Digging Out Inefficiencies In A Marketplace

Lately, I’ve been giving some thought about which marketplaces have untapped opportunities. And one of the first things to look at is inefficiencies in the marketplace.

Here’s a quick checklist I’ve been running through:

  1. Information flow: fast, easy, cheap, universally available.
  2. Trust: Not blind faith, but expect people to live up to their promises.
  3. Competition: for both sides of the transaction, and encouraged by the marketplace.
  4. Property Rights: clean definition of individual property, and less “common” property.
  5. Transaction Costs: which can spring from inefficiencies above, or just inherent costs.

The online display advertising marketplace used to be very bad with information, but with the recent ad exchanges and real-time bidding, that gap has been filled in. I think Facebook and Twitter ads have an information gap, but they own one side of the marketplace, so advertisers don’t have much of a choice.

Craigslist has a distinct lack of trust.

Click fraud on text ads (like Google’s Ad Words) is a transaction cost arising from an inefficiency.

The job market (at least tech-related jobs in the Silicon Valley) has an information problem as well as high transaction costs: (a) People aren’t comfortable talking about salaries, so hard to figure out current market rates. Also hard to figure out who might be passively looking for a change, unless you know them well. (b) Costs are high with many steps required to get into the transact phase and many failed transactions.

Shipping costs or Sales taxes or delay in delivery are transaction costs for online retail.

Visa/Mastercard fees are a transaction cost. But so is printing and handling physical cash.