal price budget (for a car or stereo), and want “the best at that budget”.

    On electricity — and probably every high capital intensive mfg item:
    ” We find that people eventually do reach equilibrium, but it takes them three and a half years in the market where they only compete every month. In Steven Ali’s example, it’s much more like they compete every day. The prices goes a whole lot faster. I think it’s not a set of questions where the equilibrium is the right way to think about this. I don’t think that we know that that’s the right answer, I think it definitely varies, but something as simple as saying, “If everybody can do this best response exercise, we’re going to do this, I should do this. If I’m going to do this, you can do this.”
    ::
    So with fairly stable electricity supply, it took 42 months / price iterations. If the price iterations were daily it would be done in 6 weeks.

    It’s hard to know about buyers, but easy to see the prices of others. Models focus more on the easy competitor price facts, and try to solve for, or assume, the hard to know buyer responses.

    I immediately thought of how rapid tech changes, often within a 6 week window, partially invalidate a “prior equilibrium target”.

    There was some unexplored details about search and recommendations — when I wanted a Java course, I searched for “Best free course on Java” or some variant. To get the EdX MOOC (model is free audit course, paid low cost certificate). Others are available. Searching for best recommendation is often what I do, tho for books I just go to Amazon.

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