Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Thursday, April 07, 2005

Choice Economies

Kevin L. thinks that psychic costs create choice diseconomies - that having too much choice is costly. This reminds me of Shirky 'mental transaction costs'. Kevin points to behavioral econ experiments covered by Gladwell.

I don't think we need to resort to behavioral data to make sense of this. Simply assuming bounded rationality and limited info-processing capability will yield choice diseconomies as well. If you can only process so much info, you'll reach a point after which each new choice makes decision-making progressively more inefficient.

Note, this is all essentially a restatement of the 'post-scarcity economy' question (ie, attention/info-processing is the scarce resource in an economy where tangible goods are all free/zero marginal cost): psychic costs/disutility dominate, by definition, when financial costs don't.

The interesting bit is the strategic impact. Kevin says he thinks it's important for aggregators to limit choice in the niche. That's the implication of the above. But how do you limit choice?

For example, I visited Les Senteurs over the weekend. Their choice is very limited, relative to a Selfridges or a Harrods. They are a boutique - they limit choice by quality, which is a very old-skool way of playing the game. Conversely, Harrods and Selfridges way of reducing the costs of choice is to offer relatively hassle-free exchanges and refunds.

The implication is that choice-limiters can either limit in time or in space. If you limit in space, you have to be a boutique - you have to create choice economies by already filtering out the highest quality goods (and, by implications, dimensions of quality), and let consumers assume your risk. If you limit in time, you have to be a mass-marketer - you have to let consumers create their own choice economies by filtering out their own highest-quality goods over time, and you assume their risk.

Now, the point of this overly long and confusing post is that I think the boutique model is dominated by the mass-market model on the Net, because smart players can leverage sharing mechanisms to let consumers help other consumers eliminate choice diseconomies. Conversely, you can use network FX to create choice economies more efficiently than boutique-owners can create them.

Note that in this context, sharing mechanisms are not just Amazon style book reviews - that's simple info-sharing. To let consumers create their own choice economies, you would have to simplify this information to allow them to costlessly search it. Another nice market space for tags...

-- umair // 12:28 PM // 0 comments

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