Tuesday, November 14, 2006

The Economics of Search

One of the things I like doing on this blog, as regular readers may have observed, is constructing mental mashups - creating new material by uncovering hidden relationships between old material from different sources. I am often stimulated by the diversity of material that comes into my newsreader.

Today's mental mashup puts together Alex Bosworth on Google: In your business, taking your money, and Masood Mortazavi on Transaction Costs and Search.

As Alex points out, there is clearly a difference between the following search outcomes:
  • finding the best (cheapest, fastest, highest quality) supplier - from a complete and perfect search
  • finding a good enough supplier from an incomplete and imperfect search
  • finding the supplier that has the highest advertising budget - in other words, the one that is paying Google the most money
Meanwhile, Masood's post questions the assumption (found in neoclassical economics) that transaction costs can be understood as search costs, and also questions the assumption that internet search engines reduce search-related transaction costs. For my part, I'd like to know how does transaction cost theory address the trade-off between the perfect (and infinitely expensive) search and the imperfect search - where you don't get quite what you wanted, and get ripped off into the bargain?

These are questions that economists should understand. But what about the following outcomes?
  • finding the supplier that meets your preconceptions of the requirement
  • finding the supplier that meets Google's preconceptions of the requirement
  • finding a supplier than can meet the requirement
As the difference between these outcomes indicates, search is a semantic/cognitive problem as well as an economic one. Google makes Herculean attempts to match content with advertising, or even content with content, and the consequent juxtapositions range from the helpful or serendipitous to the absurd or positively misleading. Earlier this week I relayed a story about such a juxtaposition - Cross Purposes.

In service-oriented world, as Rocky Lhotka pointed out recently, the transaction costs are dominated by questions of semantics. See my post on Semantic Coupling.

I should very much like to see an economic analysis of these semantic questions, but I somehow doubt whether this analysis is going to come from neoclassical economics.

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