The Economy of Cyberspace

U.S. retail Internet sales are expected to reach $146 billion in 2008, a 14.3% rise from 2007—and yes, that reckoning takes into account the economic downturn, which has actually boosted online sales because of high gas prices and reduced driving. While U.S. retail sales rose by 2.8% between the first quarter of 2007 and the first quarter of 2008, online sales rose by 13.6% during the same period. As for the shoppers who insist on buying from a brick-and-mortar establishment, eight out of ten first kick tires online.

In France, e-commerce is expected to reach US$32.4 billion this year, a 30% jump. In Brazil, the online retail market expanded by 43% in 2007, and 79% of all Brazilian Internet users have shopped online. In the UK, grocery shopping has moved online and 44% of the country’s Internet users have given it a go. In China, online shopping surged to US$8.2 billion in 2007, up 90% on the previous year.

If You’re Not Online . . .

These are staggering (and for retailers, mouthwatering) statistics. An even more astonishing one, however, comes from a January 2008 press release from The Nielsen Company: of the world’s population with Internet access, more than 85% have shopped online—approximately 40% of the total global population—and more than half of those online shoppers have made a purchase within the last month.

The fastest-growing segment of the global online marketplace is clothing, accessories and shoes with 36% of sales, but the most popular online purchase remains books with 41%. Other common purchases are movies, games, music, airline tickets and electronic equipment. Merchant trustworthiness is important to online shoppers, and many seek recommendations from friends or rating services or find a few sellers they trust and stick with them. The most popular payment method is a credit card (60%), with Visa the most often utilized, although 25% of buyers prefer Paypal, which may effect payment through a credit or debit card or through a direct bank transfer.

Many new buyers live within developing nations such as India, Brazil, Egypt and China and have such online payment services to thank for opening these new shopping horizons before them. When the goods these shoppers want can’t be found on the shelves of their local stores, they turn to the Internet and its international marketplace to fill that gap, and they’re often willing to pay a little more to a reliable seller or for shipment tracking.

The largest online retailer in 2007 wasn’t actually a single retailer but eBay, with a membership of over 83 million active buyers and sellers moving $60 billion worth of merchandise on website platforms in 28 countries around the world. As a comparison, Amazon.com had sales of $14.8 billion (both figures from 2007 annual reports). Because eBay sales are generally from individual to individual, international shipments are often marked as gifts to avoid customs duties, and the collection of state sales taxes on the Internet is notoriously difficult, leaving open the issue of lost governmental revenues worldwide. So are such individual purchases tracked as part of a nation’s balance of trade? If so, how?

. . . You’re Nowhere

A largely misunderstood aspect of the virtual marketplace is the foreign exchange, called the forex trading market. Although many people are only familiar with foreign exchange from traveling (or those money-making schemes advertised everywhere), the fact remains that sales across international borders generally involve crossing currencies as well. While credit cards and Paypal will exchange currencies for individuals for a fee, larger transactions must change through brokerages, which buy and sell currencies against each other on the open market.

The forex trading market is therefore comparable to those for stocks or commodities with one catch: it’s utterly virtual. There is no centralized exchange where brokers meet and bid against each other. Historically these deals were arranged via telephone, but often now they’re executed online with dedicated software trading platforms that track the prices of various currencies against each other to the fourth decimal place and graph the changes on a real-time basis. This increased efficiency has caused, well, a virtual explosion in forex trading, which by April 2007 had surged to an average daily turnover of $3.2 trillion dollars as tracked by the Bank for International Settlements.

There is much not yet understood about the economy of cyberspace, but it’s clear this is no longer a niche market, and retailers—and governments—will ignore it at their peril.

Keeping Up Appearances: The Benefits of Pretending to be Insane

The poet Horace once said, “Ira furor brevis est” – “Anger is a brief madness.” This is taken to be a strict warning against getting letting your emotions run away with you. The implication is that anger is a poor alternative to logic and reason.

The GodfatherImage Credit: labnol

In the book The Godfather, the village that Don Corleone comes from (the village Corleone) is populated mainly by women. Apparently, the men were all killed by vendettas. A logical person will say that such are the fruits of passion. However, insanity (anger) has undeniable advantages, as I will attempt to show.

Chicken Games

A chicken game is a special type of game where you want to convince the other person that you are going to go ahead with a certain plan no matter what the cost. The implication of this game is that if both of you take a certain course of action, it will ruin you both. However, if only one of you does it, then a reward awaits that person.

Take the example of two employees who want to ask for a raise. The boss is a guy who doesn’t like to be pushed around. So if you both ask for a raise, he’ll feel that you’re ganging up on him and fire you both. If however, only one of you asks for the raise, that person will get it.

So what can be the outcome of this game? As explained in an earlier article, stable outcomes are Nash equilibriums. So what are the Nash equilibriums in this game? There are two. The first is if only you ask for a raise. The second is if only your colleague does so. In either case, neither you nor your colleague regret the choice. If the person who didn’t ask for the raise had been bold enough to do so, then he would have gotten fired along with the other person.

Games like this are called “Chicken Games” since the question revolves around who will chicken out first while deciding whether to ask for a raise or not.

Winning Chicken Games

So if you’re in a game like this, what should you do? First, we must determine the outcome that you want. Obviously you would be most happy when you’re the only person to ask for the raise. That way, you get a raise, and no one gets fired.

Obviously there is no point in requesting your colleague not to ask for a raise. Why should he let you walk in and get the raise while he sits on his butt? However, if you could convince him that you are going to ask for a raise no matter what, then he will indeed not ask for it. If he did, he would get fired along with you, and no one wants that.

Unfortunately, you’re a reasonable person, and your colleague knows it. He knows that you don’t want to get fired. Therefore, your threat to ask for a raise even if he does isn’t credible. So how do you convince your colleague that you will ask for the raise no matter what?

The truth is, you can’t convince him. As long as your colleague thinks that you’re a cold blooded rational person, there’s no way you can convince him that you’re willing to get fired. The only solution is to make him think you’re illogical.

If you make him feel that your goal is not just to get a raise but also irrationally prevent him from getting one, then you have a credible threat. If you can convince him that you’ve put up with a low salary for too damn long and that you don’t mind getting fired (when you really do mind), then again, you have a credible threat.

Either way, you have to show your colleague that you’re not thinking straight, and that you’re not motivated solely by the money. If you can do this, then your colleague, being a rational person, will not ask for the raise since he thinks that you are going to do so no matter what.

The Catch

Threaten InsaneImage Credit: TheAlieness GiselaGiardino²³

However, if you feel that your colleague is insane and is willing to get fired while asking for a raise, then you mustn’t ask for one! It all depends on whether you think he is rational or not. Whether he is really rational is irrelevant as long as he makes you think that he’s not. Just like it’s irrelevant whether or not you’re rational. In chicken games, appearances rule.

The only problem is, acting as if you you’re insane is not easy if you’re really sane. A truly insane person has a huge edge in chicken games because he’s not acting. Therefore, a little bit of madness goes a long way!

This is the reason why we’re all afraid of red ants. You can’t threaten them with death! They’re just not rational. They will bite you period. And that’s a credible threat.

Group Practice: The Secrets to a Successful Medical Practice

My post about solo practice medicine brought along some interesting comments and trackbacks. In addition to traditional solo practice medicine, there are other models of medicine that are more economically efficient. One such model is the group model of medicine. In this model, several solo practitioners band together to form a “group” to share costs of overhead such as office space, assistants, equipment, and other services.

The group model is attractive for many practitioners because they get to save money on costs. The model is more economically efficient than a solo practice because office space and personnel are always being utilized. For example, a solo practitioner may choose to take one half day or one full day off from work. However during this time, his employees and overhead are still being paid. Thus, the office is not “closed” but is still open and is generating revenue. Banding together with other practitioners allows full utilization of staff and space.

One great benefit of group practice is also the built-in referral base among group practitioners. Typically in a specialty group, all or most of the solo practitioners have a different specialty interest. Thus they can refer patients to each other. This concept is particularly attractive for those fields in medicine who rely on referral from primary care and other practitioners.

An additional benefit may be more purchasing power by belonging to a group. For example, the group may save money on supplies and may negotiate service contracts. Similarly, a group may purchase their equipment and office space because they can pool together the finances of all members of the group.

However, despite all of the benefits of the group practice model of medicine, at the end of the day each doctor is a solo practitioner – essentially their solo practice within a larger group. Thus, the analogies I made in my previous post about solo medicine not being a good business model still ring true – without the key physician employee, there is no revenue.