An Economic Analysis of BookMooch.com

Eliot Rosewater

I thought it would fun to analyse a small economic system that exists on the Internet - BookMooch.com. One could try to draw comparisons between its workings and that of the whole economy, and so one could use it as a teaching aid. I think it's a good intellectual exercise in it's own right.


BookMooch is a book sharing website. You put up a list of books you have, someone from around the world sees a book they want, and then they "mooch"/buy it off of you. They "pay" for the book using BookMooch points.

Before the payments breakdown was like so: for domestic trades it cost 0.9 points to mooch a book, and the seller got 1.1 points. For international trade it cost the buyer 1.9 points, and the seller got 3.1 points.

So there's two important things. Firstly, prices were (and are) fixed. Secondly the money supply was constantly expanding, and at a hefty enough rate too.

About year ago I noticed the effect of this: points were becoming useless. I'm an avid book buyer - the kind that sometimes buys books without intending to read them - and yet I had loads of points left over that I simply couldn't use. Why? Because there were no good books to mooch! As soon as anyone put a half decent book up one of the thousands of people like me who have tons of points grabbed it.

I believe this was the result of rapid inflation and a simple market failure to allocate books according to demand. The effect was subtle because of the fixed prices. If people were allowed set custom prices they would probably have started balloning, a la Wiemar Germany, making the problem much more obvious.

In researching this thread I decided to browse BookMooch for economic analysis and - lo and behold - these inflationary policies are being phased out! The BookMooch economy - the owner John Buckmann has said - is beginning to "cool", and basically that macro-economic steps are necessary to prevent the system going into recession. The price of a domestic book is being raised to 1 point; international trades to 3 points.


Anyone have any other thoughts? Do you think the new policies will mitigate against the downturn, or do the fixed prices ensure that the market will constantly be failing?

Do you think good comparisons could be drawn between the BookMooch economy and the actual one?

Anonymous1987

At a glance it would seem that inflation is built in to the pricing with a difference of 0.2 points between the price the producer receives and the price the buyer pays for a domestic trade and a 2.2 point difference for international trades. Inflation occurs when the money supply expands beyond the supply of goods and services in an economy and since producer prices exceed consumer prices each trade seems to be generating inflation!

Ideally prices would fluctuate to reflect demand and supply using an ebay type bidding system to determine price. Perhaps new users could receive some initial points for signing up and then trade on supply and demand thereafter? This would introduce liquidity into the system to get things moving. There will be some inflation but it will be minimal and once off in comparison to the present system.

I would think that the owners steps will have some impact on mitigating the effects but inflation of 0.1 will still be generated for each trade. He could set prices such that the price of producing is the same as consuming but the problem still remains the consumer preferences and demand have no way of signalling to producers.

Anonymous1987

I have to say Mr. Rosewater, I am surprised with your involvement in this planned economy :P. For your sins, I suggest you read chapters 4 to 8 of Hayek's Road to Serfdom :pac:

Eliot Rosewater

Yes (to your first post :P)! I'm going to take out my economics book soon and read more into the concepts. Given it's such a simplistic economy, with only two products (domestic book; international book), one could probably make a stab at modelling it.

There are lots of stats available. This one is particularly telling.

BookMooch activity over the past 1.5 years has been contrary to the international trend of increased web usage. My BookMooch usage has roughly followed the graph: general decline from the end of summer 2009 to now owing to a lack of good books to mooch (i.e. production). Could you argue that the BookMooch economy has been in recession for some time?

I would tend to think it has, and that the lack of reaction from the policy makers (until now) is attributable to the fixed prices concealing currency devaluation.

Eliot Rosewater

Anonymous1987 wrote: »

I have to say Mr. Rosewater, I am surprised with your involvement in this planned economy :P. For your sins, I suggest you read chapters 4 to 8 of Hayek's Road to Serfdom :pac:

Naughty! :P

Anonymous1987

Eliot Rosewater wrote: »

Yes (to your first post :P)! I'm going to take out my economics book soon and read more into the concepts. Given it's such a simplistic economy, with only two products (domestic book; international book), one could probably make a stab at modelling it.

There are lots of stats available. This one is particularly telling.

BookMooch activity over the past 1.5 years has been contrary to the international trend of increased web usage. My BookMooch usage has roughly followed the graph: general decline from the end of summer 2009 to now owing to a lack of good books to mooch (i.e. production). Could you argue that the BookMooch economy has been in recession for some time?

I would tend to think it has, and that the lack of reaction from the policy makers (until now) is attributable to the fixed prices concealing currency devaluation.

It is a fascinating site, thanks for bringing it to my attention. It certainly looks like it is in recession.

Eliot Rosewater wrote: »

Naughty! :P

I couldn't resist, I'll be good now that I've got that out of my system.

gerry87

It seems similar to a LETS system. I've thought about these systems before and I just can't get past some of the problems with inflation/credit supply. I haven't seen the strange pricing system like this one before, and I'm not sure I see the point in it.

The main problem I can see is how money is introduced into the system? How can you start off in this new system? Realistically you should sign up and have to sell something to get any money, but then the money supply stays fixed and the amount of goods keeps increasing - deflation.

The other way is you get x number of credits when you sign up, then there's a constant influx of money without the goods to back it up - inflation.

There's no built in way to manage inflation or deflation at all so prices would completely diverge from real world prices. Then again, arbitrageurs might start to hop in if there's enough business in it which could bring things back in check. But then the prices would converge on real world prices, so there wouldn't be any benefit in the site really

I always thought if you ran a large one of these that had enough trading, it could almost be a tool for setting up monetary policy experiments.

Anonymous1987

gerry87 wrote: »

The main problem I can see is how money is introduced into the system? How can you start off in this new system? Realistically you should sign up and have to sell something to get any money, but then the money supply stays fixed and the amount of goods keeps increasing - deflation.

The other way is you get x number of credits when you sign up, then there's a constant influx of money without the goods to back it up - inflation.

The initial endowment would bring inflation however I would assume that the vast majority of trades would be completed by repeat users rather than once off trades meaning inflation would be mitigated to a large degree?

bookmooch

Hi, John from BookMooch here. There's a fair bit of economic theory behind what I do on BookMooch, though I know it appears that the site is simplisticly inflationary: the real situation if a bit more complicated than that.

Inflation:

- On BM, you earn 1 book point by listing 10 books that you're willing to give away. This is the main way that money is printed.

- A domestic book trade costs 1 point and the sender receives 1 point. However, an international book trade costs 2 points, but the sender gets 3 points (another point is printed).

- There is a +0.1 point creation from each trade (resulting from the 0.1 you receive for adding your book to your inventory), and that's something I may revisit.

Deflation:

With all Internet sites there is a high rate of account abandonment. On BM about 80% of the accounts created in the past 5 years have been abandoned. The points these abandoned accounts earn are lost to the economy and are a strong deflationary force. This is the primary reason BM constantly prints money: abandoned accounts are effectively burying gold that is never found, thus depleting the money supply.

Now... a more debatable economic point. In a fixed-price economy "inflation" doesn't manifest itself as it would in a normal variable price economy, so it's trickier to spot. I believe that the main way inflation would shows itself on BM is by a shortage of goods you can buy with the currency. Ie: too much money, not enough stuff to buy.

I do think that's been happening lately on BM, which is why I've been removing some of the causes of inflation (the 2 vs 3 international swap inequality, for example).

I interpret people listing books in BM as a deflationary effect: there are now more valuable goods to buy. Thus, as I run this economy, I try to encourage more books to be added to the economy, while simultaneously removing inflationary trends. But, I need to balance that off with account-abandonment, and the very deflationary effect that has.

Further?

Would love to talk further about this, if people are interested.

On another topic, this economics paper was very influential on me, explaining the real world problems of a lack of currency and the effect of hoarding in a babysitting swap service:
http://bookmooch.com/files/buckman_ca/babysitter_crisis.pdf

-john

Eliot Rosewater

Welcome to Boards.ie John!

I think my personal story on BookMooch mirrors the economic situation there. I've actually stopped using the site precisely because of what you say here "I believe that the main way inflation would shows itself on BM is by a shortage of goods you can buy with the currency." I totally agree with this. Over the last months I have struggled to find any books I want on BookMooch.

As I said above, in a normal variable price economy inflation would manifest itself in higher prices, but the effect in a command economy like BookMooch is more subtle. I personally think that the value of money has been decreasing in this manner for a long time - at least a year. But that's borne out of personal experience rather than looking at the stats.

I had neglected to consider the effect of account abandonment. I was actually going to comment on BookMooch forums tonight, saying that merely tweaking the point ratios won't fix the problem in that the money supply will still be too large - but I imagine the deflationary effect of account abandonment is significant.

bookmooch wrote: »

- There is a +0.1 point creation from each trade (resulting from the 0.1 you receive for adding your book to your inventory), and that's something I may revisit.

But it does provide a very good incentive. If you were to reconsider it, I think I better solution would be to reduce the amount received for giving away a book to 0.9. Thus the whole process of giving away a book would yield 1 point for the giver. By "front-loading" 0.1 for putting it in the inventory it would maintain the incentive, without much of the inflationary effect.

bookmooch

Eliot Rosewater wrote: »

I've actually stopped using the site precisely because of what you say here "I believe that the main way inflation would shows itself on BM is by a shortage of goods you can buy with the currency." I totally agree with this. Over the last months I have struggled to find any books I want on BookMooch.

Am I correct in understanding that you're not in the USA?

I ask, because if you're not, then you likely mostly need to do international swaps (there aren't that many users in Ireland), which have previously had the "2 points cost, sender gets 3 points" which I think has led to a situation where people who used to send to other countries now choose not to, because they have too many points. The 1 for 1 domestic swap avoids that problem and is largely not inflationary.

In other words, what I think has happened is that the "2 points cost, sender gets 3 points" initially motivated people to send internationally, but eventually had the opposite effect, by giving people who trade internationally more points than they needed, so that they stopped sending books internationally.

International sending is currently where I think the strongest inflationary effect is felt.

I've already announced that international swaps will go to a simple "3 points cost, 3 points to sender" system, and a 3 month grace period before that takes effect. Hopefully, with account abandonment causing deflation, within a year we should see the mitigation of the inflationary effect on international swapping.

I've already changed a few things, such as removing the +0.1 point for leaving feedback, and also imposing a stricter system for the 2:1 ratio of receiving to giving, regardless of the number of points you have.

I think those two changes have already had an effect, because if you look at these two metrics, which have had a year-long downtrend, they have now flattened and are no longer declining:

http://bookmooch.com/about/stats_show?chart=userids_with_asins_listed&chart=number_of_asins_listed&type=chart

andrew

Why not just let people bid on books auction style and let the market solve?

bookmooch

andrew wrote: »

Why not just let people bid on books auction style and let the market solve?

A few reasons:
1) your suggestion already exists: it's real currency coupled with eBay.
2) one-to-one selling of books doesn't seem to work, for many reasons, which is why almost all used books are sold through aggregators. However, an even larger amount of books are stored forever in homes, for lack of a market for them
3) simplicity: a used book you aren't going to read (again) has a very low value to you, and if you receive a book you did want, you're happy with the exchange.

-john

Denerick

The most annoying thing about bookmooch is that too many international lenders will not send outside their country (Specifically the US) Ireland is a small island nation and we have no choice but to be open and export orientated. America, an industrial behemoth, has a huge domestic market and need not concern itself with the benefits of free trade.

Not sure if I'm talking about economics or bookmooch here.

bookmooch

Denerick wrote: »

The most annoying thing about bookmooch is that too many international lenders will not send outside their country (Specifically the US) Ireland is a small island nation and we have no choice but to be open and export orientated. America, an industrial behemoth, has a huge domestic market and need not concern itself with the benefits of free trade.

Not sure if I'm talking about economics or bookmooch here.

I think you're talking Economics

For me, it's just a question of setting up the right incentives. I do believe that inflation with the international points bonus has, while initially encouraging people to give internationally, over time it actually created a disincentive by giving many people more points than they need.

There is another factor, also economics, that I can't control, and that's that the US post office used to have a low cost rate to ship books by boat, but a few years ago they discontinued that and all books must be sent air mail, which is much more expensive.

Some countries (Finland, France, even Canada at times) make it much less expensive to send books internationally than domestically. They're manipulating their own economic incentive systems.

-john

Anonymous1987

I think you should reconsider introducing market prices. While it might seem that this exists in the form of ebay, the currency is a key difference which allows traders to avoid exchanging cash or using credit cards. In addition the BookMooch market is in essence a specialised self contained market with only the production and consumption of used books.

An issue with the fixed price economy is that it requires correctly priced homogeneous goods. While it would seem there are only two goods, a nationally traded book and an internationally traded book, in reality these goods will be differentiated by consumer tastes and preferences. I would be concerned under the present system that the pricing is too high to allow market clearing and some priced too low to attract listings.

If all consumers of books are required to first earn points i.e. sell books in order to purchase books then inflation should not be an issue. Since the economy currently has a money supply in place, a switch to a free price system would not require granting new traders "free" currency on signing up as a stock of money and demand already exists within the system. On the other hand it would result in a once off reward for existing points holders and it won't resolve the inflation issues in the short term.

If you want to keep the fixed price system, I think one point for selling and one point for buying would seem appropriate. Giving additional points for listing is increasing the money supply without necessarily increasing a desirable supply of books, hence too many points chasing too few books. In the long run this will probably self regulate back through deflation. While the incentives did work initially, they are self defeating in the long run. It is similar to introducing tax incentives only to exacerbate market swings.