One of the fundamental assumptions of neoclassical economics is that market participants, such as suppliers and consumers, have all relevant information related to the transaction. Economists have won Nobel Prizes for incorporating into economic theory the perhaps obvious fact that this is almost never a characteristic of markets in the real world. The information that flows in markets, including the asymmetry of information between different consumers, different producers, and most importantly, between producers and consumers, is critical to the functioning and outcomes of markets.
The Internet, of course, can dramatically change an information asymmetry. It’s fascinating to think of information asymmetry in the context of existing markets with massive revenues. Take the professions for example. Many professions — think law and medicine — are in large part about delivering information to consumers at extraordinary cost. (Of course, licensing requirements mean that there are things — prescribing or appearing in court — that only guild members can perform.)
Information asymmetries play out in both the availability of the product itself as well as market signals. In terms of product, personalized information often really means delivering standard information to multiple parties with the same issue or problem. In terms of market signals, there are also asymmetries about market performance dynamics — such as price, value of the work, time required by the provider, quality and skill, appropriate expertise, other participants, etc.
While suppliers like to think that their high rates are about expertise and the product delivered, high prices may be more about the asymmetry between suppliers and consumers in having access to market signals. Nonetheless, both product and market signals are an area of potential disruption of existing, fat markets. Think of consumers banding together to share information, that is off-the-shelf, for free or low-cost, or to compare notes on how much something should cost or where a high-priced expert is truly required. An independent repository and delivery system for information emerges as a player in the market, not necessarily replacing the existing suppliers but changing the market dynamics between consumers and suppliers.
Indeed, an internet where everyone is online, in theory should allow the frictionless spread of information, pushing down the cost, improving the quality, and accelerating innovation of information-based markets. However, there is a practical reality. The frictionless spread of information depends on — in a world of limited attention and time — being able to get users to use the Internet to participate in the creating and the delivery of the efficiency-creating information. And that comes down to creating a compelling user experience. This lesson is demonstrated through the consumer internet: the application has to make the user want to constantly “check in” on FourSquare or “post” on Twitter and Facebook, and participate in the spread of information. Finding the user experience to produce a large and committed user base is the toughest part of disrupting an existing market.
So, in order for the theory to play out, a very practical product needs to be created that has a large and committed user base. Once you have the user base, you can mold it to create better working markets — the savings from which are the source of monetization for the idea. This is my interpretation of Union Square Ventures’ succinct investment thesis — ”a large network of engaged users that has the potential to disrupt a big market [outside the existing system].” This other post, and particularly, the comments have great discussions of how this thesis could play out in two large, static markets — health care and education.