There’s a common meme floating around the so-called “blogosphere” that relates economist George Akerlof’s Nobel-winning “market for lemons” ideas to the software industry:
- David N. Welton‘s Web Hosting – A Market For Lemons makes the case for the lemon market phenomenon applying to the web services hosting market. It hearkens back to 2005, but it has resurfaced in references from other sources because of the current “market for lemons” meme propagation.
- Bruce Shneier‘s A Security Market for Lemons relates the lemon market phenomenon to the often abysmal quality of computer security products. Shneier may be largely to blame for the current popularity of the meme.
- Reg Braithwaite‘s The Not So Big Software Design, where he tackles both the software engineer employment market and the cutom software development market. If you’ve ever wondered why so many huge corporations use cruddy customized ERP “solutions” that literally cost millions of dollars, this might give you a hint. Of more immediate concern to most of us, this also pretty well illustrates how it might be that we ended up with employers hiring all the wrong people and refusing to pay the right people what they’re worth without just calling hiring managers idiots — though he mostly lays that subject at the feet of “steveblgh” at reddit and focuses on the custom software subject.
- Richard Tibbetts ties some of this together quite well in The Lemons Meme in Software, and brings up resale value — which actually further devalues custom ERP packages and the like.
The short version of the theory of lemon markets goes something like this:
- Customers can’t tell just by looking at a car whether it’s any good.
- Sellers know more about the quality of what they’re selling than the customers.
- Sellers with crap products are likely to lie about the quality of the products when they can get away with it.
- Customers tend to become wary of high-priced products, because if the car turns out to be a lemon they’ve lost more money than with a lower-priced product.
- Nobody pays more for a car than within spitting distance of the average quality of car in that product’s class.
- Higher quality cars that aren’t worth selling at the depreciated “average quality” price are thus priced out of the market.
- Without those higher quality cars dragging up the curve, the average quality of cars on the market drops — as does the average price.
- Wash. Rinse. Repeat.
Thanks to trends in the proprietary software industry over the last twenty years or so, the tendency is for the customer to have less and less information about the software he or she considers buying. Software of all stripes is affected by the lemon market phenomenon, but unlike in other (only slightly) healthier lemon markets, there’s a lower bound on price because of the effective commercial monopoly on low-end general purpose computing software. This means that the lemon market phenomenon can cause quality to drop precipitously while ensuring that prices do not follow suit.
The lemon market phenomenon, in this case, essentially drags customers out of the high-end software range and into the mediocre-end software range, because they’re unwilling to pay the price for high-end software but unwilling to drop below the mediocre quality of the software they find themselves using as a result. Things are changing, however.
Open source software development, because of its apparently unique relationship to an information market, throws a spanner in the works of the lemon market. Think about it: the center of gravity for the software industry is information management. There’s a reason they call this stuff “Information Technology”, after all. Software itself is just information — but in attempts to shore up the defenses of positions of market dominance, the proprietary software vendors have embarked on a crusade against the sharing of information related to their own software offerings. They wish to maintain asymmetrical information access so that they are in a position of power with regard to the customers. Open source software, by contrast, predicates the success of its business model (for lack of a better term) on the free, unfettered sharing of information.
Because the lemon market phenomenon is entirely dependent upon asymmetry, the rise of open source software in the public consciousness is beginning to shake up the software industry. The lemon market effect that keeps MS Windows customers (I mean businesses as much as, if not more than, end users) from going back to Unix and mainframe systems is being undermined by the simple facts that:
- No lemon market can survive roughly symmetrical information access.
- Open source software, such as free unices, is available at a price that Microsoft just can’t match under its current business model.
I’ve talked before this about the fact that the combination of the “wild west” aspects of the Internet and the freedoms available through open source software leads to a purer free market economy in practice than just about anything else we’ve seen. The monkeywrench in the lemon market phenomenon that has ruled much of the software industry for so long is a significant part of the reason for that.
Computer security, web hosting, and custom software development are really just special cases of the overall lemon market tendencies of a closed source software industry predicated upon notions like security through obscurity, astroturfing, and intellectual protectionism. Principles of security through visibility, social networking, and a protected public domain serve as foils for the lemon market effect in the software industry, however. We’re on the right track. Just don’t let us get derailed.