Thursday, June 22, 2006

Trading a paperclip for a house! The Internet and the Extent of the Market

Adam Smith would be impressed with this dude
This guy started with a paperclip and through a series of bilateral trades he hopes to one day acquire a house. His website walks you through his trade by trade highlights of moving up and closer to his goal. How is this possible?

Imagine if there were no Internet. This guy would have to take his paperclip around his neighborhood and see what people would give him for this. The person with the maximum valuation of the paperclip would make him the best offer but in a town of 100 people, the maximum won't be that high. He'll have a lot of trouble getting his house.

In our Internet world, this dude is able to transact with perhaps 500 million or a billion Internet users around the world. With heterogeneous preferences and relatively low transaction costs for searching for a bidder, the maximum bidder over such a large set is likely to be pretty high --- especially if the item the dude is offering is viewed as rare.

Now that this guy has become a celebrity social interactions make it easier for him to achieve his goal. Usually trades are anonymous. I don't know the name of the person who gives me my coffee at the Harvard Square Starbucks and he doesn't know me.
But in this trading case, people who want their own 15 minutes of fame may be willing to give him something valuable now to be part of his "chain". This is like a groupie thing I guess.

So I actually think he will achieve his goal and that this is a tribute to the Internet's role in making Adam Smith's vision of capitalism play out.