Monday, March 13, 2006

eBay as a Smithian Market

“Pierre Omidyar's three laws” by Dan Farber

Pierre Omidyar, eBay founder, talked about his notions of choice, sustainable business models and social good. "Businesses can be a force for good. I recently rediscovered Adam Smith….If the baker sells bread to the shoemaker, the profit in the transaction is evidence that quality of life of baker and shoemaker increases. What we really want to do is to enable individuals everywhere to pursue their self interests in an environment, which doesn't lead to harm," Omidyar said. "When you unleash people to pursue their self interest, it ultimately leads to a better place."

Adam Smith has his rules, and Omidyar has his basic three laws for creating businesses the improve quality of life and enable social good. First, open access, which means a level playing field and transparency. "Anyone can join the club and there is transparency around the rules," he said. Secondly, individuals must be enabled to connect and interact with one another, leveraging collaboration and the wisdom of crowds. "It will inevitably lead to individual self empowerment within a given structure." Third is "skin in the game." Individuals have to make an investment to participate and be accountable for how they behave.”

Well, based on outcomes and the record of participants' behaviours, I think eBay (I have never used or visited the site, so I am unbiased) does a good job in connecting people in markets that leave both parties to a transaction (a few cheats and fraud excepted) better off, though not necessarily equally better off, which is the definition of a good deal. It approaches, may even attain, a Nash Equilibrium. I am sure that Adam Smith would have approved.

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