Friday, January 09, 2009

Gap in the Market: Adverse Selection

The majority of networking companies and services suffer from the problem of “adverse selection”, the phenomena first noted by Nobel Laureate George Akerlof in 1970: In a market where buyers cannot accurately gauge the quality of the product that they are buying, it is likely that the marketplace will contain generally poor quality products.

The popular social and business online networks (LinkedIn, Ryze, Friendster, Orkut, Ecademy, etc.,) are inundated with people looking to find “good” contacts, which are those seen as having more connections and resources than others. These people are “takers” as opposed to “givers”, and are using the network to get something they need or want. This constant bombardment of cries for help causes the most sought-after contacts to pull away and discontinue their interest in the network, if they even join in the first place. For that reason, the most successful and famous people often do not appear in LinkedIn, etc. or if they do, it is with a minimal profile and little activity. The quality of the network therefore continues to go down.

Because Globond has a strict membership process, we solve this “adverse selection” problem by ensuring that members are of a certain quality and with complementary interests. These members will exchange benefits with one another on a mutually beneficial win-win basis at each interaction. They therefore remain involved and interested in Globond events and introductions. Their experience then creates a buzz and word of mouth which further increases the quality and quantity of the membership.

Specific measures with which Globond solves the adverse selection problem:
• Third-party screening and adherence to quality criteria
• Signaling through superior branding
• Signaling through superior reputation
• Standardization of quality throughout the organization
• Distinction of service levels offered to members

We also monitor our members in an indirect way, quietly keeping our eyes and ears open to make sure members are doing right by one another. If we learn of any bad faith or lack of trustworthiness by one member to another, we remove them from Globond immediately (this rarely happens due to the care with which we choose members).

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