Platt Perspective on Business and Technology

Business intelligence as a quantitative distinction 6 – marketplace cycles and the information economy

Posted in macroeconomics by Timothy Platt on November 2, 2010

Costs to design, produce, market, distribute and sell do not hold steady and constant, and neither do prices paid by retailers and other middlemen, or end user prices. That is both obvious and immutable, barring artificial cost and price controls. And even there, change happens. It is just that this change is hidden as gain and loss of profit margin on the one side, and cost-effectiveness to purchase on the other. But baring external constraints such as governmental price controls, all of the numbers here shift with time.

This is my sixth posting on business intelligence as a quantitative distinction, and part of a longer and more extensive discussion of the monetization of information, with all related preceding postings included in the series Macroeconomics and Business. And my goal here is to at least start a discussion of the various cyclical and non-cyclical trends and factors that would cause costs and prices to change, and both in the marketplace and leading to it.

First there are cyclical factors:

• This includes seasonal factors. End users are more apt to purchase cold weather clothing, for example, as the weather starts to get colder – and again for end-of-season sales for the next year. They are less likely to buy cold weather clothing after the end-of-season clearance sales and when the weather is warm and going to stay that way for months to come.
• There are similar patterns in business purchases, where annual cycles can be driven by the financial constraints of the business year. This includes business-driven cycles that relate to the marketplace. It also includes patterns that reflect more on the business cycle and on internal to the business pressures, than on the marketplace itself. As an example of that consider the high level purchasing that can take place approaching the end of a business year to use up budgeted funds held by departments and services before they can be drawn back into an organizations general accounting.
• Unless prices are artificially and externally controlled, shifts in purchase volumes, and in pressures to buy can always be expected to affect prices.

This also involves non-cyclical but predictable trends:

• For rivalrous goods, this includes depreciation on the book value of holdings, and whether business assets or inventory.
• For no-rivalrous goods this includes shifts in market value as exclusivity of ownership slips, and as new and competing resources come online and enter the marketplace. (Here, I exclude common standards and other informational resources that can gain value as they come into more common use as far as market exclusivity is concerned, but even there, older standards loose value as they become supplanted and as they become legacy baggage.)
• Fashion and related trends enter in here too, and I have to add that this type of factor applies just as much to businesses and to non-rivalrous business information, as it ever has for clothing and high fashion. When the competition and businesses with solid reputations start using some new information-driven capability (e.g. AJAX or Ruby on Rails or any of a wide range of other software developments), the pressure is on for your shop to either adapt it too, or to be able to explain why not.
• Raw data that would be processed with these information management tools also carries a distinct shelf life and can degrade in value very quickly as it looses accuracy (e.g. personally identifiable information where people move, change credit cards and so on, or sales figures when this information is out of date and out of season.)

Together, these factors and ones like them tend to cause value to cycle up and down, but virtually always along a longer term trend that is itself downward. And this holds for both rivalrous and non-rivalrous goods.

There are exceptions. Objects that gain a status and value as antiques can retain and even gain value for their rarity. A closely held trade secret that competitors cannot readily match in the marketplace for perceived value to the customer can retain value long term and even over many generations. But the basic trends, cyclical superimposed on longer term noncyclical hold as the general rule. And this brings me to one of the key points I would make in this posting.

• This general pattern applies with equal force and it takes a very similar form, for both rivalrous and non-rivalrous goods. This is a fundamental point of similarity for them in the marketplace, affecting both buyer and seller, and any middlemen in between.
• Perhaps the most significant factor affecting this as a difference between rivalrous and non-rivalrous goods in a marketplace is uncertainty as to precisely where an effective price point would be at any given place in this process, and for a normative buyer and seller as discussed in part 5 of this series: Establishing the Normative Buyer and Seller.

The next posting in this series is going to look at the marketplace and discuss buy-in requirements for developing an acceptable and accepted price point based open market for non-rivalrous goods. In this, I will turn to a gold standard test case and business valuation, for both its rivalrous and non-rivalrous assets.

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