INTERNET EMPOWERMENT

A condensed version of this post appeared in the Blood-Horse. Reproduced with permission.

The Internet has reduced the power position of experts in virtually every commercial endeavor. Prior to widespread consumer access to the Internet, experts had an asymmetric, or lop-sided, information and knowledge advantage over their customers or clients. The expert continues to know more than the layman about a particular subject, but the Internet has markedly narrowed the gap because consumers are better informed.

Physicians and lawyers, for example, are highly educated in their respective fields. Yet, mostly free technical information has become instantaneously available to patients and clients at reputable websites like WebMD and DearEsq and the well-known LegalZoom is essentially an online law firm that provides legal forms and consulting services.

The bestselling book Freakonomics provides a superb empirical example of the Internet’s rationalizing effect on business transactions. One of the authors, Steven Levitt, a University of Chicago economics professor, conducted a carefully controlled study using public data on 100,000 home sales in suburban Chicago. Three thousand of these were transactions in which real estate agents sold their own homes. The study’s purpose was to determine how well the experts–in this case, the real estate agents–did in selling homes for their clients as opposed to selling homes that they personally owned. The key finding was that an agent typically held out for a better price on his or her own house. To be exact, real-estate agents kept their own homes on the market an average of ten days longer than clients’ homes but got an extra 3-plus percent selling price, which would amount to about an $8,000 premium on a $250,000 house. However, importantly, a follow-up inquiry found that, with the proliferation of information on websites like Realtor.com, the realtors’ average premium in selling their own homes has been reduced by one third.

Freakonomics reported similar results for sales of term life insurance. With the appearance of Quotesmith.com in 1996 and other such websites that allow the consumer to search for the cheapest rates, the amount paid out by buyers for term life insurance shrunk by $1 billion per year.

The same kinds of Internet-enabled effects are occurring in many facets of the racing and breeding industry. For example, a farm buyer can quickly find out how much a parcel of land previously sold for by going to the local government website that maintains records of property-tax assessments and real estate sales. Prospective investors in racing partnerships can discern how much a managing partner paid for a colt or filly at auction and therefore can calculate the percentage markup that the managing partner is taking. Pari-mutuel bettors have the capability to conveniently shop around for the best deal of the moment from an advance deposit wagering company or for the racetrack with the lowest takeout.

The search capability of the Internet has vitiated the longtime information advantage of experts over clients and sellers over buyers. This is a development much to the benefit of consumers.

Copyright © 2010 Horse Racing Business

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