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transaction costs in anonymous markets
Some people have predicted (advocated?) frictionless capitalism, which
will be brought about by the use of digital technology to reduce transaction
costs. However, in anonymous markets these costs may be quite high.
Two main components of transaction cost in an anonymous market will be
the cost to maintain anonymity and the cost to evaluate reputations.
Maintaining anonymity requires that communications be done through
special untraceable protocols. The current state-of-art (i.e.
RemailerNet) adds several hours of transmition time to each message to
achieve effective untraceability. Contract negotiation, for example,
becomes very difficult under these circumstances. Untraceable
communications also use up more computing and communications resources.
Although remailers don't yet charge any money to pass along messages,
this is sure to change in the future. Unless the structure of the
Internet is completely redesigned, untraceable messages will always cost
more than traceable ones, although I hope this cost difference can be
reduced through technical advances.
The second big part of transaction cost in an anonymous market is
reputation evaluation. Of course, normal, everyday transactions require
reputations to be evaluated. However, more effort and cost will be
expanded on these evaluations in an anonymous market because the effects
of misevaluations will be much more damaging. Reputations must be
constantly reevaluated, as pseodonyms are easily transfered. Since no
good theories of reputation currently exist, these evaluations are
difficult to automate. Perhaps theoretical advances can make these
evaluations easier and/or more accurate. However there does not appear
to be any major research effort in this area.
If these costs remain high, but anonymous markets develop regardless, it
will be interesting to see how these costs affect the structure of the
markets. Will special protocols for contract negotiations develop to
minimize the number of round-trip messages? Will each market be
dominated by a few big entities because people can't keep track of
reputations of many smaller players? But then how will these big
entities be organized?