Examples
Hanover parking meters
Imagine that the Town of Hanover decides to allow the price of metered parking spaces to fluctuate from hour to hour. The town buys new meters that can sense whether the parking space is filled and have wireless communication with Town Hall. The town adjusts prices from hour to hour on the basis of its experience of how demand changes throughout the day and also the current demand for parking. The town makes all its information including the pricing formula available on its website.

Why is value created here? There is an increase in allocation efficiency. The parking spaces now go to those drivers who have the highest valuation. Others with lower valuations miss out now whereas before they might have gotten a space by chance, but they benefit from the town having more revenue that is not provided by them. Moreover, prices fall when demand is low.

Parking space time is a perishable good, so it would have always had a flexible price were it not for the previously high cost of changing price. The internet solves that problem. It also solves the problems of measuring demand and then getting new prices to customers (most new cars will have wireless internet access within two years). It therefore speeds up the information cycle. By making all its information available, the town solves any asymmetric information problem. The internet provides the added bonus of drivers with wireless connections being able to easily find empty spaces or even reserve a space -- but that is not related to price flexibility.

That leaves the bounded rationality problem. Is the parking meter price too small a deal to even be bothered with? Probably not, if you don't have to search for the needed information and in any case maybe you have some software that just decides for you on the basis of your past decisions.

B2B
B2B sites are emerging in seemingly every industry. They are adding value by enhancing competition between suppliers, and by providing non-price information on industry developments such as regulation and product development. However, for many industries the greatest increases in value will come about by increased flexibility in prices causing more efficient allocation of resources to their most high value use.

The B2B sites speed up the information cycle in markets by getting new price information to buyers and sellers more quickly and then aggregating the resulting changes in demand.

Who gets the value?
Which markets have potential?
In which markets can internet innovations release the most value by enhancing price flexibility? There are two things to consider. Firstly, is the root cause of price stickiness an information cost that the internet can reduce? Can the information cycle be accelerated by an internet application? Can information asymmetry be eliminated? These questions are not trivial. It could be that price stickiness derives from something else that internet innovation cannot change, such as government regulation that protects vested interests.

Secondly, are either the demand or supply curves highly elastic (flat)? If so, then changes in supply and demand are resolved principally by changes in quantity, rather than changes in price. If not, and if either demand or supply or both are inelastic, then price changes are important and increased price flexibility will have a large effect upon market efficiency.

Markets that do not meet these two tests may still be fertile places for internet investment, but increased price flexibility will not be a driver of value creation.

Who gets the value?
If value is created by reducing price stickiness, then how is it divided between the players in the market? The division between buyers and sellers will depend upon the relative elasticity of demand and supply. A steeper (more inelastic) demand curve leads to more of the released value accruing to buyers. High demand elasticity arises if there are few substitutes for the product. If a market that buyers are locked into becomes more efficient then they reap the benefit. Likewise inelastic supply implies that the production cannot be readily scaled up or down and so existing suppliers benefit when market efficiency is enhanced.

But what of information intermediaries that are neither buyers nor sellers, such as the creators of many B2B websites? How much of the value increase can they claim? Here the issue is barriers to entry. If the market intermediary can erect a barrier to entry by other intermediaries who would claim a share of the profits from intermediation, then they should be able to claim a large share of the total value created by more flexible prices. Network externalities may be just such a barrier. In many cases the value to any one buyer or seller of being part of the network of users of the B2B site increases with each new buyer or seller who joins. In that case the market will tip in the direction of a single dominant site. Other intermediaries will find it very difficult to create new sites and substantial value will accrue to the dominant site.