For reasons I truly can’t fathom, the buffets in Las Vegas were famous when I was growing up. People raved about them. When I finally went to Las Vegas years later I was understandably eager to see what the fuss was about. To say I was disappointed is an understatement. But I wasn’t surprised. Because I knew the incentives of buffets are misaligned with its customers. You pay the money up front. The incentive is to fill you up as cheaply as they can. Make pizza and bread plentiful and put them up front. Put the roast beef in the back and carve it to order so it is slower to serve.
This dynamic plays out more often than people realize. Everyone wants an unlimited data plan for their cell phone. But once you get one you realize you’ve given the carrier no incentive to improve service. If you were paying per gigabyte they would have a reason to make it blazing fast to increase your usage.
There is a concept in auction theory called “incentive compatibility.” In a traditional auction where I pay whatever I bid there is an incentive for me to hide how much something is really worth to me so that I might be able to get it for cheaper. But if we switch it to a “second price” auction where I only pay what the second highest bidder bid (even though I have privately bid more) then I can just say exactly what it is worth to me and not worry about paying more than strictly necessary to win the auction.
The idea that two people in a system can have compatible incentives, even as they may compete, is powerful. I see it play out in our industry all the time. Consider the case of mobile platforms. Early in the smartphone era ad supported apps helped them sell phones so incentives were aligned. But as their models incorporated services revenue the alignment faded. They make money when people buy apps or make purchases inside of those apps. They don’t make any money when people just spend time on an application that makes money somewhere else.
It is counterintuitive but correct that if you are optimizing for performance you should pay for mobile data as you use it. Likewise it is counterintuitive but correct to ensure those people you depend on get to participate in the upside of your success. When two entities are economically intertwined it is much harder to find the energy to sustain conflict.