Granular Transaction Formula

A mandated Granular Transaction Formula keeps markets focused on what people across the base of the economic pyramid have to sell. It is inevitably complex, but behind-the-scenes and unlikely to be of interest to users of POEMs (Public Official E-Markets).

BACKGROUND: The Economic Value of Small Transactions

Operators of any exchange have leverage over which transactions are favored. This is typically directed to encouraging trades most profitable to operators. Witness for example favoring of large sellers who generate disproportionate revenue by Etsy, eBay, or Amazon Marketplace. As an overarching aim, POEMs (Public Official E-Markets) should aim to encourage small transactions.

This is because those transactions are:

Inclusive: Small requirements can be met by small producers. This facilitates market entry, competition and experimentation.

Climate friendly: Resources will be used more precisely and fully, minimizing consumption. For example, a bus that can be hired (by provenly qualified drivers) by the hour will be better used than one only available only by the day for 24-hour blocks.

Commercially Unattractive: Unfettered online markets constantly seek to grow their average transaction size to maximize revenue. A key aim of POEMs is serving markets that will be low priority for purely commercial operators.

Restrictive of POEMs' scope: By driving operators to focus on small transactions, the platform's reach into the economy, and destabilization of alternative businesses, is reduced.

1) The need for a GTF rule: Bulldozers v. Bicycles

A system of markets granted unique access to government facilities will have advantages over alternative trading forums. However, if operators can retain the proceeds from a uniform percentage mark-up across all transactions, they will prioritize high-value purchases. An operating consortium need to be incentivized, cajoled or forced to focus on small trades.

To make this issue tangible, assume the fixed percentage markup across all POEMs' transactions is 2%. Now consider a market within POEMs that allows anyone to rent out their bicycle when it’s not needed. Each seller may only charge an average $1.50 an hour (so operators' mark-up is $0.03 p.h.). But a comprehensive market for bike rental has substantially the same software needs as a market allowing any construction company to rent out their bulldozer when not required. Those assets can command $1,500 an hour (operators' mark-up $30).

In each case, the bike or excavator may be traded for hours, days, occasionally weeks. A possibility of damage during the rental requires functionality for follow-up resolution. Someone, possibly a third party within the contractual chain, has to check the item out and confirm its condition on return. Delivery to the renter’s location may need to be part of the transaction; a teen cycling the bike round, or a flat-bed truck with escort vehicle for an excavator. Insurance may need assembling into the deal.

The consortium running POEMs will look for these commonalities in the functionality required across diverse market sectors. There are of course more bikes than bulldozers in the economy. But people who hire bikes tend to be less predictable, legally compliant and homogenous than the regulated construction companies who have excavators to offer. And bike hires can be short (“15 minutes to get to work”). This all adds to complexity the software must manage. An unrestrained POEMs consortium would probably build what’s needed to rent bulldozers, possibly scaling it down for bikes as an afterthought.

2) How a Granular Transaction Formula Works

A GTF (Granular Transaction Formula) rule in POEMs' enabling legislation rewards the platform's operators for growing volumes of lower-value transactions across the jurisdiction’s economy. Once any purchase falls outside the parameters defined in the GTF, earnings from the flat-rate mark-up are diverted away from market operators to a surplus fund.

Bikes and bulldozers are one example. POEMs will feature a suite of mechanisms to construct transactions. Each can handle purchases with specific characteristics, and each will have high value and low value applications. Code that can manage letting of short-term domestic storage (“I want to rent the space in my shed”) for instance, is immediately ready to trade - as one example - rental of expensive advertising hoardings.

Likewise, enabling trading in bespoke adjustments to garments needs management of a cycle typically comprising; (a) sellers assesses project and submit plan (b) a seller gets commissioned or re-submits (c) seller executes plan (d) buyer signs-off or demands modifications. Commissioning expensive specialist architects involves the same process. In each case, the lower-value sellers are the more challenging for an online platform.

A GTF inverts the commercial incentive to prioritize transactions for highly paid people and expensive resources. The system will still enable those interactions, but operators gain little or nothing from them.

3) How POEMs' Users Would Experience the GTF: Help for Lower Value Transactions

POEMs' users should never have to consider the GTF (Granular Transaction Formula) even though all its details would of course be public. They simply intuit diminished scope for higher value transactions in the system.

Any user should be free to offer or purchase anything on POEMs at any price they want. But sectors and activity that reward operators the most will inevitably feature the most sophisticated, helpful, functionality to facilitate each transaction. So, a user might offer their $1m house in a POEMs list of general items for sale, but the system facilitates his transaction only by providing that directory for listings.

By contrast, if renting a tent for the night, priced at $40, there could be be data to help with pricing, prestored images of the tent to be accessed, insurance offered from an interlinked marketplace, delivery options through similarly connected markets, and so on. A GTF rule ensures operators gain from a thriving market in low value tents while having no interest in users selling houses on the platform.

Similarly, a user trading as a legal assistant earning $30 an hour should find herself fully supported with certification plus data and tools around additional training. But as she ascends to a fully qualified attorney, able to charge perhaps $100 per hour, she should notice POEMs progressively losing interest in her progression.

She can still trade through the system, that is a fundamental right for any citizen in the jurisdiction doing any legally permitted trade. But she may now need detailed time-logging and compliance tools which POEMs itself lacks incentive to provide. She will need to turn to outside suppliers providing POEMs-compliant apps as she becomes increasingly commercially attractive with rising earning power. POEMs itself is focused on bringing a next wave of low earners up the ladder.

4) Parameters for a GTF rule: Unit of Sale, Pivot Point, Value Ceiling

Creating a transparent, enduring GTF rule within legislation to enable POEMs requires setting of three core metrics. Decisions about each are political and should be made clear in the enabling concession. They are, inevitably, wonky.

To keep POEMs lastingly focused on transactions that most benefit those at the base of the economy pyramid, drafters of a concession need to weigh tradeoffs to arrive at figures for each of these measures:

a) Definition of Unit Cost: Simply capping the value of transactions would be crude, and counterproductive. For example, a worker may be hired for 10 weeks, equating to 400 hours of work. We don't want to limit the duration of that booking, but we want operators rewarded for focusing their facilities on, for instance, barbers who may earn $20 an hour rather than brain surgeons who can command $5,000 a day. So, each market sector in POEMs needs a definition of the unit cost that is used for GTF calculations regardless of the value of any booking.

Typically, the defined unit cost in any sector will be one of:

Hours: This should cover the bulk of POEMs trading. Workers - and resources offered for rental - are priced around a per-hour charge. So are appointments such as driving lessons.

Days: Vacation accommodation, mortuary slots, industrial storage, conference equipment, and other resources trade typically in 24-hour blocks.

Mileage: Pricing of a journey or delivery can compute a cost-per-mile. It will be cheap for coach travel, pricy for helicopters. POEMs has no interest in fostering the latter.

Purchase price: When a user wants rid of – for example - their summer wardrobe there is a one-off sale price for each garment. That is the unit of sale.

b) Pivot Point: At what value for the Unit of Sale does the share of transaction income going to operators start declining? This setting will decide factors like the hourly pay at which POEMs starts to diminish in usefulness for a worker. We suggest around three-times-average-minimum-wage as a starting point metric; this briefing uses $50 as illustration. Pivot points should be inflation linked.

c) Value Ceiling: If operators' income starts to decline at the pivot point, at what unit of sale value do they cease to gain any revenue from a transaction? In other words, what is the unit value at which market structures have zero incentive to support the purchase? Double the Pivot Point would create a tapering of support for sellers or workers entering higher income streams; this briefing adopts a ceiling Unit of Sale of $100 in the examples below.

These three core determinants of a GTF rule require some further clarity:

Calculating Unit Cost from offer OR purchase: A sector's Unit Cost should be calculated on size of offer or size of purchase, whichever is the smaller. The aim is not to deter bulk sales or offers, merely resources that are onlyeligible for a large sale.

For example, it should be acceptable for a large producer to sell 100 tonnes of wheat if buyers can realistically purchase it in quarter-of-a-tonne increments. This allows small bakeries to access the resource alongside large counterparts. But if pricing, or delivery conditions, preclude breaking into small lots, the Unit Cost for that transaction has to be counted as the full 100 tonnes. Likewise, if one buyer purchases 100 tonnes of grain in equally sized parcels from 100 small farmers, the unit of sale for the transaction is one tonne.

Refining the Unit Cost: In time, accumulated POEMs' data would allow Unit Cost for any sector to be calculated very precisely. It may emerge that portable air conditioning units, largely rented by the day outside POEMs, are being traded in 8-hour blocks for use in offices. Ranking all the trades by number of hours booked in that sector over a previous year would allow a blanket rule to be applied and its variables constantly recalculated. For example, a rule could be that any sector involving assets not traded by the hour would rank bookings by length of rental from longest to shortest with the Unit of Sale being set at the top of the 25th percentile. The aim is to keep operators pushing markets towards the smallest viable units of sale.

Protecting against unintended consequences: When determining Units of Sale there is a danger of incentivizing artificial atomization of assets. In an exaggerated example, operators might structure a market for car sales so it encourages a seller to split a $50,000 car into 1,000 lots. Buyers are then pushed towards purchasing all lots to gain ownership, resulting in 1,000 X $50 sales.

Mandated transparency can guard against this kind of structuring in system code, but there should be a test ensuring levels of granularity are dictated by buyer or seller choices, not operators' imperatives. For example, a GTF rule should not inhibit any seller who genuinely wishes to raffle their car (if legally permitted). It is disproportionate promotion of that possibility in platform interfaces that needs to be outlawed.

5) Possibilities for Cross-subsidy

Initiating an enormously efficient, officially backed, trading machine, then not allowing bulldozer owners the option of using it seems pointlessly restrictive. Construction creates housing, public amenities, jobs and peripheral work opportunities. Other sectors reliant on costly resources also have societal value. A GTF could use revenue from that activity to subsidize low-margin transactions.

As an example, assume the maximally desirable Unit of Sale for any trade within POEMs (the "Pivot Point" above) is set at $50 and the ceiling (the Unit of Sale value at which operators stop getting any income from that transaction) is $100. Assume also, the system's standard markup on each purchase is 2%. Simplistically, that means if a watch is sold for $50 through POEMs, operators gain $1. If it sells for $101, they get nothing.

There are multiple possibilities for operators' income calculations within these three datapoints, including formulae that use surplus income from larger transactions to disproportionately reward operators for small ones or transactions which involve no transfer of funds, such as volunteering or freecycling of goods. Each possibility fosters its own incentives around structuring of markets.

Options can be compared on standardized graphs. Obvious possibilities include:

a) Fixed Income, no tapering, abrupt cut-off

This is the simplest formula; operators' take climbs steadily to the Pivot Point. But that is also the ceiling, so operators are incentivized to keep workers and sellers at - or just below - the pivot in their earnings per hour or Units of Sale. There is negligible incentive to grow small or non-revenue transactions which generate tiny commissions.

b) Subsidized commission, no taper

Operators earn equally from any transaction of lower value than the Pivot Point. But they are disincentivized to progress users' earnings towards the Pivot Point because doing so puts them on a trajectory to exceed it, at which point operator income from their bookings crashes to zero.

c) Subsidized commission, with taper

This is a more balanced formula. Operator income does not drop off a cliff as users pass through the Pivot Point in earnings. Any incentive to keep them below the Pivot Point in their Units of Sale is reduced with a gentle tail out to the ceiling figure.

d) No subsidy, with taper

This formula encourages operators to offer data and tools that edges users towards the Pivot Point with a progressive tail off in interest as they move onwards from there. But there will still be negligible commercial interest in low or no value transactions.

e) Semi-subsidized, with taper

This option draws on the surplus fund to motivate operators to grow low and non-revenue transactions as they are assured of some return. But it makes sale of a $75 item as attractive to operators as sale of a $1 item so they may opt not to develop the facilities to support very low value transactions, likely to be more complex than $75 sales.

f) Semi-subsidized with fall and taper

This formula rewards attention on low value transactions, each will guarantee at least half the full mark-up rate for operators. By stepping their income down to half the full mark-up rate after the pivot, then tapering it to the ceiling, operators are motivated to focus on small transactions while not overly discouraging increased earnings.

g) Semi-subsidized with uneven taper

This option removes a "cliff" in operator income after the Pivot Point is reached, reducing any desire to hold Unit Cost values at or just below the Pivot Point. It rewards activity just over the Pivot Point but then starts a "long tail" of progressively diminishing returns after a value equidistant between the pivot and the ceiling.

Option 7 above is recommended. It rewards investment in low and no value trades which create market entry points and bring resources into play (for example "freecycling", giving unwanted goods away is an alternative to landfill). It removes an abrupt loss of income for operators as Units of Sale pass through the Pivot Point.

To keep system finances contained, the GTF could stipulate any entitlement to cross-subsidy is subject to the surplus fund being in credit. So, operators have some incentive to foster larger transactions (to keep the surplus fund positive) but an equally compelling need to grow the smallest transactions (so as much of that fund comes to their account as possible).

6) Exceptions Within a GTF Formula

There could be many reasons for tweaking the Granular Transaction Formula in any sector to align with specific, transparent, government priorities. Exceptions could apply to a sector, geography, target group of buyers or sellers, or cycle in the wider economy.

By permitting a higher Unit Cost value, or changing tapers so operators retain a higher percentage of the mark-up on more expensive purchases, operators would be incentivized to facilitate target activity.

Example exceptions might specifically aim to foster activity around:

An economically depressed region.
Sectors within an industrial policy, electronic vehicle rental for example.
Training courses that upskill workforces.
Trading that stimulates resilience, for example builders who could be critical to repairing infrastructure after flooding.
Medical appointments, particularly preventative interventions.
Loans to businesses.
Investment in any user's development.

Preserving economic norms could also justify tweaking a GTF formula. For example, truckers operating around America's Port of Los Angeles are typically freelance owner operators, each driver owns the vehicle they drive. A normal GTF would incentivize decoupling of driver and truck in market design (any driver could of course choose to stipulate they can only be booked with their specific truck). But allowing the Unit of Sale calculation to rise to encompass both elements of the booking, POEMs' operators have no motivation to encourage separation of drivers from their vehicles.

7) Assigning the GTF Surplus: A Possible “First Rungs” strategy

Operators should not be permitted to ban large transactions in their markets. Use of the system is a public right. However, badly they are served there will be sales above the ceiling point. Many millions of dollars could accumulate in the “GTF Surplus Fund”. How could it be spent?

Options include:

Investment in POETs functionality: Not advised. This would incentivize operators to focus on high-end transactions because they will fund a better system.
General taxation: The surplus could be directed into government coffers. But then politicians will want to see expensive items favored in POEMs. The system needs to be robustly independent, shaped by wider economic policy, not skewed towards its potential as a cash cow for public agencies.
Bonuses for operators: The surplus could boost operators’ bottom line if they meet key targets for output. An obvious possibility; job creation. So, 50% of the current surplus might be paid out for every 20% of POEMs users that transition out of the market into full time employment for at least 6 months as tracked by payroll data. This has the benefit of rewarding behavior that is good for users but illogical for operators, fostering off-platform relationships.
Market hygiene: Processes like arbitration in cases of irresolvable disputes between a buyer and seller will keep the platform’s markets clean and trustworthy. Serial complainers can be identified in an accountable process, and sanctioned. Cases could be funded as small-bore court cases are now, with winner awarded costs. But some victims may still be unable to launch an action. The Surplus Fund could act as a form of legal aid.
“First Rungs” investment: This is our suggested option. The funds are used as investment in people who are struggling either to get into POEMs’ markets or are not increasing their earnings having done so, probably due to skills mismatches or rough times personally. The kind of initiatives to be enabled could include:

Guaranteed Work: Funds pay for publicly beneficial, entry level, tasks such as public space clean-ups or shopping for the housebound. This work is directed towards low-earning market users with low utilization, perhaps through community organizations appointed by local government in each region. It enables them to build a track record and start moving up the income ladder.
Outreach to non-users: Pools of provenly reliable workers with experience in POEMs could be offered training as “Peer Navigators” who then get booked to support individuals who are homeless, uncomfortable with technology or otherwise in risk of being economically marginalized.

So, someone just out of prison might be offered 20 one-hour sessions with a Navigator who lives locally and was themselves formerly in the justice system. Meeting in a café or library, the client is supported through POEMs registration, vetting by a specialist intermediary and on to first bookings. The Navigator completes pro-forma reporting at the end of each session, possibly earning a bonus when their mentee completes 10 hours of paid work. They are of course trained to spot when referral to professional services is required.

Extended reach: POEMs terminals in facilities used - as example - by the homeless could extend opportunity. That’s particularly true if the initiative was coupled with others on this list.

Training: Individuals in low-paying, high utilization sectors could be offered retraining for more in-demand types of work in their area.

Seeding demand: Perhaps cat-sitting is a good step up from minimum wage in some parts of a city but not others where the sector has yet to ignite. Strategic subsidies in underperforming areas could start a flywheel of buying and selling that allows sitters to up their earnings.

We recommend a combination of the last two options above. The Surplus Fund could, of course, be allocated without human judgement by applying a formula to POEMs’ detailed data to make the decisions. But this predictability could incentivize gaming of the rules; by government, charities or individual users. For example, it might be worth artificially keeping earnings low if you know in another week that will trigger paid retraining. So, the fund could be allocated by a less predictable independent panel of stakeholders, as lottery income is in many jurisdictions now.

First Rung Investment would position POEMs as a tool for economic inclusion that extends beyond the immediately techno-literate. It incentivizes operators to grow functionality that brings uncertain new users into trading, with the system facilitating all sorts of support. (Because operators get 2% of each hour of a Peer Navigator and then of each hour a new user works.) Users generally will benefit from the network effects of a growing userbase, and potentially lower public assistance costs.

Philosophically, First Rungs investment makes clear POEMs belongs to regular people. High-value trades can go through it if buyers and sellers wish. But a levy will be incurred that supports its intended beneficiaries.

NEXT: Structural Decentralization