A couple of years ago, while working on the theoretical basis for Stinson Analytical’s content, I came across a TEDtalk by Robert Litan dealing with what he referred to as “artificial scarcity”.
He introduced the topic by referring very briefly to early problems that online dating site Cupid.com encountered with what I would call network formation and network stability. Apparently, Cupid.com permitted men to make a large (or perhaps unlimited?) number of approaches to women. As a result, making an approach that involved a low probability of compatibility did not require men to forego an opportunity to approach other women with whom they were more likely to be compatible.
At a minimum, then, there was little incentive for men to carefully consider potential compatibility before making an approach. Women, being aware of this, would assume in most cases that the approach was not the result of careful selection and could therefore not be taken as a signal of potential compatibility. Women were inundated with large numbers of indiscriminate, low commitment offers. Thus, the original system imposed high costs on women and reduced the information content of an approach.
To make matters worse, we can speculate that the problem was not simply the lack of incentives for compatibility but the presence of inadvertent incentives for incompatibility. In that regard, one expects that many men, being generally over-optimistic in these matters, may have “swung for the fences”, so to speak, and specifically targeted women with whom their incompatibility was painfully obvious (to the women, in particular). Women whose physical beauty was not of the conventional kind, or whose charms lay elsewhere, may thus have been neglected, notwithstanding their greater compatibility.
Result: women exited the network, with the consequence that men also exited the network. Both Eros and network formation were thwarted.
The solution, proposed by economists Muriel Niederle and Dan Ariely, was that men should be limited to two approaches per month. This caused men to take account of the probabilities that (a) their interest would be reciprocated, and (b) if so, compatibility would be the result. Women, aware that choice by men had become costly, would interpret an approach as a marker of commitment and possible compatibility. The network grew and everyone lived happily ever after.
The limit Cupid.com placed on approaches was characterized by Litan as the introduction of “artificial scarcity”. I can see why many might interpret it in this way, but I believe this interpretation to be faulty. It flows either from a failure to understand that this is a network problem or a failure to fully grasp the mechanics and purpose of a network, as readers of Stinson Analytical reports will have already concluded.
The problem was not the lack of “artificial scarcity” but the presence of an actual scarcity, i.e., compatible matches. The source of the initial discoordination was that there was no natural signal of the scarcity to discourage frivolous or incompatible contact. In the offline world of romance, transaction costs (search, transportation, fear of rejection/humiliation, etc.) create incentives for compatibility. The analogous costs online tend to be absent or much lower — hence the need for Cupid.com to introduce a signal of the scarcity in the form of a quota.
This, in turn, points to a rather interesting observation: there are situations in the offline world in which, without fully realizing it, we may have come to rely on transaction costs of long standing to assist in coordination. Presumably, this is limited to situations in which an explicit price plays little or no role. In the absence of the transaction costs or where they are suddenly reduced, coordination may require the introduction of an explicit signal of “scarcity” or incompatibility to assist in coordination, such as the quota used by Cupid.com or some sort of transfer from one side of the transaction to the other to account for the imposition of additional costs of coordination. One can also wonder whether relying on transaction costs may in some cases have been socially convenient and whether replacing them with something explicit may be less convenient.
Have a happy Valentine’s Day.
14 February 2017