Efficient Market

For the entrepreneur, an "efficient" market is a market where all information is known and buyers can find out anything and everything in the market place unencumbered by intermediaries.

Whenever one group or person provides value such that people are enabled to do things they couldn't feasibly do without going "through" that person or group, inefficiency results. Take the travel industry, for example.

You used to have to go to a travel agency to get information about flights because the travel agency controlled access to the data through special software. Consumers could get the data, but the search costs were so high it was simply easier and cheaper to use a travel agent. That's where the value was added, and the inefficiency.

The Internet has created a more efficient market for travel. Search costs have moved toward free, so voila--few travel agencies left. Creating inefficiency is a little like kicking the legs out from under a table.

This added efficiency is what's causing entrepreneurs problems monetizing, or making money from, business concepts. "Yeah, but how are you going to monetize it?" is the question. Intermediaries, such as travel agents, who used to create inefficiencies by controlling access to information about flights, have been eliminated or removed to a significant extent.

In the age of the Internet, they no longer add value, except in certain situations. A travel agency that has specialized knowledge about cruises, for example. Or an in-house travel agency which contracts with a given company because it's easier for the company to control the flights their employees can be reimbursed for.

In this environment, entrepreneurs can make money if they create an inefficiency in the market that adds value to a customer's information search. Once this is found, the entrepreneur has to be very agile because change can come quickly and eliminate the advantage the entrepreneur has built for him or herself.

What do you think about this? Post a comment.

Entrepreneurship informs all of my professional activities. For entrepreneurial real estate, go to www.yourstopforrealestate.com./blog and for entrepreneurial writing, go to www.kearneymusicschoolmurders.blogspot.com

Search Costs

Economist.com gives the following definition:

The cost of finding what you want. The economic cost of buying something is not simply the PRICE you pay. Finding what you want and ensuring that it is competitively priced can be expensive, be it the financial cost of physically getting to a marketplace or the OPPORTUNITY COST of time spent fact-finding. Search costs mean that people often take decisions without all the relevant INFORMATION, which can result in inefficiency. Technological changes such as the Internet may sharply reduce search costs, and thus lead to more efficient decision making.

Forbes Financial Glossary has a more formal definition of it:

Costs associated with locating a counterpart to a trade, including explicit costs (such as advertising) and implicit costs (such as the value of time).

In a related term, Information Costs, Forbes says:

Transaction costs that include the assessment of the investment merits of a financial asset.

The entrepreneur wants to do what he or she can to reduce the cost of finding their product or service. Automobile websites can significantly reduce the cost of searching for a car. Sellers of cars can reduce the time and expense of finding a buyer. Google can reduce the time required to buy a ticket.

Search costs could be time costs or effort costs. Imagine an elderly woman, call her Gloria, who needs a walker to get around her retirement home. Gloria has agreed to have dinner with a younger, more mobile, friend, call her Sylvia. Imagine Gloria sitting waiting for Sylvia to come down for dinner. Sylvia arrives and says, "Are you ready?" Gloria says, "I don't know, is the dining room open yet." She's sitting just a few yards from the door but it's a real effort for her to get over there. Sylvia, the younger one, goes over and looks and says, "Yes, let's go in." And go.

The message here is that for the Gloria, the woman in the walker, the cost of searching for information whether the dining room is open, is higher because it's more difficult for her to move around. It's cheaper for the friend, Sylvia, who can just walk over there and look.

What do you think about this? Have you ever gone to a store which is in disarray? Hard to find stuff which increases the search cost. Post a comment.

Entrepreneurship 2.0 is my entrepreneurship course. The ideas in it supply the life's blood of my professional activities: teaching, writing, and real estate. For entrepreneurial real estate go to www.yourstopforrealestate.com/blog and for entrepreneurial writing to www.kearneymusicschoolmurders.blogspot/com.