Monday, May 25, 2009

Amazon mobile app and the death of rational ignorance

originally published at Biznology on 5/20/09 by Eva Lyford.

I changed my shopping habits recently by acquiring Amazon Mobile for iPhone. My 7-year-old, a careful student of anything having to do with Lego acquisition, has been studying me surreptitiously. It was probably the tugging on my arm and the caterwauling pleas for instruction that gave him away. I let him have a go with it and without any instruction he very shortly was doing comparison shopping for all his favorite objects of desire. (Legos, bionicles, and Wii cartridges comprising the universe of desire for him at this point.)

The app encourages the user to take a photo and send it off to Amazon for identification. A short time later Amazon returns a likely match, pricing info, ratings, an option to add it to your wish list, and recommendations for other products. Once my son understood the concept, he was off--photographing every likely Lego item he could see, and checking out the info Amazon brought back.

There is usually a cost associated with educating yourself on a product and its pricing, so most people will only educate themselves to the point where the savings compensate for the time invested in the education: this is referred to by economists as rational ignorance.

For example, I know that the gas stations in my area sell diesel for my VW Golf TDI at prices ranging from $2.17/gal to $2.09/gal, because I've seen the signs as I drive. ($2.09/gallon is about €0.41/ltr, gentle European readers.) When I need gas, though, I don't hunt around for the place that was advertising at $2.09--I just stop at the most convenient location. Because the 96¢ savings I would get by educating myself on where to find the $2.09 retailer isn't worth the hassle.

The Amazon app reduces the costs of educating myself to near zero; or, to be more specific, since I've already assumed the fixed costs of the 3G data service and the device, the variable costs of using it drop to near zero. This is shocking, when you consider it. Retailers in some way must count upon consumer's rational ignorance to drive their pricing decisions; a retailer can price an item higher by taking advantage of the rational ignorance zone, so long as they don't exceed the threshold point where consumers would find it worth their while to do the research on pricing and find the best deal. This started in a small way with shoppers finding the best deal on travel rather than heading to a travel agency, but the shopper was still required to sit at their desk and process the transaction on a full-sized computer. The introduction of the Amazon Mobile app--and other mobile shopping tools--will change the way we shop for goods in a way that hasn't been seen since hunter-gatherer tribes first started to gather in markets.

Where does this leave retailers? Do they have anywhere near as good of an information stream to tell them which of their suppliers is offering the best price? Amazon has a clear incentive to provide this information, and encourage a shopper in a store to consider delaying their purchase gratification to gain some savings. Does any supplier have a similar incentive? Soon enough the retailers will start behaving like consumers.

Retailers already want just-in-time inventory, low stocking costs, and supply-chain efficiency. Suppliers that provide their retailers with a tool that makes it easier for the retailer to buy from them will have an advantage. This won't work in every case; obviously Chrysler's dealers can't comparison shop to find Chrysler SUVs from another manufacturer. However, an auto manufacturer's supply chain experts can shop around to find the most economical provider of the parts they need for the assembly line.

So if you're a supplier, start considering: What can you provide to your customers to eradicate ignorance? Can your customers find what they want from you by casual searches on the web? And if you're a retailer, ask yourself : Which suppliers are providing you with the best information? Are you using search technology to kill off any vestige of ignorance?

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