IZA World of Labor - Should countries auction immigrant visas? IZA World of Labor Back to Articles Should countries auction immigrant visas? Selling the right to immigrate to the highest bidders would allocate visas efficiently but might raise ethical concerns 2015 Madeline Zavodny Zavodny, M (Agnes Scott College, USA, and IZA, Germany) 10.15185/izawol.202202 View full article Elevator pitch Many immigrant destination countries face considerable pressure to change their immigration policies. One of the most innovative policies is auctioning the right to immigrate or to hire a foreign worker to the highest bidders. Visa auctions would be more efficient than current ways of allocating visas, could boost the economic contribution of immigration to the destination country, and would increase government revenues. However, visa auctions might weaken the importance of family ties in the migration process and create concerns about fairness and accessibility. No country has yet auctioned visas. Key findings Pros Auctions would allocate visas more efficiently across immigrants or across employers. By enabling workers with the highest-valued skills to immigrate, auctions have the potential to boost economic growth.

By enabling the government to fund other programs, cut taxes, or reduce the deficit, auctions would increase government revenue. Auctions would substitute market forces for government determination of who should be able to immigrate. Auctions are a flexible alternative to complicated point systems for encouraging high-skilled workers to immigrate. Cons No visa auctions have been conducted, so their effects are only theoretical. Auctions do not guarantee the admission of immigrants who will contribute the most to long-term economic growth. Auctions might change the composition of immigrant populations in ways that are unpopular, particularly among immigrants who want to bring in family members. Some potential immigrants and employers may view auctions as too complex or unfair. Sending countries might be adversely affected if the composition of emigrants changes. Author's main message Under work-based visa auctions, employers would bid for the right to hire foreign workers, who would then receive a visa. Governments that opt to auction such temporary work-based visas should also consider creating a pathway to permanent resident visas for immigrants who succeed in the labor market. A resale market in unused or unwanted visas, visa portability across employers, and enforcement are all important components of a successful program to auction visas.

Policymakers who want to boost immigration’s economic contribution should consider auctioning work-based visas rather than auctioning visas directly to immigrants. Motivation Around the world, far more people want to move to another country than are able to do so legally. Immigration offers the possibility to rejoin family members, to pursue better economic opportunities, and to be safer. Desirable destination countries, worried about being overwhelmed by a flood of immigrants, restrict the number of visas they offer. Countries that limit the number of visas must decide how to allocate them. Common criteria for allocating visas include skill, employment guarantees, and kinship ties; some countries use a point system, in which immigrants are admitted based on the number of points assigned for specific characteristics. Visas are typically awarded to all people who meet certain qualifications or, if demand exceeds supply, on a first-come, first-served basis. Some countries have introduced additional mechanisms in recent years for allocating the right to immigrate, such as lotteries and investor programs. One program that has been promoted by some economists, including Nobel-laureate Gary Becker, but that no country has yet adopted, is a visa auction, or selling the right to immigrate to the highest bidder.

Discussion of pros and cons How visa auctions would work Visa auctions would allocate a specified number of visas to the highest bidders. The number of visas could be determined by the government or by an independent commission. Visa auctions could take several different forms. Potential immigrants themselves could bid for visas, or employers could bid for permits that allow them to hire foreign workers, who would then receive visas. Visas and permits could be temporary or permanent; even the right to citizenship could, in theory, be auctioned. Separate auctions could be held for different categories of immigrants, such as for different education or skill groups or for year-round versus seasonal workers [2] . There are multiple ways to conduct an auction. A sealed-bid, single-price format might be the best option for a visa auction. Bidders would submit secret bids, and visas or permits would then be allocated from highest to lowest bid until the quota has been met. Winners would pay the price of the lowest accepted bid. In economics, this type of auction is often called a “ Vickrey auction .” This structure would help reduce concerns about the “winner’s curse,” or paying too much. It would also make more people willing to participate in the auction and bid their true willingness to pay.

Vickrey auction A Vickrey auction is a second-price, sealed-bid auction. Each bidder submits a confidential, or sealed price, bid. The highest bid wins the auction, but the winner pays the price of the second-highest bid. If multiple copies of the item are being auctioned, all winners pay the price of the lowest accepted bid—this is called a single-price auction. The economist William Vickrey showed that this auction design gives bidders an incentive to bid their true value of the good being auctioned instead of under-bidding in order to pay less if they win. Source: Lucking-Reiley, D. “Vickrey auctions in practice: From nineteenth-century philately to twenty-first-century e-commerce.” Journal of Economic Perspectives 14:3 (2000): 183–192. There is considerable precedent in other markets for government auctions. Governments regularly auction bonds to investors in order to fund deficits. The US Treasury uses a sealed-bid, single-price format to sell trillions of dollars of debt. The US government has also auctioned offshore oil leases, the wireless spectrum, and sulfur dioxide allowances, among others.

The EU auctions emission permits as part of the EU Emissions Trading System; Iceland, Liechtenstein, and Norway also auction emission permits. Many people have experience with auctions thanks to eBay. Paying for visas and setting up resale markets One concern about auctioning visas directly to immigrants is their ability to pay. Many potential immigrants whose income gains would be expected to exceed the price of a visa might be unable to pay upfront for a visa, and they might not be able to borrow enough to pay for a visa because of limited credit markets in their home country. Auctioning permits to employers would avoid this concern. Alternatively, the government could offer loans to auction winners, who might be required to make a down payment. Winners would then repay the loans over time, perhaps when they file their taxes each year. Having a resale market is critical to the success of visa auctions, particularly if permits to hire foreign workers are auctioned to employers. The government could run an electronic resale, or secondary, market where employers who hold valid permits can post them for sale. Tradable permits make employers more willing to participate in auctions by reducing their risk of holding a permit they no longer need.

A resale market also allows employers to buy a permit later if they did not bid high enough in an auction or did not participate in an auction at all but later want to hire a foreign worker. Small businesses, in particular, might find a resale market more accessible than an auction. Portability of visas Visa portability—the ability of foreign workers to switch employers—is also critical to the success of an auction system. Foreign workers who cannot switch employers are more vulnerable to being exploited, and they have limited bargaining power. This, in turn, may put downward pressure on wages and working conditions not only for foreign workers but for competing native-born workers as well. Visa portability also allows foreign workers to move to sectors or areas with stronger demand for labor. Such movement reduces bottlenecks and promotes economic efficiency and growth. New immigrants are an important source of “grease in the wheels of the labor market,” and immigrants’ willingness to go where the jobs are is a key source of the economic gains from immigration [3] .

A system that auctions visas directly to immigrants would presumably allow them to choose whether and for whom to work in the destination country [2] , while a system that auctions tradable permits to employers should give foreign workers the flexibility to move across permit-holding employers. However, auctioning visas directly to immigrants might not help alleviate labor market shortages since auction winners might not have the skills that labor-seeking employers need. If employers bid for permits that allow them to hire a foreign worker, they presumably would bring in immigrants with skills that are in short supply among the domestic workforce. Pathway to permanent visas A government that opts to auction temporary work permits to employers could create a pathway toward permanent visas for immigrants who succeed in the labor market. The government could hold a separate auction that immigrants with a temporary visa could enter after a set number of years, or permanent visas could be automatically offered to temporary visa holders who meet certain conditions, such as being employed on a temporary visa for five or ten years. Immigrants with permanent visas would not be restricted to working for employers who have a permit to hire a foreign worker. Creating a pathway toward permanent residence for immigrants can help avoid creating a persistent underclass of workers who are vulnerable to exploitation by employers who threaten not to renew a worker’s temporary visa.

Enforcement A final key component of a visa auction system is enforcement. If immigrants can easily enter a country or work there without a visa, there is little reason for them to pay for a visa or for their employers to pay for a permit. Effective enforcement might encompass border security and internal enforcement, depending on the country. Worksite enforcement that ensures that workers are eligible to work in a country is one component of internal enforcement. Worksite enforcement tools include audits of employers’ records, electronic verification of workers’ employment eligibility, raids, deportations of unauthorized workers, and punishment for employers who violate the law. Other considerations Although visa auctions may seem like a radical departure from current immigration policies in most countries, many immigrants or their employers already pay a fee. For example, as of mid-2015, the fee for an employment-based permanent resident visa in the US was US$1,070; Canada’s Express Entry system for employment-based permanent visas costs C$1,040; and Australia charges A$3,520 for its skilled independent visa class. Some current immigration systems also involve fees that are not paid to the government. Many immigrants or their employers hire a lawyer or consultant to guide them through complex immigration program requirements.

Potential immigrants abroad often pay an agent to help them secure a work-based visa. Visa auctions would capture some of the funds that legal immigrants and their employers currently pay to lawyers, consultants, and agents. At the same time, many people who are migrating illegally pay large fees to smugglers or bribes to border guards. The government could potentially capture some of these funds and reduce the risks of unauthorized immigration by allowing migrants who pay a fee to migrate legally instead of illegally. Most unauthorized immigrants would probably be willing to pay more in order to migrate legally if they could; illegal immigration is a consequence of limits on the number and type of visas available [4] . Since an auction system would still limit the number and type of visas available, it must be combined with enforcement in order to minimize unauthorized immigration. Across the globe, the desire to emigrate far outstrips the actual emigration rate—millions of people are willing to pay considerable sums of money in order to move [1] . Even at current fees, there is excess demand for visas to immigrate to certain countries, as evidenced by the long backlogs of people waiting to emigrate to Canada and the US [5] , [6] .

Under an auction system, there would be no backlogs, or excess demand. The price would adjust to clear the market, moving up automatically when demand for visas rises, and down when demand falls. Economic advantages of auctions Auctions offer several advantages over current immigration policies. Most important, auctions have the potential to allocate visas to their highest-valued use [7] . When there is a limit on the number of visas and they are issued on a first-come, first-served basis, visas are awarded to whoever is first in line regardless of whether that person—or the person’s employer—values a visa more than other potential immigrants do. Visa auctions, in contrast, use market forces to allocate visas efficiently based on willingness to pay. Employment-based auctions are an “invisible hand” directing the admission of immigrants with the skills valued the most in the labor market—the immigrants with the highest productivity. It is difficult for governments to estimate or forecast the number of workers needed in specific occupations in the face of changing labor market demand [5] . Auctions of employment-based visas eliminate the need for the government to try to determine which occupations are in highest demand or are experiencing a shortage of workers.

Immigrants who work in those occupations or their employers should be willing to pay the most for visas. In addition, auctions would reveal information to policymakers about bottlenecks in the labor market—situations where labor supply does not meet demand [8] . Policymakers could use this information to design education or training programs to alleviate bottlenecks in the long term, while allowing immigration to alleviate them in the short term. Alleviating bottlenecks would boost economic growth. In theory, the government could simply set a higher price for visas instead of holding an auction. This could also lead to an efficient allocation of visas. However, the government is unlikely to know the demand for visas, which changes over time, and hence is unlikely to know the optimal price. Auctions would reveal this price and allow it to fluctuate. Further, changes in visa prices, either at auction or in the resale market, would provide a useful market-based signal to the government of changes in the demand for visas. An increase in prices would indicate an increase in demand for visas. The government might then want to increase the number of visas available. Otherwise, it would risk incurring more unauthorized immigration or worker shortages and bottlenecks to economic growth.

If the government wants to reduce the number of foreign workers during an economic downturn, it could decrease the number of visas available at auction and even buy back visas in the resale market. However, a government that tries to manipulate the number of visas in response to the business cycle must do so nimbly and adeptly. Otherwise, changes in the number of visas may kick in just as the business cycle shifts to another phase. Auctions have the potential to generate considerably more revenue than governments currently receive for visas. The gains to immigration are substantial, suggesting that many immigrants or their employers would be willing to pay large sums for visas or permits. Low-skilled workers can earn ten times as much in the US as in Egypt, Haiti, or Nigeria; workers from Guatemala and Mexico can earn at least 2.5 times as much [9] . In 2000, low-skilled Mexican men earned an average of US$10,000 more annually in the US than in Mexico [10] . In 2009, Indian computer programmers working in the US on temporary visas earned about US$58,000 more annually than they would have earned at the same job in India [11] .

Visa auctions would transfer some of these gains from immigrants (and their employers) to the government. Government revenues would also increase indirectly if an auction system leads to an increase in average incomes among immigrants [2] . Auctioning visas directly to immigrants would presumably result in a shift toward higher-income immigrants since they would be more able to afford a visa; an employer-based auction system would likely also result in a shift towards higher-paid immigrant workers. Either way, government coffers would swell due to higher tax revenue. The revenue raised by visa auctions can alleviate some of the concerns of opponents of immigration. The funds could be used to pay for training classes for native-born workers who work in immigrant-intensive sectors or areas. The funds could also be used to offset costs incurred by areas that receive large numbers of immigrants, such as the costs of educating their children or providing publicly funded health care or other services to immigrants. Alternatively, the government could cut taxes commensurate with the increase in revenue from visa auctions. Visa auctions also help address concerns that immigration drives down wages and employment among native-born workers. By raising the price of hiring foreign-born workers, auctions increase employers’ incentive to hire native-born workers. Meanwhile, visa portability benefits both foreign- and native-born workers.

Concerns about visa auctions Although auctions should admit immigrants with the greatest willingness to pay for a visa, auctions do not guarantee that the number of immigrants admitted will be optimal. Auctions should result in the efficient allocation of a given number of visas, but the government still must set the number of visas. However, current immigration policies also require the government to set the number of visas. One benefit of an auction system over current policies is that the government can use visa prices as a signal of when it should change the number of visas. Auctions of employment-based visas should admit the workers who are the most highly valued in the labor market at the time of the auction, but those workers may not be the most highly valued in the future. For example, computer programmers or their employers might be willing to pay the most for visas during an information technology boom, but those workers might become unemployed during an information technology bust. Governments might want to auction only temporary visas, not permanent ones. However, the same concern applies to other schemes used to admit immigrants; the skills in demand today may not be in demand in the future. Of even greater concern is the fact that an auction system does not necessarily admit the immigrants who contribute the most to long-term economic growth.

For example, an auction system might result in lots of investment bankers, but long-term economic growth might be higher if the country instead admitted lots of scientists and engineers. A system that prioritizes certain occupations or skills may better boost long-term economic growth, as long as the government is able to successfully target immigrants who make the greatest contributions to growth. Relatedly, a market-based system like visa auctions ignores any positive—or negative—externalities associated with immigrants. For example, discoveries made by immigrant scientists might boost patent activity in other companies. Employers are willing to pay for visas based on the value of contributions to their own companies, but are unlikely to be willing to pay for the value of positive spillovers to other companies. Alternatively, a system that auctions visas directly to individuals might result in many visas going to wealthy retirees, who do not contribute to the labor force at all but who make considerable demands on publicly funded health care. An auction system might lead to a decline in the number of workers in relatively low-paying fields.

Separate auctions could be created for certain categories of workers to ensure that low-skilled workers are able to immigrate, but the workers with the skills most in demand within those categories would still be the ones with the greatest willingness to pay for a visa. There is no obvious optimal set or number of categories for which to run visa auctions. Indeed, creating categories voids the simplicity and market-based nature of a visa auction scheme. A deeper objection to visa auctions is that they are unfair—that the right to immigrate should not be decided solely on economic grounds. Immigrants may contribute to a country’s diversity and its culture in ways that are not valued by markets. In particular, markets do not value family ties to people already living in a country. Being able to sponsor relatives to immigrate may be important to a country’s residents, particularly those who themselves immigrated to the country. Likewise, an auction system does not admit immigrants on the basis of humanitarian considerations. Concerns that an auction system unfairly places economic considerations ahead of family ties or valid asylum claims may make it politically untenable, or at least deeply unpopular [12] . An immigration scheme that loses popularity might lead to backlash against immigrants or force the government to reduce the number of visas available.

It is worth considering, however, that immigration policies that admit people on the basis of family ties or being first in line could also be considered unfair by people without family ties or not near the front of a line. Finally, visa auctions might adversely affect sending countries if the auctions lead to changes in the composition of immigrants. Visa auctions could lead to more “brain drain” if they result in more high-skilled people leaving a country than current policies do. Visa auctions also could lead to a decrease in a sending country’s capital if visas are auctioned directly to immigrants. Potential adverse consequences include higher interest rates, less innovation, lower tax revenues, and slower economic growth. On the other hand, allowing more high-skilled people to immigrate could boost remittances and the transfer of ideas and technology to sending countries. How other innovative models compare with visa auctions Although no country has yet auctioned visas, there are several other innovative ways that countries currently allocate visas. These include point systems, visa lotteries, and investor visa programs. Several countries use point systems to allocate certain classes of visa, particularly for economic immigrants. Applicants earn points based on specified characteristics, such as age, education, occupation, language ability, and having a job offer.

Australia, Canada, and New Zealand have had point systems for a long time, while several other countries (including the Czech Republic, Denmark, Japan, Singapore, Sweden, and the UK) have recently created point systems. An auction system has several advantages over a point system. A point system requires determining the relative importance of potential migrants’ various attributes—policymakers must decide how to award points. Points cannot be awarded for attributes that cannot be observed or quantified. An auction system does not require such decisions; immigrants (or employers) who are willing to pay the most are admitted. A point system does not ensure that immigrants will have the characteristics that are valued most by employers; a system that auctions permits to employers does. A point system that includes a limit on the number of visas available can result in considerable backlogs if the number of people who meet the point threshold exceeds the number of visas available; an auction system clears the market. A few countries use a lottery to allocate some types of visas. The US currently uses a lottery to allocate up to 55,000 permanent resident visas (“green cards”) per year through its diversity visa program for immigrants from countries that send relatively few immigrants to the US.

New Zealand runs a lottery, or ballot, called the Pacific Access Category, that admits a small number of immigrants from several Pacific island nations. In both the US and New Zealand, immigration authorities use a lottery because the programs are oversubscribed—far more applications are submitted than the number of visas available. The US also uses a lottery to allocate H-1B temporary foreign worker visas for skilled specialty workers in years when more applications are received the first week than are available for the entire fiscal year. Otherwise, H-1B visas are allocated on a first-come, first-served basis until they run out; the program is capped at 65,000 visas per year plus 20,000 visas for applicants with a US master’s degree or higher. Awarding visas based on a lottery creates a perception of fairness, but it does not allocate visas to their highest-valued users. In addition, lotteries may encourage people to try to game the system. In the US, for example, some companies submit far more applications for foreign workers than they need, and some workers have multiple H-1B visa applications submitted on their behalf.

A number of countries have programs that award visas to people who invest a certain amount in that country. In the US, for example, the EB-5 investor visa program allocates up to 10,000 permanent resident visas annually to people who invest at least US$1 million in the US and create or preserve at least ten full-time jobs or invest at least US$500,000 in a high-unemployment or rural area. The UK’s Tier 1 investor visa requires investing at least £2,000,000. Malta (an EU member) and the Caribbean nation Saint Kitts and Nevis even offer citizenship upfront to investors who meet certain requirements. The existence of these programs may signal that countries are open to auctioning visas. However, Canada scrapped its federal investor visa program in 2014 despite a considerable backlog of applicants because of its unpopularity with many Canadians, who complained that too many of the immigrants were wealthy Chinese investors who bid up housing prices in big cities. The Canadian province of Quebec still has its investor visa program, however. The key advantage of auctions over existing investor visa programs is that investors may be willing to pay more for a visa than governments are currently charging.

Auctions reveal prospective immigrants’ willingness to pay. However, the high prices likely to result from auctions aimed at investors would preclude most people or employers from being able to afford a visa. Another advantage of auctions is that they may avoid concerns about fraud that plague some investor visa programs. In addition to visa auctions, economists have suggested creating tradable immigration quotas for refugees or other groups of migrants [13] . Assigning countries the number of immigrants they must accept and at the same time allowing countries to buy or sell those quotas via electronic auctions could increase global welfare. Under such a scheme, higher-income countries with high anti-immigrant sentiment would pay lower-income countries with low anti-immigrant sentiment to accept more immigrants. Such proposals do not include direct auctions of visas to refugees and other humanitarian immigrants; visa auctions would be aimed primarily at employment-based immigrants. Limitations and gaps To date, no country has auctioned visas, so the real-world success or failure of visa auctions and their short- and long-term effects are unknown. Visa auctions are more likely to be successful in countries that admit immigrants primarily on the basis of employment or skills, not family ties or for humanitarian reasons.

The potential scope of auctions may be limited in EU countries that have a large share of “free movement” immigrants from other EU countries, unless they greatly increase the number of non-EU immigrants admitted. The unpopularity of Canada’s federal investor visa program suggests that auctions may be untenable even in countries that admit immigrants primarily on the basis of skills or employment. Summary and policy advice Far more people want to move to another country than are able to do so legally. Popular destination countries restrict the number of visas they offer and need a mechanism for allocating them. Visas are typically awarded to all applicants who meet specified criteria or, if demand exceeds supply, on a first-come, first-served basis. Some countries have introduced additional mechanisms, such as lotteries and investor programs. A promising but as yet untried mechanism is auctioning the right to immigrate or to hire a foreign worker to the highest bidders. Visa auctions could boost efficiency, increase immigrants’ economic contribution to the destination country, and increase government revenues. However, visa auctions do not consider the role of family ties in migration and create concerns about fairness and accessibility. On balance, the economic benefits are likely to outweigh the costs, and policymakers should consider auctioning visas.

Policymakers who want to create a visa auction should consider starting with a pilot program. The best pilot program might be an auction aimed at investors, who are willing to pay substantial sums for visas. This might generate public support for broader auctions aimed at replacing employment-based visas for high- and low-skilled workers. Using the funds from visa auctions to reimburse localities that absorb large shares of immigrants for immigration-related costs or to cut taxes would also increase public support for visa auctions. Continuing to admit some immigrants based on family ties or for humanitarian reasons might make a visa auction more palatable. Economists have considerable experience at designing successful auctions in other markets, which policymakers can draw on in designing visa auctions. Acknowledgments The author thanks an anonymous referee and the IZA World of Labor editors for many helpful suggestions on an earlier draft. Competing interests The IZA World of Labor project is committed to the IZA Guiding Principles of Research Integrity . The author declares to have observed these principles. © Madeline Zavodny Capitalist Econstruction | WIRED Capitalist Econstruction 6 months for $5 - plus a FREE Portable Phone Charger. Author: Chip Bayers.

Chip Bayers Magazine Date of Publication: 03.01.00. Time of Publication: 12:00 pm. 12:00 pm Capitalist Econstruction Think beyond ecommerce: A new school of researchers envisions an economic revolution that will usher in a 24/7 global marketplace of true fluid markets, real dynamic pricing, and kick-ass shopbots. Basingstoke, England, isn't normally considered a cutting-edge kind of place. The quintessential British suburb lies 60 miles southwest of London, in the Hampshire countryside. "Boringstoke," as it is sometimes called, has long been the butt of jokes for the likes of Gilbert and Sullivan, Monty Python, and Douglas Adams, who, in The Hitchhiker's Guide to the Galaxy, pokes fun at the town's countless traffic roundabouts. In 1214, the weekly market day – when vendors would gather in Basingstoke to hawk their wares to the townspeople – was moved from Monday to Wednesday, where it remained for the next 700 years. That's pretty much the pace of change in these parts.

This article has been reproduced in a new format and may be missing content or contain faulty links. Contact wiredlabs@wired.com to report an issue. Lately, however, some residents of Basingstoke have found themselves in the vanguard of capitalism. Five hundred of them are participating in EasiOrder, a shopping experiment at the Safeway supermarket on Worting Road. Using a Palm equipped with a barcode scanner, a modem, and software from IBM's Institute for Advanced Commerce (IAC), the middle-class consumers shop remotely. When they empty a can of soup or a box of cereal, they scan the barcode on the package to add the item to their shopping list, which is then uploaded to the Net. The groceries are waiting for them next time they visit the store. Safeway also offers tailored shopping services – reminding customers when, for instance, based on their purchase patterns, they're likely to run out of tea. Compared with grocery-delivery services like Webvan, EasiOrder may seem rather quaint. After all, consumers still have to travel to the store. But don't let that throw you. EasiOrder is less interesting for what it currently is – or isn't – than for who's behind it.

For the IBM researchers who dreamed up the experiment and are monitoring customer usage, EasiOrder is a precursor to the wholesale changes in capitalism they believe will come with the emergence of a seamlessly networked economy. Sitting with me in his small office in Hawthorne, New York, his desk overwhelmed by stacks of paper, soft-spoken IBM researcher Jeff Kephart predicts that bots will soon take over the shopping process – managing our grocery lists, filling our pantries, and dickering over the price of every purchase we make. "Agents," Kephart says, "will become economic decision makers in their own right." It's the sort of prediction we've heard before, but Kephart, an electrical engineer with a PhD from Stanford and a background in physics and applied mathematics, is no blue-sky dreamer. The IAC, an offshoot of IBM's Thomas J. Watson Research Center, has the practical goal of finding ways for IBM to sell its wares. Kephart has already devised a system in which thousands of competing bots can do exactly what he describes. And he's not alone.

Kephart is one of dozens of researchers straddling the academic and commercial communities – designing new tools, and even new kinds of markets – in search of superefficient businesses in a world of Net-enabled capitalism. It's become clear that, thanks to the Internet, geography matters less and less, the gaps between supply and demand are continuing to shrink, and price is no longer determined just by the seller, but by the buyer too. What this bodes for our capitalist structure is less obvious. For this new breed of researchers, the goal is a perfect market, efficient and self-correcting to a degree we can only approximate today. The impact on consumers will be profound: If you think the eBay experience is interactive, it has nothing on what's coming. A new set of software tools will allow us to negotiate – largely by proxy – custom prices on nearly everything we buy. The effect on retailers will be even more dramatic. To manage supply and demand in a world of interactive pricing, the organization of stores themselves will change. Three years from now, the supply chain of a typical retailer won't look anything like it does today. And what of the concept of brand?

Not surprisingly, some experts predict that as consumer behavior shifts toward personal shopping agents, retail-brand awareness will disappear. Combining an understanding of economic history with the power of technology, the new researchers are those most likely to identify – if not craft – the commercial exchanges of tomorrow. While the dot-com crowd fights to stay alive and grow in the face of daily changes in the new economy, the scientists, insulated from market pressures, have become trailblazers. "What you're seeing in startup business models now is people using the Net's fast communications – but so far, no one is taking advantage of the computational power that's out there to create something entirely new," says leading ecommerce researcher and Caltech professor Charles Plott. "The gap between academic research and startup companies is almost as large as the gap between the Wall Street markets and the new electronic markets." DYNAMICONOMY This revolution has its roots in the Net's own commercial beginnings, back in 1993. Since then, we've seen many new business models, all seemingly novel and exciting (even addictive, in some cases). But most of them have precedents – models developed during the last re-creation of capitalism, 500 years ago in village markets across Europe.

That's about the time the dance of capitalism began between the residents of an English or French or Dutch town and vendors peddling everything from livestock to leather goods. Economies that had heretofore subsisted mostly on barter and, in rare cases, cash gave rise to stock and commodity exchanges, the development of modern financial instruments, and, ultimately, our modern consumerist society, with its mass markets and retail pricing. Then things got sloppy. Market expansion in subsequent centuries may have wrought exponential growth and more efficient manufacturing processes, but it also set off a less predictable chain of supply and demand. The farmer selling vegetables at market could hear firsthand what customers wanted. Not so for mass retailers like today's computer maker, who, within the constraints of a two-tiered distribution system, struggles to forecast demand even while churning out thousands of new PCs. Indeed, an open secret about the mass market is that, with vast gaps of time and distance between producer and consumer, it can easily break down. The best hedge against fluctuations in supply and demand is the blunt tool of a fixed list price. Until now, the most efficient markets have been those that traffic in information-based goods like stocks and bonds, usually traded inside a closed exchange involving certified membership.

Now, the Internet offers a novel opportunity to enhance the rigor of Wall Street's closed-market system. We've heard over and over how the new economy is "reinventing" commerce. A seamless network of consumers, vendors, and manufacturers means increased efficiency and communication, real-time sales analysis, a diminished need to stockpile excess inventory, and the eradication of many hurdles in the supply chain. But how will that transform the shopping experience? The buzz among top-tier business thinkers concerns the birth of "dynamic" pricing – where all retail prices fluctuate freely based on supply and demand. But there's more at stake still. In his three-volume masterwork, Civilization and Capitalism, French historian Fernand Braudel describes the most efficient forms of capitalism when he writes about the development of economic life between the 15th and 18th centuries. By the 1400s, Braudel notes, the weekly market had become a powerful engine in European communities, linking the small country farmers to their urban neighbors through "thousands of humble points of intersection." A small village market of a thousand people might generate trade among a community of people six or seven times as large. It wasn't the existence of the market that was new.

In every culture since ancient Babylon, humans have gathered to exchange goods. What was different about Europe 500 years ago was that so many pieces of the puzzle that had been developed in simple form centuries earlier – markets, stocks, paper currency – matured into sophisticated tools in a tightly defined geographic region during a brief period of time. Braudel argues that the resulting volume of economic activity, with an exponential increase in speed and fluidity, for the first time gave economics a dominant role in everyday life. And with that, our capitalist society was born. The "winner's curse" comes when the top bid is $500 for a 99-cent Pokemon card. It's the reason why eBay is just the beginning. "Men's activities, the surpluses they exchange, gradually pass through this narrow channel to the other world with as much difficulty at first as the camel of the Scriptures passing through the eye of a needle," Braudel writes.

"Then the breaches grow wider and more frequent, as society finally becomes a 'generalized market society.'" As we re-create capitalism – this time, as one global market rather than the many regional exchanges Braudel chronicled – we are erasing the inefficiencies that have developed in the last 500 years. We're getting a chance to reconstruct commerce, which means we'll face the same issues that vendors in a 15th-century French market had to confront. Who has the right to set up a table, and what position is optimal? Do customers have to line up, or can they wave their money and shout out a price? If you, the consumer, band together with your neighbor to buy twice as many tomatoes, can you get a better price? Do merchants have to show all their tomatoes – or can they impose scarcity by withholding? Will anyone pay more for Pierre's tomatoes than for Jean's because they trust Pierre more? Is anything fixed? Is anything free? In short, what are the rules? IT'S NOT EBAY The success of auction sites like eBay offers clear (if crude) evidence of economic evolution in the hands of the Net.

For the first time in history, these sites allowed buyers and sellers to convene without regard to geography, which caused a furor. Wall Street reacted as though it had seen the future. But the academics and researchers contend that eBay – at least eBay as we know it – isn't the future at all. For all their popularity among Beanie Baby and Pokémon collectors, auction services are themselves an incredibly inefficient form of transaction. The very phenomena responsible for eBay's success will, this argument goes, relegate it to the margins of the economy. There's a subset of research in economics literature devoted to the "winner's curse" that plagues traditional sequential-bid auctions. It's the sinking feeling you get when you realize you just paid $500 for a Pokémon card that can be had at Burger King for 99 cents. When people get caught up in the frenzy of topping an opponent's bid, someone will pay too much. "The most optimistic guys win, but there's a penalty for being too optimistic," says UC Berkeley professor Hal Varian, coauthor of Information Rules, a best-seller.

In an auction, he says, "you need to bias your bid down to offset the euphoria." For a classic example of the winner's curse, think back to the failed FCC bandwidth-spectrum auction of 1996. Thanks to a congressional order, participants weren't required to guarantee bids up front. Inevitably, they overestimated spectrum values, and when they couldn't recover costs, many of the winning firms went bankrupt (and the spectrum reverted to the FCC). Economists have long sought ways around the winner's curse. William Vickrey, a 1996 Nobel laureate in economics, made a well-known attempt to do so in the 1960s. In its simplest form, the Vickrey auction averts the curse by awarding the loot to the highest bidder at the second-highest bid. If A bids $1, B bids $3, and C bids $5, C wins the auction and pays $3. Ideally, the Vickrey model removes the frenzy and generates prices that are closer to "true" market value. Bidders can be aggressive while knowing that a competitors' actions will determine the real price. The real intellectual ferment, however, lies beyond both traditional and Vickrey auctions.

Caltech's Plott thinks he has the answer. Plott, who has designed auctions for real estate clients, believes software tools can create new types of bidding structures. "Using modern technology and its vast computation and communication abilities, I can implement this weird thing that would only exist on paper," Plott says. "We can imagine things, then create them on the computer." Plott's specialty is the multiple-item combinatorial auction, where product bundles are recrafted, round by round, as the price for each item changes. In the spectrum-auction example, the blocks of bandwidth up for sale would be divided by region, making them more valuable to a buyer (who would bid on adjoining blocks rather than a scattering of orphans). The FCC's challenge would be to uncover the highest total price for the package – not just the best price for each individual block. This is far easier in theory than in practice. How do you allow bids for different packages while avoiding overlap? If one buyer has the high bids for blocks A and B at $10 each, and another offers $100 each for blocks D and E, both may want block C.

The easiest way for the FCC to apportion C would be to hand it to its highest bidder – but if the first buyer offers $100 for C and the second bids $10, the combined sale would be $120 versus $210. Extend that scenario across dozens of possible overlapping blocks and it's easy to see where the FCC could miss out on a vast sum of revenue. Plott has designed a system that solves the problem. In each round of his auction, potential buyers submit bids for the blocks they want. Those bids are published on a Web page, and the buyers are given a short time to adjust their bids for the blocks they've lost. (They can also be knocked out of blocks they've already won.) When a new bid is made, the auction program adjusts a winner's list until the bidding round expires. In this model, both the products and the price are being manipulated in real time. "What's being sold is being crafted simultaneously with the price," Plott says.

"Experimenters have been working on features like this for years – but in clumsy ways, with clumsy tools." The arcane world of spectrum auctions may appear to have little in common with the everyday consumer's experience, but Plott has applied these lessons to markets you and I might recognize. Last fall, for example, a real estate agent used Plott's simultaneous ascending-auction format to sell 14 units in a new San Francisco condominium complex. Amazon who? As customer loyalty shifts to shopbots, retail-brand awareness may disappear. In the overheated San Francisco real estate market, the 10 one-bedroom and 4 two-bedroom condos on the edge of the Mission District were valuable commodities. The question was, how valuable? The developer was considering listing the one-bedroom units through traditional brokers for $285,000 to $315,000. (Demand in the Bay Area is such that buyers regularly offer more than the list price.) But with multiple units to sell, the developer didn't want to flood his market and depress the average selling price. A straight auction wasn't the solution.

Under traditional rules, buyers might hang back and avoid bidding on a second-choice unit when it was offered first, only to find themselves priced out of their first choice when it came up for bid. "One of the problems with real estate auctions is that people inevitably say, 'The first one you offer is my second choice; the second one is my first,'" says Bill Stevenson, the real estate auctioneer who approached the developer and proposed using a simultaneous auction designed by Plott. "We said, 'Look, we know that if you run this properly, people will come out feeling good about it because the process is transparent, and because we promised that the owner wouldn't be bidding.'" After a three-week period during which real estate agents showed the units, Stevenson conducted a simultaneous auction on a Saturday afternoon last fall. Of the 38 bidders, 6 logged in from home. Each was assigned a unique ID and a password. Buyers were required to outbid a previous offer for an individual unit at a minimum increment of $3,000. The results were continuously updated on a Web page for all to see. When it was over, all the units were sold – for 16 percent more than if Stevenson had offered them at the planned list prices.

The buyers were "thrilled" with the process. "Everyone knew they paid a fair price," he says, "because it was only $3,000 higher than the person behind them." BOT VERSUS BOT Plott's simultaneous auction is just one example of how technology can ease the burdens of consumers. Making life easier for shoppers is also the goal of the many companies developing shopbots on the Web. Services like DealPilot and mySimon have sprung up with price-comparison engines. Sitting in Hal Varian's high-ceilinged, book-lined office at UC Berkeley, I watched him log on to DealPilot to search for Information Rules. We saw a list of prices for the title at dozens of Web sites – from brand-name stores like Amazon.com, Borders.com, and barnesandnoble.com to lesser-known entities like A1Books and the BCY Book Loft. DealPilot ranks the stores by price, including shipping and sales tax. While DealPilot is just an early version of a shopbot – a rather slow, inelegant glimpse of what's possible – even in this primitive form, it suggests the changes to come.

What was striking about DealPilot was how infrequently the best-known stores topped the list. For Varian's book, Borders surprisingly came in fourth – 67 cents over the lowest price. Amazon, on the other hand, came in at $9 off the pace. Which raises a question: With all variables (such as delivery time) being equal, how much more would you pay to buy the book from a store you've heard of? It's conceivable that many would pay the extra 67 cents to buy from Borders because it's a vendor they trust. Is Amazon worth the extra $9? Probably not. So where do you draw the line between 67 cents and $9? In other words, how much is a brand worth? That question highlights one of the legacies of the old economy that has so far carried over to the Internet: the power of a brand name. But what if brands like Amazon cease to exist? Or what if the brand you come to trust is not Borders or Amazon, but DealPilot? The dot-com players are torn. On one hand you have Jeff Bezos betting large sums of money on the power of Amazon's brand.

On the other are those who believe traditional brand equity won't survive in the dynamically priced future – at least, not for retailers. Venture capitalist Steve Jurvetson – a managing director of Draper Fisher Jurvetson, whose investments include Hotmail and FastParts, a semiconductor trading exchange – goes so far as to predict that retail brands are on a death march. "Amazon.com is an anachronism – completely out of place on the Web. In fact, the entire notion of a retail brand is out of place there," Jurvetson says. "The consumer may start to trust a personalization agent that's with them everywhere they surf, offering promotions and coupons and specialized offers. In a physical world, there's no way to gather that information cost-effectively. On the Web, you can collect user feedback and have an objective third party steer you toward the products you want to buy as an all-in-one service. That's all they do. They don't ship your products – they don't even sell you products.

All they do is help you find what you want to buy." Jurvetson and a growing chorus of bot cheerleaders believe merchandising and product selection will separate from order fulfillment and product support in the same way the computer industry has shifted from vertically oriented companies, which built all the pieces of a machine, to horizontally organized ones. The only brands that survive, he says, will belong to manufacturers and intermediaries. "Do you want to be stuck in the middle with partnerships shifting around you all the time? The value is at the edges of the network – the product on one end and the customer interface on the other." But before Amazon's competitors begin celebrating its demise, they should pause to consider this: If consumers are going to try to skate through the frictionless economy, Varian warns, the smartest retailers are going to "throw SAND on the ice." SAND is his acronym for the tools – switching costs, alliances, networks, and differentiations – retailers may employ to overcome low-price competitors. "You hear a lot about the frictionless economy," says Varian, "but all the companies in it are trying to make their customers become more loyal and less likely to go off to find the best price." Amazon doesn't promise to be the low-cost leader.

Instead, it promises better service and more reliable delivery. On the other side of the coin, there's nothing to prevent retailers from using bots to watch competitors – and not as a way to guarantee they're offering the lowest price. Varian suggests that technology could just as likely keep competing prices high and within pennies of each other, letting retailers create informal cartels. "Everybody thinks more information is better for consumers," he says. "That's not necessarily true." Big liquid trading exchanges, open to anyone, anywhere, will move everything from groceries to gasoline. In the past, similar-product suppliers trying to keep their prices in line would find out too late that a peer had broken ranks to sell at a cheaper price. With a bot, they can always know what other sellers are up to. "The problem with a cartel," Varian explains, "is that you never have enough information about whether the other members of the cartel are cheating. Now cartels have perfect information!" IBM's Kephart would probably agree. On a PC in his Westchester County, New York, office, Kephart shows me what happens in the simplest version of his experiments with letting retail bots loose to compete with each other inside a simulated economy.

Across his screen dances a severely parabolic graph, each plot point representing a price controlled by a different bot. The bots in this particular program can see the prices offered by their competitors and adjust their own prices accordingly – acting and reacting to each other over time. When the bots try to grab market share from each other by undercutting competitors' prices, it sets off a war that drives the price curve all the way to the bottom of the screen. But eventually, the curve rises. "After a certain point, the margin is so low that you might as well just sit there and make a huge killing," Kephart says, pointing again to the top of the curve, where the highest prices lie. "Once they all discover that's really the right thing to do, they all hop up, and the market goes through these price-war cycles." Kephart has created a more sophisticated version of his simulated economy that, in effect, teaches the bots the error of their ways. The bots watch each other and mutually determine a price that should maximize their return. The price war never happens.

In the end, Kephart says, pointing at his screen, "the prices are being held pretty much right up at the monopolist level." He compares the model on his sim to the behavior of four gas-station managers occupying the corners of an intersection. "They all see one another's prices," Kephart says. "Is one of them gonna start a price war? 'Well,' one says, 'if Joe lowers his prices, I'll have to lower mine, and it's gonna be ugly. Ah, forget about it. I know what Joe is gonna do.'" THE PRICE IS RIGHT All this technology is after one thing: the perfect liquid market. Stock exchanges are often referred to as the "most perfect" market because buyers and sellers (assuming securities laws are being followed) have access to the same information, allowing them to match their bids and asking prices and therefore find the ideal market price for a product. For that reason, some emerging businesses like Freemarket.com suggest that the model for the market of the future is Wall Street today. But that's not necessarily the most prudent move: Wall Street is a closed community that can't handle certain transactions.

For example, you can't sell a portfolio of stocks on Wall Street – those are traded off the floor, in a back room. And you can't deal with commodities like natural gas and electricity, which have traditionally required utility commissions to manage prices. "Wall Street really is the most efficient human creation for making a market – up to a point," says Caltech's Plott. "But there are things it can't solve." As a result, even the traditional financial markets are reimagining themselves. "We're struggling with the same issues that were manifest in a primitive market," says Al Berkeley, president of Nasdaq, "but the issues aren't primitive at all." Exchanges historically have operated in agricultural, industrial, and financial commodities, but the rise of the Net has stimulated renewed interest in other types of exchange. The new commerce is about markets accessible to anyone, anywhere. And it's about more than just stocks – it's about everything from electricity to groceries to surplus goods. Onsale (now part of egghead.com) and eBay, for example, set off a rush when other sites realized that they, too, could liquidate excess inventory. Companies like Moai Technologies and OpenSite began to offer off-the-shelf auction software.

Both companies are moving beyond auctions in their next generation of products, prompted by requests from customers who run business-to-business sales sites. "We're going from very simple auctions to big, liquid trading exchanges," says Deva Hazarika, CTO of Moai. "We're getting to a critical mass, where companies have an eBay setup in an industry and want to add on other types of decision criteria." For retail products, those criteria will extend beyond the up-front cost into the terms and conditions of a deal. For example, according to Alex Kleiner, president of Frictionless Commerce (an MIT Media Lab spin-off), we'll bargain for warranties and service plans – automatically, with little additional effort on our part – as part of any purchase we make. "The first generation of shopbots was all about basic price comparison – very utilitarian," Kleiner says. "The next generation is value-based, where price is just one factor.

Once you create a space where you can assess value, the next step beyond that is to negotiate it back and forth." BACK TO BARTER From eBay to name-your-own-price services like Priceline .com to group-buying sites like Mercata, the grease in the transaction is cash – the dollars exchanged between parties when the price is right. But maybe the most efficient market won't involve cash at all. Like the price itself, money has been metamorphosing from atoms to bits, from the gold standard to paper money to plastic. To capitalize on that trend, some entrepreneurs are trying to take money out of the equation altogether. A new class of Net-based services has arisen that doesn't depend on money at all – at least, not money that's produced by a national government's central bank. Technology allows us to slice the price pie into smaller wedges. It's an information bundle – so just debundle it. At Ubarter.com, CEO Steven White has created a place where small-business owners can trade product for product. Companies that want to exchange spare office furniture for ad space, for example, use a virtual currency called Ubarter Dollars.

Like frequent-flier miles, they're redeemable in an internal economy sponsored by a participating company. The secret, according to White, is that Ubarter helps businesses preserve their traditional pricing structures. "In the barter model, people are able to keep prices closer to retail," White says. "They're buying things with their own product." The barter model is also being extended into the consumer realm. At least two swap-sites, ExpressBarter and Barter-n-Trade, have already appeared, and a third, MrSwap.com, was due to launch earlier this year. On MrSwap, customers will be able to trade CDs, with the market's internal liquidity ensured by a virtual currency similar to Ubarter Dollars. Replacing real money with virtual currency may be only an interim step, however. Institute for Advanced Commerce director Stu Feldman sees a day when money itself may disappear in sectors of the economy. Why, Feldman asks, when he wants to buy 100 shares of IBM stock, does he have to sell shares in AT&T, convert them to cash, and then pay for the IBM shares? With the right application, a computer can handle all the steps for him. "What I really want is to do them all together.

So why not just offer that bundle?" Feldman says. "And you can decide – you, the market maker, or you, the person who has a whole bunch of stock anyway – what you're going to do. In essence, I'm creating a mutual fund. But it's my mutual fund, and I offer it to the market." The same technology, Feldman says, can be used for consumer products and services. "Let me bundle a refrigerator and four hours of painting against a car repair. That's an auction item – with no money, and with interesting questions about taxation once you start having payments that aren't payments." Feldman sees money-free barter snowballing in a networked economy because it's so much easier to keep track. "Bookkeeping is not exactly a big deal anymore," he says. "Mr. Cheap Computer will be happy to do it." BARGAINING FOR GROCERIES If there's one person in the dot-community who's trying to bridge the disconnect between academia and commerce, it's Jay Walker. An irrepressible marketer with a background in direct mail, Walker has restyled himself through Walker Digital, his ecommerce R&D house, into an inventor pursuing patentable ebusiness models.

One of the first dot-commers to put new theories about pricing and markets into practice on the Net, Walker has seen his most prominent success to date in Priceline.com. Priceline requires consumers to guarantee, with a credit card, their offering prices, which Priceline can accept or decline. The WebHouse Club grocery business, one of the most recent iterations of Priceline, may traffic in the mundane, but Walker likes to use it as a springboard for waxing philosophical about future scenarios. Walker's vast office is in the former General Signal building just off the Merritt Parkway in Stamford, Connecticut. When I visited him there late last year, one end of the room looked like the aisle displays I built during my brief career as a supermarket clerk. A conference table and surrounding shelves were piled high with WebHouse Club product samples – boxes of spaghetti, jars of peanut butter, bottles of vegetable oil. Walker lectured me about how the bundle of information embedded in a price would inevitably be carried to the Net. "It's like saying, 'Where's all this power stuff going?' The electric grid. Well, where's all the information stuff going?

It's going on the info grid." In the consumer world Walker envisions, you carry a PDA that will begin communicating with a store network the instant you enter a supermarket. As you walk down the aisles, the PDA display will give an individually tailored price for every item you pass. But those prices are just a starting point. "You might change it," Walker says, imagining a conversation with a tube of toothpaste. "I have my PDA and I say to Crest, 'Here's the deal: I'll buy it six times. What's the price?' '99 cents – but if you buy it 12 times, it's 89 cents.' 'OK, I'll buy it 12 times.' 'OK, here, take it. I know who you are.'" Just like that, consumer and retailer sign a contract. "If you don't buy 12 times," says Walker, "the toothpaste police won't come to your house, but your credit card will be billed for the six times, back to the correct price.

You're going to enter into a forward contract the same way you do with a credit card." While Walker preaches the power of the consumer in this example, the truth is, retailers and manufacturers have at least as much to gain. Inventory management and production control will be available to the makers of Crest in real time. "It connects the boardroom to the store," says Jim Jorasch, Walker Digital's chief inventor. "We can develop demand curves for different prices almost instantly, and once you get demand-curve information, you can really change prices." Like an audiophile adjusting the controls on his amplifier, a manufacturer could turn prices up in the South and down in the Northeast simultaneously, depending on demand. Consumer marketers at companies like Procter & Gamble have long run price tests in different regions and stores, but they have had to wait weeks or months before determining the results. In Walker's world, they won't have to wait at all. WHERE NEXT? While the academic and commercial realms are moving forward at different paces and via different routes, convergence is inevitable: Indeed, in some places, like Basingstoke, it has already occurred.

But the open issue – the one with no historical precedent – is how much time we're willing to spend talking to toothpaste. "It's not worth your time to do all this negotiation, but it may not be worth your time to give instructions to the agent, either," says UC Berkeley's Varian. "Everybody likes a deal, but there's always this struggle between savings and convenience." The negotiation process may become more complex as technology allows us to slice the price pie into smaller wedges. "Right now, most prices contain elements we don't want," Walker says, including predetermined timing and availability, quantity, quality, and level of service. "Because we come from a mass-production society, we're used to having all that bundled. But it's an information bundle – so just debundle it." It sounds easy. Why not use technology to carry the load? To Walker it's a rhetorical question; for the rest of us, it's not so simple. Change of this magnitude is as frightening as it is empowering. Which means there'll be room – at least, in the short term – for simplicity. GM's Saturn division, for example, built a brand on consumer angst over the negotiation dance that has long been part of the car-buying experience.

Clearly, there will be at least one Saturn in our new way of shopping. And yet, no matter how consumers, manufacturers, and retailers feel about this reconstruction of capitalism, it has already begun. In the next few years, we'll have not only a once-in-a-lifetime chance to watch the very framework of our society reshape itself, but also a unique opportunity to actually take part in that reconstruction firsthand. For hundreds of years, the smartest economists, businesspeople, and scholars have studied the evolution of capitalism the way they'd consider the slow blooming of a flower through a series of time-lapse photographs. Today's scholars – thanks to the pure, dumb luck of being alive in today's economy – get to watch the flower unfold before them. Even better: So do we. Don't blink.

Question: Created by a Canadian Nobel laureate, a Vickrey auction is one where bidders submit secret written bids and in which the highest bidder wins, but the price paid is that of what?
Answer: Second-highest bid