Price Discovery (First of a Series)

I want to talk about something of which I know nothing: Wireless Internet Access.

We spent the weekend in pgl-land (NYC), at a friend’s apartment. Since he’s a rather prominent computer graphics designer, I assumed, incorrectly, that he would have some form of Internet access at home.*

So I did what I always do: opened the laptop and searched for an available wireless access point.

At no time were there less than 15 indicated. And while most of these were “Security-Enabled,” I get the impression that either (1) that has become the default setting for service in the past few years or (2) enough people have been persuaded by the FUD campaigns of MSFT and others that they read that part of the instruction manual.**

I had kids to distract, so access to barbie.com or dailynoggin was important. That is, I would have been willing to pay a few dollars for a weekend’s worth of access, or some equivalent thereof. If there were a market available.

And, probably, at least a few of those 15 or so router-owners—badger or linksys or 5AMews—would have been willing to make a few dollars providing some of their excess capacity to my 54.0Mbps laptop. If there were a market available.

But there wasn’t.

Or, more likely, there was, but the effort wasn’t worth it. One of the key aspects of economic analysis is the assumption that markets (1) clear [both buyer and seller voluntarily agree on a price] and (2) are efficient [everyone involved in the market has all the information they need to make a rational decision on what the clearing price is/will be].

In the real world, investment banks spend millions of dollars to attain that “efficiency.”*** Nor is anyone of the illusion that the terms of all transactions are completely voluntary on both sides. But those are variations on the model, and the markets created from or supported by them, while not an economic ideal, can be analyzed as variations.

What happens when there just is not a market?

In the case here, I have no way of knowing who the local providers are or, more importantly, where they are. Badger could be my next-door neighbor, or two floors away and at the other end of the building. So I would have to spend time

1. knocking on doors, interrupting people (including some who have no capability themselves; there are many more than 15 apartments in the building),
2. having discussions with some people who might have non-economic reasons not to agree to permit me access (including FUD),
3. (c) finding people who really do use all of their capacity,****
4. finding people who could provide access but with whom I cannot agree on a clearing price, and
5. either
   1. finally, finding someone with whom I can come to a market agreement or
   2. giving up and depending either on unguarded WAPs or finding an alternative.

In all scenarios, even 5(2), I have spent some portion of time, possibly significant, that must be included in the Full Cost of the Search.

Which is probably why there is not an active secondary market in Wireless Internet Access in the United States.

The consequences of this specific example are left as an exercise. The consequences of the problems with Price Discovery are To Be Continued.

UPDATE: Felix Salmon wonders about the need for price discovery in commercial WiFi:

If I’m looking for a wi-fi network, it’s easy to see which ones are encrypted and which are open. But of the open networks, it’s impossible to see which ones are genuinely open and which ones will take you only to a sign-on page which asks for a credit card number and which often doesn’t work….A network which purports to offer free wi-fi should do just that: firewalled wi-fi should look different somehow.

*No DVD player, VCR, or television, either; not a keeping-the-kids-busy-without-touching-things place.

**I am convinced that it’s not out of actual knowledge because several of the “secure” networks were still named linksys, Apple Network ######, or similar. It may not be true, but it is the way to bet.

***As cactus noted, the EMH is of dubious value if there is a significant disconnect between the alignments of the financial markets and those of “main street.” But let’s pretend it works for the normal “markets” model.

****Highly unlikely, for reasons to be discussed in another post.