WINNER TAKE ALL

Dick Pountain/Mon 13 September 2004/1:05 pm/Idealog 122

As Google drowns under a storm-surge of blogging and Kelkoory, the great tripod of the Internet Revolution is left perched on only two legs, Amazon and eBay, and it's no coincidence that both these institutions thrive because they let people buy things more cheaply. I have friends working in specialist fields like oriental textiles who now make most of their living buying stuff on eBay and selling it in the real world. I even tried it myself once, to sell a left-handed bass guitar, but in the end I got more than twice the eBay price by selling it on a dedicated Left-Handed Bassists site in Germany, which only confirms that finding the lowest price is nice for buyers, not for sellers.   

Readers of previous rants in this column may have formed an impression that I'm some kind of half-reconstructed Marxist who loathes the whole notion of markets (and probably favours Use Value over Exchange Value, as the jargon used to have it). Nothing could be further from the truth: I take great pleasure in seeing a great product that improves people's lives succeed in a fair market, and need no convincing that markets are the most efficient way of distributing the material products of any society, given the wretched failure of most alternatives that have been tried. Where I part company with today's free market ideologues is that I don't believe markets offer the best solution in certain realms of life, such as assistance, affection or information; I don't believe that markets are always rational and perfectly efficient (I know that they're not); and I believe that it's no sin to intervene in a market if most people dislike the outcomes it produces. It's encouraging to know that I'm far from alone in such opinions, as there's a strong and growing body of academic opinion that, while wholly in favour of markets as a means of distribution, studies the kinds of distortion and irrationality that can infect them with a view to devising ways to alleviate them.

Of these market mutations perhaps the most significant, widespread and potentially disruptive is the Winner-Take-All market, which has been extensively studied by the American economics professors Robert H. Frank and Philip J. Cook, and summarized in their book 'The Winner-Take-All Society' (Penguin 1996). This type of market should be very familiar because it now rules in our entertainment industry, in sport and in the boardroom of most of our larger corporations. In essence a Winner-Take-All market is just what it says on the tin, one in which a single seller ends up with all the revenue and other participants receive nothing. The enormous fees and salaries paid to movie stars, sporting heroes and management 'fat cats' are the result of bidding in such markets.

Frank and Cook demonstrate that a Winner-Take-All market can only (but won't always) arise in a sector where *relative* rather than *absolute* performance determines reward. In the movie business, when your film competes against several rival blockbusters, a star face is the only guarantee of packing the cinemas on that crucial first weekend - to cast anyone less than the hottest is suicidal and you must pay whatever they demand to get them. Contrast this with a classical market like plumbing services which supports hundreds of thousands of plumbers, all earning more or less the same money (which may feel outrageous when your drain's blocked, but imagine how much Nicole Kidman would charge). The difference is that any one of these plumbers could unblock your drain pretty effectively - that is, only absolute performance matters, so few people would pay double to have their drain unblocked in half the time.

In a Winner-Take-All market, would-be sellers must invest in performance enhancements to make sure they're picked as number one, since number two and below won't get paid. Hence the explosive growth of aids to personal appearance that we're witnessing: designer clothes, cosmetic surgery, personal trainers and all the rest. Hence the anabolic steroids in sport. Movie stars need to look great, weird, or fierce - anything but ordinary - and this attitude is filtering outward to other professions from PR to advertising to law. Personal appearance is more and more read as a token of fitness, making gym membership and an Ermenegildo Zegna suit compulsory investments. Even among freelance software developers waist-length greasy hair, an ice-hockey mask and a White Stripes tee-shirt is now barely acceptable as interview-wear. 

Another characteristic of Winner-Take-All markets is that success breeds success: once you win one contest, you're exponentially more likely to win the next one. Hence that ever-shifting list of Who's Hot in Hollywood only takes into account your last movie, at most two. Hence footballers' astronomical transfer fees, or the fat-cat options paid to managers who've won famous takeover battles. This same effect drives the continuing dominance of Microsoft Windows and Office.

Laisser faire dogmatists may shrug that this is all a perfectly acceptable evolution of the market, but Frank and Cook point out that Winner-Take-All markets are grossly inefficient - they attract far, far too many people who stand no chance into competion and induce them to waste large sums on performance enhancement. This inefficiency has a tragic dimension that's become a source of sick entertainment in itself: Simon Cowell's 'X Factor' and Vanessa Feltz's 'Cosmetic Surgery Live' are our new coliseum, offering deep (if slightly whiffy) insights into the way we live today.