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.)