H-Market model: Brief explanation of a market model for overcoming economic inequality with growth
HIRANO Satoshi, Ph.D
Peace and Passion
Research fellow of University of Tokyo
Aug. 20th, 2022-
The H-Market model is a demand-centric market theory (hypothesis) that aims to solve economic inequality. Purchasers can buy at lower prices than before and most sellers can increase their sales even at the same prices. The model is based on the insight that the economic disparity problem is worsened by the power law distribution of the click-through rate of the search result ranking. The model matches a request (demand) using weighted randomness with multiple suppliers, including low-ranking suppliers. To avoid deflation caused by excessive price competition, the model uses a matching and two auctions. By raising the income of the low- and middle-income earners, the model will boost the local economy and create a positive feedback loop in which the income of the high-income earners will also rise.
- "Power law" is invading our lives and lowering salaries
- Overview of purchase and sale with H-Market model
- Cheaper than buying in popularity ranking
- Many sellers will earn higher salaries and the economy will grow
- Efficient and low cost
- Different retailer prices
- Request shift for regional revitalization and reduction of CO2 emissions
- Seller selection
- Adjusting prices and inflation
- Toward the next era
The H-Market model (Hirano Market model) is a novel market theory that aims to overcome the issue of economic inequality and to establish the foundation of Requestland (the Land). In brief, it is a request- and map-based online market that naturally (and hopefully) reduces inequality and improve the local economy. In an age where sales-related jobs are being taken over by AI, it is also an important goal to create jobs with a decent income in the region.
In this text, "model" means a mock-up that we use when building a theory. So, the meaning of "cheap" in this site is that, when you purchase something, though sometimes cheap and sometimes not, we expect cheaper than the current purchase prices on average. In the long term, in order to increase added value, sellers need to raise prices.
H-Market model is a hypothesis that requires more examination and validation in society. If you encounter any problems or have any questions or criticisms, please kindly email me.
"Power law" is invading our lives and lowering salaries
Many countries have small and medium-sized enterprises (SMEs) that make up the bulk of their businesses, but they can't afford to pay higher wages. For example, in Japan which 99% of businesses are SMEs, SMEs with sales of 50 million yen or less are almost in the red on average.
We need an economic mechanism to increase the sales of (most readers belonging) small and mid businesses so that they can pay their employees more and boost their purchasing power, and grow the local economy. This will thicken the middle class and raise wages and tax revenues. It will also provide financial resources for education and welfare.
Except for food and daily necessities that we can buy near our home, we use Web search widely to find products and shops in almost every shopping situation.
Online shops and search engines show results in order of rating, price, number of reviews, etc. Due to performance reasons, the listings must be displayed in the order in which they are stored in the database, meaning every listing must have some sort of ranking.
Figure 2 shows the click-through rate of the top 20 links in Google search results. Surprisingly, it shows a steep downward curve, not a flat line.
Purchasers (those who want to buy) start investigation from the top of the search results, that is a ranking. The 7th position has less than 3% click-through rate, so it is clear that most people only check the companies listed between 1st and 6th positions. That is because we have limited time to research.
Orders are concentrated on the sellers and products with high rankings, giving them brand power and higher pricing. Profits are reinvested for SEO, YouTube videos, and social media to improve search rankings and ratings, leading to compound interest.
Also, the "Recommended" of online shops uses the AI Vector Search and the scoring of revenue trends and ratings, so it tends to recommend products that other users have purchased a lot, and proposals by large-scale language models (AI) such as ChatGPT tend to return what is said a lot on the internet and refer to raking sites, which makes the top-ranked products even more advantageous.
Lower ranked companies with good products or services have trouble selling because of low visibility, leading to price competition and labor cost cutting.
The rich get richer and the poor get poorer. WE are dying in the ranking hell.
This is a phenomenon called “power law” and can be seen in various social and natural phenomena. The famous 80:20 rule is one of them. The business of creating rankings and selling ads to lower ranked companies is thriving.
Overview of purchase and sale with H-Market model
Requestland does not have rankings to avoid the power law. Even if you don't research yourself, sellers will offer you something that fits your needs.
As an example, I will explain the transaction between Purchaser Alice and Seller Bob. Bob is a salesperson of a paint shop, which is a typical small business you often see.
If purchaser Alice writes a request like "Please paint the exterior wall of my house. I would like to consult with 3 companies", sellers will make various proposals that match Alice's needs. You can choose the number of sellers to consult from 1 to 6, typically 3.
Purchaser Alice can choose what he/she likes from the offers or pass. It's very easy. This works for other requests too, such as a car or a piano teacher.
Seller Bob reads the request and, if he wants to sell, makes an entry. At that time he pays an entry fee that he can decide himself. Zero fee is also OK. The Land will select up to 3 sellers from entries with a probability according to entry fees from the sellers. If Bob is selected, he makes proposals that suit purchaser Alice and sells one.
Seller selection will explain more.
Cheaper than buying in popularity ranking
Figure 3 is
The horizontal axis in Figure 3 above is the list of sellers up to the 20th. For products that high rankers have brand power, the top companies have higher prices while the lower companies have lower prices, creating a downward sloping curve.
For instance, if purchaser Alice believed that buying the same thing as others would be safe, they would have purchased it at a high price, such as $4,000, from the top of the ranking. However, after receiving proposals from three companies, she found that the product recommended by seller Bob, an average seller, "fit her purposes," and she could buy it at a lower price, say $3,500.
As an actual example of body soap, Bioré U, which has a lot of TV advertisements and has brand power, costs 721 yen per liter, while Milky, which is not well known, costs 375 yen per liter, which is a large difference (Amazon). Even non-branded products with low advertising costs are often of sufficient quality.
While each purchase may be expensive or inexpensive, as a general trend, the purchase price is lower than choosing from some companies at top of the search results or a popularity ranking.
Many sellers will earn higher salaries and the economy will grow
If a purchaser uses rankings to purchase, and the average ranking of seller Bob is 10th, the click-through rate is 1.01%, and the chance of sales is 1%.
On Requestland, if 20 sellers make entries with the same fee, the system selects 3 companies from 20 companies with a 15% chance to make offers. That is 15 times more.
And seller Bob can sell with a 1/3 probability of 15%, which is 5%. Sell-ability increased five-fold, from 1% to 5%.
This creates a win-win situation where purchasers can purchase at lower prices and most sellers can increase their sales even at the same prices.
When sales increase, the salary also increases as it is determined by the added value. A virtuous cycle occurs in which higher productivity leads to higher wages, higher consumption, and higher employment. That is called "positive supply shock". The effect of such repetition is greater for SMEs. Here's the small loop in the figure at the top of the page.
Furthermore, if you place requests in your region on the Land map and buy things from nearby shops, the money will circulate in that region.
Well, do top-rankers loose?
The SMEs in Figure 1 shift to the right sales classes, increasing the income of their workers. This in turn increases the number of people who can afford to buy higher-priced products, allowing more people to buy from the top-ranking brands. For top-ranking brand companies, expanding the customer base is the most essential strategy for increasing profits.
This is the large loop shown in the figure at the top of the page. The goal of Requestland is to keep the small loop of increasing salaries for SMEs turning, while also turning the larger loop that includes large companies, creating a double loop that drives the economy.
Let's look at the numbers in Figure 3. If ten companies make entries, each company has a 10% chance of making a sale. Sellers ranked up to third place have a click rate of 10% or less, allowing them to make a profit. If companies ranked higher than third place spend much for advertisement or labor costs for social media or SEO to keep the ranking, they can increase profits by shifting advertising costs to entry fees for the Land.
Now, looking at Figure 1, we can see that companies with higher sales have a higher per employee value added (gross profit before deducting personnel expenses, etc.). However, as shown in Figure 4, when we look at the value added as a percentage of per employee sales, we find that larger companies have lower values. Could it be that bigger companies are spending time in meetings or having impressive headquarters?
Lower-ranked sellers (smaller firms) can add more value per employee by selling products at the same price compared to higher-ranked sellers (larger firms), which can also increase national GDP, that is the total added value. The national economy will grow.
Efficient and low cost
It is difficult to compete with AI in terms of cost for human sales, such as proposals and consultations that leverage the seller's expertise, because they are costly. In order not to lose our job, we need to have a higher cost-effectiveness in total, including customer satisfaction.
First of all, in order to make proposals with AI, stores need to advertise and attract customers to your shop.
However, I think there are many people who are fed up with video site ads like me. Ads are very inefficient because they are displayed to viewers who are not interested. The cost of running online ads is surprisingly high for stores, but if they stop, sales will drop.
This model is cost-effective because it allows us to sell only to people who wrote a request thinking "I want...", and only to those who wrote a request that you want to make an entry. Building human relationships will also increase repeat purchases. On Requestland, you can interact with multiple purchasers at the same time using chat, bang board, and video calls (using recording). It can be said that the transaction cost is low and efficient compared to the conventional advertising-based market.
The essence of product proposals and consultations is to support problem solving comprehensively by taking into account the problems (Things to do) that customers have in the background of their purchase motivation, which requires human abilities that AI cannot do. For example, in Bob's case, if he notices that sap from the trees planted next to Alice's house is dirtying her house, he would advise her to prune the trees heavily.
No matter how advanced AI technology becomes, it cannot have human sensibility or empathy. Many people prefer human elements such as peace of mind, empathy, and good sense of sensibility when they can see their faces.
By reducing the cost of sales and contributing to customer problem solving, it may be possible to increase the number of industries that do not lose their jobs to AI by having a higher cost-effectiveness than AI, even if not all industries can do so.
If Requestland itself earns a significant profit, it is probable that similar markets will arise. If a purchaser places a request in multiple markets, it will surpass the seller limit and inequalities will persist. Therefore, we do not prioritize profit but instead focus on addressing societal concerns.
Different retailer prices
In the case of products that makers and retailers are different such as home appliances and consumer products, many retailers sell the same product at different prices.
For example, washing machines with high functionality is located at left in Figure 5 and less functional products are located on right. The multiple lines for each product indicate that retailers are selling them at different prices.
When you request a washing machine, you may receive a very good product proposal from a lower-ranked search result. If you search a price comparison site for the product by its model number, you may find another seller, D, that sells it for a cheaper price than seller C, who initially suggested it. This is because it takes labor costs to listen to you and make product proposals for your needs.
In this case, you may face a dilemma. Money or obligation.
A request displays two numbers (counters) of previous requests and purchases made by the purchaser. Both numbers increase when a purchase is made on the Land, but the purchase counter will not increase if you do not make a purchase on the Land.
Sellers will spend more time for customers who make frequent purchases, though they will not make entries to requests from those who have only made requests. It's up to you whether you choose to buy from Seller C for the sake of convenience in the future, or save some money by buying from Seller D.
If you are looking to buy a home appliance at the lowest price listed on a price comparison site, it is better to do your own research from the beginning using the Banban board. It also supports purchasing good products including lower ranked.
To purchase a product at a price lower than the lowest price, you can submit a request with your desired price.
Sellers are likely to respond to your request when you are purchasing multiple items, when they need to meet a sales goal at the end of the month, when they have excess inventory. If there are no responses to your request, your request counter will not increase and there will be no penalty described above.
If you often buy what not suite to you and sell them at a flea market, it may be better to seek advice with requests before making a purchase to avoid mistakes and ultimately save money.
Request shift for regional revitalization and reduction of CO2 emissions
Cities are full of people and have much demand. Jobs are available to meet the demand, but there are frustrations with life: expensive, cramped, and in a bad environment. Many of largest cities are becoming to have slums, increasing poverty and crime rates.
The countryside is comfortable, but there are few jobs, and the big problem is that young people are leaving for the city.
Request shift means that when placing requests on the map, each person staggers them slightly towards the perimeter of the city.
For example, as shown in Figure 6, people who live on the east side of the city should place requests a little further east. That's all.
Those who live further east will place their requests further east. Southerners place requests further south, and northerners place requests further north, like a bucket brigade.
Job opportunities shift to the periphery as the bulk of demand in the city seeps to the periphery. If sales in the area increase, employment will increase and the population will increase. As the population increases, the demand will increase, and the surrounding area will be able to live around its own demand.
Workers who get a job at the region will be able to work in a comfortable environment. Spacious home, cheaper foods, shorter commute time, green town...
Urban overpopulation will be alleviated and poverty and crime rates will fall.
Furthermore, purchases that require delivery and job requests that require business trips also reduce CO2 emissions. This is to ask the seller in the adjacent area. A nearby seller come early. Sellers save time and labor costs for transportation, and less CO2 is emitted for transportation.
Another request shift is timeshift.
Normally, shops don’t want to miss any chance, so they prepare their staff and equipment for busy times. When customers don’t come, valuable resources aren’t being utilized. Waiting staff feel like they are wasting their lives.
Therefore, if the purchaser writes a request when the store has time, such as on a rainy day, the store can serve you with more time. The key is to avoid peak hours. Stores can lower costs. There are benefits for both purchasers and sellers.
Requests (demand) are a finite resource on the commons, so if someone takes too much, it will quickly be depleted (the tragedy of the commons). To prevent the depletion of resources, the cost (the entry fees) is charged to the sellers when taking requests, and this fee is used to cover the operation costs of the system.
If we only select sellers who pay the highest fees, it would lead to a 'winner takes all' situation, where the winner can afford to pay more fees in the future while others cannot. This is considered the norm in a free market, but it ultimately results in a widening economic gap.
On the Land, the system adjusts the balance between competition and equality by taking into account the weighted probability based on the entry fees and a coefficient that mitigates the power law. This is similar to throwing three darts at targets of different sizes for each seller, as shown in Figure 7. Because sellers who are not selected are not charged, they can try again without loss. Paid entries are prioritized over free entries.
Repeating this process several times, even sellers with lower entry fees can have a fair chance of making sales. This is a structure that is less likely to create economic disparities, and it is a system that enables young couples who are starting their own business for the first time to make a good start.
Entry fees are near to advertising costs. Generally, sellers need to advertise to make sales, and they know that higher advertising costs lead to increased sales. Entry fees are determined by their motivation to make a sale and the seller's ability to make optimal sales for the request. The H-Market model considers it as a signal indicating the degree of fit with the purchaser's needs. When the probability is the same, the distribution of income opportunities is complete, but even those with less motivation to sell can get opportunities without putting in any effort. What about sellers with no seriousness? Weighted randomization ensures that all sellers have a chance to earn income, but it also requires sales motivation, resulting in a fair balance between competition and fairness.
Let's take the example of the painting work. Painting contractors have their strengths and weaknesses. Some specialize in repairing household painting, while others work on painting projects for large buildings or public works. Large companies have established a system that generates profit from large-scale projects, so they may not profit much from smaller jobs. On the other hand, smaller contractors specialize in smaller projects and are flexible in their approach, providing low-cost solutions. However, not all larger contractors charge high entry fees for every type of painting request. Moreover, paying higher entry fees can result in higher sales prices, putting them at a disadvantage when comparing quotes.
Adjusting prices and inflation
The H-Market model consists of three chains of choices:
- The 1st selection: Matching based on the receiver's conditions (α choices)
- The 2nd selection: Auction of sales rights by entry fees (β choices)
- The 3rd selection: Auction at selling prices (1 choice)
In a highly competitive market, corporate managers are motivated to increase or maintain market share by investing productivity improvements in price reductions rather than wage increases. It's the deflationary business model. Consumers love it, but it leads to bad deflation and lower wage levels in the long run.
A large amount of money supplied by the zero interest rate policy and fiscal policy have widened the economic gap between those who receive the benefits and those who do not. Let's solve this classic disparity.
I created the H-Market model during Japan's prolonged period of deflation. The H-Market model has the ability to directly adjust inflation rates. It could complement the indirect adjustment of inflation rates through the manipulation of policy interest rates without side effects.
For example, when a purchaser submits a request, 30 sellers have set up receivers that meet the required conditions. The system then selects 20 of these sellers as the first selection to receive the request. Let's call the number of sellers who receive the request at the first selection α (in this case, 20).
After reading the request, 10 of the 20 sellers make an entry, and the system randomly selects a number of sellers for the second selection, which we call β. The purchaser chooses β from 1 to the upper limit value (6), but the system can adjust the upper limit to change the average value of β.
As an easy-to-understand example, if β is set to 1, sellers can offer their desired estimates, and the selling price will increase. If β is increased, the selling price will decrease. For example, if β is set to 10, there will be competition among 10 sellers offering estimates, which will lower the price. By adjusting β for many items, the price level can be changed.
The appropriate β value is the one that matches the desired inflation rate, which is generally around 1% to 2% year-on-year. Central banks try to achieve the inflation rate by manipulating interest rates. However, there is a lower limit to the zero interest rate for central banks to adjust inflation rates (liquidity trap), and they have no choice but to use ineffective means, such as waiting for people's inflation expectations to change with excessive fiscal policy, to escape deflation.P. Krugman, "Apologizing to Japan"
Actually, I felt that both monetary and fiscal policies were increasing anxiety about life in our old age, and that the such ever-increasing national debt was making young people feel hopeless about the future.
The entry fee amount varies depending on α and β. Increasing α will increase the entry fee amount due to competition among sellers, while decreasing α will lower the fee. Lowering β will decrease the fee, while increasing β will raise it. This prevents a surge in fees and allows for maintaining the reasonable profitability of the Requestland.
If Requestland were to generate high profits, it would likely result in the emergence of similar markets. As purchasers place requests in multiple markets, the effectiveness of β in preventing price slaps and deflation diminishes. Therefore, Requestland operates with a profit-minimizing algorithm using α and β as mentioned above.
Toward the next era
Keynes predicted "the euthanasia of the rentier, of the functionless investor" through the reduction of interest rates in his General Theory. However, in reality, while the massive injection of money through Keynesian policies saved many people from crisis, it led to a continuous increase in wealth for investors and an ongoing widening of inequality over the past century.
In contrast to the indirect manipulation of interest rates, the α and β in the H-Market model represent more direct price adjustments that could complement the central bank's control over inflation rates.
Through the double-loop of the H-Market model, the lower-income class can transition to the middle class and enjoy a decent standard of living, resulting in an increase in effective demand and significant benefits for investors. Competition will be eased, allowing everyone to sleep peacefully.
The new theory presented here is still in the hypothesis stage, but it is not just a mere proposal or a theoretical concept. It is a system that anyone can actually use, right in front of you. If many people start using it, it will begin to address inequality.
However, for this to become a reality, your enthusiastic cooperation is necessary. Requestland is designed to support your lives and prosperity of the local community, with each of you as the leading actor.
A few years ago, I lost my brother. That should NEVER have happened. I think it was caused by the inequality and harsh competition.
Last night he appeared with Happy. Oh, you are with Happy. It was in a dream on a dark, rainy night.
As a 61-year-old, I am determined to solve the problem within the remaining years of my life, and I am pushing forward with its development with all my energy. My remaining time might be not enough. I sincerely hope that all of you with the young people who are working on this development will carry it forward and bring peace of mind and passion to each and every one of you in the next era.