Wednesday, August 18, 2010

Domains are inefficiently priced

The market for domains is an unusual one: domains have unusual characteristics as a priced good.

It's been bemoaned countless times in countless places the practice of domain squatting: seemingly every good domain is taken, and often by some domain squatter who isn't using the domain for any admirable purpose. I made a tool recently to find good available domains.

First off, these complaints are lies. Everyone who has ever complained about domain parking has a few domains they bought but are just sitting on without using them.

If you've ever thought about this issue for more than a minute, it's occurred to you that
"To combat squatting, they should raise the price of domains! If it cost $100 to own a domain 95% of squatting would go away!"
only to realize seconds later
"But then I would have to pay that much for my domains, including a few that I want to sit on and not use. I still want to pay $7!"
and then you put your head into your hands and moan about how unfair it all is.

Everyone is basically a hypocrite: domainers suck, but I still want to pay $7 for a domain and not necessarily do anything with it once I own it. It's a tragedy of the commons of intentions.

Domains are inefficiently priced.

There isn't really a good pricing mechanism for domain names.
  • there is virtually a limitless supply of domains, and more cannot be made.
  • once a domain is used, no one else can use it
  • every domain is unique
  • some domains are very high value, most are not
  • most domains are of some idiosyncratic value to a few rare individuals spread out across the earth

The quantity supplied of unused domains is practically infinite. The quantity supplied of each domain is 1.

As a result the classic functions of prices no longer, well, function:
  • No signaling mechanism. If someone buys a domain, it does not send a signal to the market that it should produce more domain names.
  • No transmission of preferences. Since every domain is unique and can only be used once, past domain market activity does not indicate what a price of any given domain should be in order to be efficient.

Since most domains without type-in traffic are of some unpredictable value to a small number of individuals, the best way to price these domains is with an auction mechanism. The efficient price for a short dictionary word should cost thousands of times more than an 8 syllable jokey domain, and the way to determine a price that at least serves a rationing function (apportioning domains to those who want it most) is to use an auction pricing mechanism.

The most important barrier to auction pricing mechanism is time value fluctuation. Everyone who wants a domain probably does not want it at the same time. Bob in Johannesburg wants a given domain in 2002, Hillary in Montevideo realizes she wants the same name in 2007. If they both had wanted the domain at the same time, we could auction it off between them.

So why doesn't Hillary just try to buy the domain off Bob, assuming he purchased it? Effectively domain buyers can just conduct one-off auctions between themselves and the current domain owner. 

Well, why not? Buying used domains should be efficient, right?
  • Transaction costs. Buying a used domain means tracking down and trying to negotiate with some random weirdo literally half a world away. This is so time consuming and frustrating most will not bother attempting it. It's also given that a large percentage of domain owners make it difficult to contact them, fearing spam.
  • Endowment effects. Psychologically, when people get something that isn't even unique and special they demand unrealistically high prices to part with it once they own it. Simple studies have subjects choose a price for a coffee cup they don't own and then are given the same coffee cup to own and asked at what price they would be willing to part with it -- the second price they choose is massively higher.
  • Inequity aversion. Someone selling a domain doesn't want there to be some massive hidden value in a domain that they aren't pricing correctly; they may be reluctant to sell without a "fair" price but have absolutely no way of knowing what a fair price should be and may refuse to sell for this reason alone. For the same reason we may refuse to buy a domain at a good price since it seems so unfair that the current owner only paid $7 for it.

Endowment effects should be exacerbated if the current owner has invested emotionally or put time into owning the domain, but should be less of a problem for more sophisticated sellers.

Large-scale domain sellers should not be effected by to these last set of inefficiencies. Big time domain parkers make it blatantly obvious how to contact them to buy the domain, have no emotional investment in any particular domain they own and should know from experience what is a fair price. Smaller domain owners are the problem with used domains.

We all hate domain parkers because we want an inefficient price for ourselves but efficient prices for everyone else. Dot-com names should cost $1000 and there should be another TLD that costs $1/year for all of our hobby projects.

7 comments:

  1. You could always use a "Domain Acquisition Service", such as Sedo.

    For example: http://www.sedo.co.uk/brokerage/acquisition.php?tracked=&partnerid=51371&language=e&domain=example.com

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  2. You have a nice grasp of what's going on. New domain owners need to take a good look at their properties and adopt a much more modest valuation. I'm glad you've taken note that more experienced domainers understand true value.

    You have missed one thing though. New domains can be made. Recently, the .Co extension has gone public and has seen tremendous success as compared to any other TLD launch to date. It's not your ideal pricing, but closer at $30/yr. New gTLDs like .XXX, .Free, .Blog will soon make their way to the public as well, though .COM will remain the premium option.

    Good post, I've linked it via Domaining.com

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  3. I love my DN's and got each one with an idea in mind (can't remember what it was - but ... ;-)

    Thanks for the link Mark.

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  4. I wrote a straw man proposal for variable domain pricing back in April. It's definitely an inefficient space right now: http://gregable.com/2010/04/domaining-is-annoying.html

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  5. Hi I did some tests but does not work gives me error.
    how it works.

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  6. Very useful and informative article you have got here. I liked all the points and they are very useful. Thanks for sharing it with us.
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    ReplyDelete