Chapter Thirty Four

The Friction of Search

In 1987, when we arrived at the store and discovered the price of the television was $2,500 US dollars, we were then faced with another decision. Do we purchase the product for $2,500, or do we incur the cost and time it takes to get in the car and drive to another store in the hopes that we might find a better deal? Back in 1987, shopping required going out and searching to find the best deals, prices, assortment, and value. Doing so also incurred a cost and this is known as the friction of search. This is a problem that's been studied by economists for decades.
“High costs are often associated with buyers’ difficulties in finding sellers, and vice versa. Even after they have located one another, the goods in question might not correspond to the buyers’ requirements. A buyer might regard a seller’s price as too high, or a seller might consider a buyer’s bid to be too low. Then no transaction will take place and both parties will continue to search elsewhere. In other words, the process of finding the right outcome is not without frictions. Such is the case, for example, on the labor market and the housing market, where searching and finding are essential features and where trade is characterized by pairwise matching of buyers and sellers.” source:
The 2010 Nobel Laureates enhanced our understanding of search markets. Peter Diamond has made significant contributions to the fundamental theory of such markets, while Dale Mortensen and Christopher Pissarides have further developed search theory. They derived mathematical formulas regarding how often and how long a shopper should continue to search, and when it is appropriate to just stop and say, enough is enough, it's time to purchase.
Fast forward to 2011, as it is the Rugby World Cup again, 24 years later. The same two teams are playing in the final and instead of having to endure the same television search process, there is an alternative option. We can visit a website like Google where we can view prices as well as an assortment of various products that we might want to buy. This can be done in the comfort of home or from the convenience of a mobile phone. The internet has reduced the friction of search. Reducing the friction of search is the first major contribution that the online world does that helps us out in the offline world. Opportunists today are starting businesses that assist people to reduce the friction of search. For instance, Yelp is a business that provides information which helps folks determine where to buy dinner. The Yelp website contains reviews from other users regarding which local restaurants serve the finest food and offer the best value. A variety of other important businesses have also started to reduce the friction of search. This is an example of how the virtual world reduces search friction also known as the first kind of friction.
The second type of friction that exists is the friction of geography. Virtually just about anything can be purchased in the shops of New York City at any time of the day. On the other hand, someone who lives in a quieter community such as Iowa City may have limited access to certain products and services. This is an example of the friction of geography as the location we live in offers certain benefits, but also imposes certain costs. For instance, if we want a fancy pair of designer jeans and we live in New York City, we can probably just walk down the street and buy a pair from any number of stores right in Manhattan. If we live in Iowa, that might be a little challenging. As a result, we may want to access the internet and purchase products that can be delivered to a geographic location. That's the second contribution the internet provides as it reduces the geographic friction of where we live. Moving forward, it is important to keep search friction and geographic friction in mind. Other frictions exist, but these two principles are significant as they help us understand how the real world and the virtual world interact with each other.
Now, we will add one additional layer to this. Let's consider goods and information and how these two concepts relate to each other. Historically all markets were fairly local. In the past, this meant if we wanted products like jeans, diapers, and whatever else, we had to shop at stores that were local. If we wanted to watch movies, we had to visit local theaters. Today, the internet has opened up the possibilities of big markets by bringing people together from various parts of the country, or the world, and pulling them together into one big market.
If we live in a small town, as mentioned earlier, like Iowa City, the internet serves as the great liberator as it offers an alternative approach to acquire goods that were once unattainable. Imagine the nearest supermarket is ten miles away. With the internet, we can visit websites such as Amazon and have everything delivered directly to our door. In a small town, the internet becomes a substitute for the lack of goods and services available locally. In bigger cities the internet is used less for purchases but operates as the provision of information. For instance, given the amount of variety in New York, the internet provides numerous websites dedicated to everything in NYC. Quick and detailed information regarding theaters, plays, restaurants, shops and any other entity is easily attainable via the internet. In a big populous place such as New York City, the internet becomes a complement for information. To recap those two points, the virtual world substitutes for the real world in small places where there is a lack of product availability. The internet becomes a complement in more populated areas where available information helps facilitate the decision making process.
Terry OReilly began his career as a copywriter for some of Canadas top creative ad agencies. In this Ted's talk he presents another side to friction that explains why some people still shop at the mall.

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