Tag Archives: james-surowiecki

Anatomy of a Price War

With the recent Amazon–Walmart price war on books and the 1992 airline industry price war as the backdrop, James Surowiecki takes a look at how price wars start, how they can be avoided, and how to (possibly) win at them.

The best way to win a price war, then, is not to play in the first place. Instead, you can compete in other areas: customer service or quality. Or you can collude with your putative competitors: that’s why cartels like OPEC exist. Or—since overt collusion is usually illegal—you can employ subtler tactics (which economists call “signalling”), like making public statements about the importance of “stable pricing.” The idea is to let your competitors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bitter end. One way to establish that peace-preserving threat of mutual assured destruction is to commit yourself beforehand, which helps explain why so many retailers promise to match any competitor’s advertised price. Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine.

These tactics and deterrents don’t always work, though, which is why price wars keep breaking out.

Surowiecki mentions that there’s apparently a big banana price war going on in the U.K. at the moment! News to me.

Harnessing Collective Intelligence Online

The ‘Wisdom of Crowds’ theory, as popularised by James Surowiecki’s 2004 book of the same name, is an important—if misunderstood—theory that has influenced a lot of recent online ventures that rely on social networks and collaboration to work intelligently.

For those who want to take advantage of the wisdom of crowds for their own ventures, Derek Powazek (who has worked at least one such site; Technorati) offers a primer on the wisdom of crowds theory and how to successfully implement it online.

The web, with its low barrier to entry and permeable social boundaries, is the ultimate medium through which to explore the finer points of the wisdom of crowds. You’re surrounded by online examples: Google’s search results. BitTorrent. The “Most E-mailed” stories on your favorite news site. Each is powered by wisdom gleaned from crowds online.

You need a few things to enable online crowds to be wise.

For other related information (i.e. how attempts at harnessing collective intelligence succeed and fail) the Wikipedia entry for Surowiecki’s book is a great place to start.

Prediction Markets and The Wisdom of Crowds

FT Predict is more than just a game. Predictive markets collect the wisdom of the crowd in a single dynamic price unit that can be far more sensitive to changes in the market than standard survey-based research. And a growing number of today’s leading companies embrace predictive market models in order to harness the wisdom of their own crowds to improve decision-making.

In The Wisdom of Crowds, prediction markets are praised for being a useful application of crowd intelligence. They sounded interesting when I read about them, now I’m going to be part of one.

(Side note: the book has an excellent Wikipedia entry.)