Transformation 21 (Part 1): Changing markets

This is the first part of a series of two posts on Transformation 21, meaning the transformation processes that our economies and societies are currently undergoing at a rather quick pace at different levels.

As a young student in economics I learned that from an economic theory point of view, the most desirable state (a “pareto optimal” state ) would be perfect competition. One of the conditions for prefect competition to happen is perfect information,

“assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times, and therefore always make the best decision regarding purchase.”

There has been a lot of criticism to the perfect competition model as actually most of its assumptions are hardly never true and that additionally it doesn’t consider any qualitative or soft factors (like innovation) and is only based on figures and quantitative indicators.

Nevertheless, there has been a constant trend in economic history over the centuries towards  a state closer to perfect competition and perfect information, without of course ever really reaching it. But we are talking about trends towards a continuously and dynamically moving target here and not about static and absolute situations that anyway only exist in theory.

Confronting these ideas with the speed of how the Internet, which means improved and more efficient communication and transaction infrastructures together with easier transportation for goods, services, data (the new products and services) and humans has affected the economy the last 15 years, it is obvious that the concepts of perfect competition and especially of perfect information play an important role in that transformation process (which is by the way not only transforming the economy but social and cultural systems alike, for the same reasons).

Let’s look at it from a more empirical perspective: It is obvious that as perfect competition and perfect information wasn’t possible in practicable terms, suppliers had a natural tendency to exploit imperfect information states to their advantage and to the disadvantage of the system as a whole. As customers weren’t able to have all relevant information to make the best buying decisions and as different other factors didn’t allow for perfect competition like barriers to entry in a specific market, suppliers had an “easy game” reflecting these imperfections in prices for a given product or service that were higher then those where perfect competition would have governed. The ultimate example is a monopolistic structure, where for whatever reason a given supplier has no competitors and therefore can charge a price that is higher than the value he offers in exchange to customers (called the “monopolistic rent”). Oligopolistic structures are in between perfect competition and the monopole and are also charging, although to a lesser extent, these rents.

Oligopolistic structures have been very common in our economies as well as some monopolistic ones, and our governments tried to actively fight these structures, although they have been at the same time supporting some of those structures for whatever political reason (which of course is a problem for credibility and trust in economic policy…)

Back to the Internet: It is a fact that the Internet increased competition and contributed to much better informed economic actors, via different ways: massive amounts of all kinds of information available, a pressure for suppliers to increase the amount of information made available for competitive advantage reasons and an exponential spreading of available information (and experiences) between customers and other economic actors commonly referred to these days as the “power of word-of-mouth”.

In addition and for the same reasons we’ve seen a formidable rise of peer-to-peer activities and collaborative consumption reducing transaction costs, eliminating the needs for a whole bunch of intermediaries which also started to undermine existing monopolistic and oligopolistic rent systems.

There are of course some industries that do heavily resist to this evolution, like the telecommunication and the energy sectors and to a lesser extent the outdated financial sector which are still rather oligopolistic, mainly due to (not really ethical) political interests as well as high barriers to entry, where the lack of transparency (and thus trust) is still the ruling business model. Or were you ever able to understand what the different mobile operators try to sell you and how to compare it to their competitors ?

The peer-to-peer movement and the efficiency of the Internet as a communication and transaction platform has another major effect: Money is getting less important as a far as it’s economic explanation is concerned. In exchange economies without money, that existed before the introduction of money into the economic system, a vendor of good X had to find a seller of good Y good which that seller also had a demand for, then they had to agree each time on how much of X to exchange for Y, meaning finding a new exchange rate for every single transaction. This was of course very cumbersome, especially at times where communication and transaction platforms were rather inefficient and thus was impeding economic development. The introduction of money paired with a whole system that made people trust in the value of that money (national central banks, stable public money policies and the banking system as a whole) eliminated that obstacle to a much quicker economic development and higher level of economic activity.

The very nature of the Internet again undermined some of the reasons for the existence of money as illustrated by more and more barter trade & peer-to-peer activities, as well as by platforms introducing their own virtual money. The reason is that the critical mass of actors on these platforms (or markets) is high enough and the efficiency of the available communication and transaction infrastructure as well as its almost “real-timeness” eliminate or attenuate some of the initial reasons for the introduction of money into the economic system.

Another consequence of the highlighted major market transformation processes (together with changing values, meaning changing utility functions in microeconomic terms, but more on this in part 2 of this post) is a redefinition of value: Value in exchange (primarily money)  is replaced by value in use, meaning the value generated by using a certain product or service based on how effective it is in solving customer’s problems. To further investigate this concept of a rising social business model, read Graham Hills excellent post A manifesto for social business.

To my understanding, these are the more scientific explanations, from an economic point of view, for what is happening in management models today: new marketing, value co-creation, service dominant logic, service design, design thinking, collaborative consumption, enterprise 2.0, corporate social responsibility, human centered design & innovation replacing process centered design & innovation (the last century’s model), trust & transparency in communication, new value network ecosystems,  social CRM, customer experience management, business model innovation, ….etc all new management models derived from these changing microeconomic rules of the game.

But besides these more economic and system technical reasons for the current major change phenomena & movements in many societal areas, there are also cultural reasons to it paired with a multi layered & rapidly growing complexity in many existential systems on a planetary level.

More on this in part 2 of this post.

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