Economics 102   no comments

Posted at 7:55 pm in Economics

After spending the last few weeks getting to grips with the very basics of economics i’ve now looked at how the various approaches and mechanisms used by the discipline could more directly be applied to the issue i’m looking at – reputation and its value. I’ve continued to concentrate on undergrad texts, primarily Economics by Parkin, Powell and Matthews, A Course in Microeconomics Theory by Kreps and Economics by Lipsey.

As i mentioned in the last blog economics assumes that individuals act in their self interest; that is, they will do things in a way that will maximise their position according to their values. When you choose to enter into a transaction with person a as opposed to person b, you will do so because you perceive that transacting with person a will leave you in a better position than transacting with person b will. One of the considerations that may lead you to this conclusion will be the degree to which you believe person a will act with integrity, and this integrity will be externally demonstrable by their reputation.  Hence,  reputation can be considered something that affects competition, and the way in which economics deals with competition needs to be considered.

There are four market types in economics:

Perfect competition, where:

  • many parties offer identical goods to many buyers,
  • there are no restrictions on entry into the industry,
  • existing vendors have no advantage over newcomers,¬†and
  • all parties to a transaction are well informed about the prices of products.

Monopolistic competition, where:

  • a large number of parties compete by making similar but slightly different products,
  • production differentiation gives each monopolistically competitive firm an element of monopoly power,
  • barriers to entry are limited.

Oligopoly, where:

  • a small number of firms compete, and
  • natural or legal barriers prevent the entry of new vendors to the marketplace.

Monopoly, where:

  • one firm produces a good or service for which no close substitute exists,
  • natural or legal barriers protect the firm from newcomers to the market.

With these definitions in place it would be possible to draw parallels between the different types of market and instances on the web where reputation comes into play. As a very rough example, an expert forum on Visio could be considered a Oligopoly, as people will only listen to the advice of a small number of recognised experts, and in order to be considered an expert a user must have certain qualities (such as a long and illustrious posting history). Newcomers will struggle to impose themselves.

I next looked at game theory as a way of potentially understanding how people may try and to actively enhance their online reputations.¬†Game theory is something i’d heard about previously, particularly the prisoner’s dilemma, but i’d not really explored it sufficiently to be able to see how it might apply to the issue i’m tackling. Very briefly, it serves as a tool for studying strategic behaviour; that is, behaviour that takes into account the expected behaviour of others and the recognition of mutual interdependence. To take this back to the reputation issue, people building a reputation do not do so in a vacuum; their reputation will only benefit them if it is ‘better’ than somebody else’s. As such, those attempting to enhance their reputation may decide to act in certain ways due in part to their perception of what their competitors may be doing.

. The prisoner’s dilemma is probably the example that most people are familiar with: two criminals have been apprehended on suspicion of committing a robbery and are being held in separate cells. The police know that the two together committed the crime, but lack sufficient evidence to convict. They are each therefore offered a deal –¬†convincingly implicate the partner. If neither implicates the other, each gets no time in jail. If each implicates the other, each receives a short amount of time in jail. If one implicates the other but is not implicated, the implicator gets off (and gets a greater share of the proceeds of the crime) and the implicated goes to jail for a longer period of time. Each ranks the four possible outcomes, with the result that it is best to implicate your partner, next best to not implicate and not be implicated, next best to implicate and be implicated and worst to not implicate but be implicated. Abstracted, this suggests that co-operation is not in one’s best interest if the other party intends to co-operate (in the prisoner example co-operating meaning co-operating with each other by not implicating each other.)

Gaining an understanding of the economic constructs of markets, competition and game theory has certainly been an interesting exercise, and i’m glad i have had the opportunity to look at them in more depth, but i still worry that the link to my issue area is a little¬†tenuous. I¬†believe¬†they could certainly add something to the understanding of one type of strategy actors may¬†pursue¬†when attempting to¬†enhance and¬†capitalise on their online reputation, but just as likely people could choose to completely ignore any notion of competing with others and still gain a positive reputation. I’ve discovered a little bit on social capital, which will hopefully fill in the blanks, and will write about this next week.

Written by jac606 on November 24th, 2010

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