On first blush, I’d respond with something like “but there’s no way that’s enough!” I think I see prediction markets as (potentially) providing a lot of useful information publicly, but needing a flow of money to compensate people for risk-aversion, the cost of research, and to overcome market friction. Of your answers:
Negative-sum betting probably doesn’t scale well, especially to more technical and less dramatic questions.
Subsidies make sense, but could they run into a tragedy-of-the-commons scenario? For instance, if a group of businesses want to forecast something, they could pool their money to subsidize a prediction market. But there would be incentive to defect by not contributing to the pool, and getting the same exact information since the prediction market is public—or even to commission a classical market research study that you keep proprietary.
Hedging seems fine.
If that reasoning is correct, prediction markets are doomed to stay small. Is that a common concern (and on which markets can wager on that? :P)
Subsidies make sense, but could they run into a tragedy-of-the-commons scenario? For instance, if a group of businesses want to forecast something, they could pool their money to subsidize a prediction market. But there would be incentive to defect by not contributing to the pool, and getting the same exact information since the prediction market is public—or even to commission a classical market research study that you keep proprietary.
I don’t think this reasoning is entirely correct. The firm’s choice depends on how much extra information-value marginal increases in liquidity have in the market. If the marginal dollar increases information value more when spent in providing liquidity to a prediction market than on internal research, then prediction markets will get funded more. Reason to think this is in general the case for many firms: Specialization and fewer transaction costs for hiring/making deals with consulting agencies.
Thanks for the excellent answer!
On first blush, I’d respond with something like “but there’s no way that’s enough!” I think I see prediction markets as (potentially) providing a lot of useful information publicly, but needing a flow of money to compensate people for risk-aversion, the cost of research, and to overcome market friction. Of your answers:
Negative-sum betting probably doesn’t scale well, especially to more technical and less dramatic questions.
Subsidies make sense, but could they run into a tragedy-of-the-commons scenario? For instance, if a group of businesses want to forecast something, they could pool their money to subsidize a prediction market. But there would be incentive to defect by not contributing to the pool, and getting the same exact information since the prediction market is public—or even to commission a classical market research study that you keep proprietary.
Hedging seems fine.
If that reasoning is correct, prediction markets are doomed to stay small. Is that a common concern (and on which markets can wager on that? :P)
I don’t think this reasoning is entirely correct. The firm’s choice depends on how much extra information-value marginal increases in liquidity have in the market. If the marginal dollar increases information value more when spent in providing liquidity to a prediction market than on internal research, then prediction markets will get funded more. Reason to think this is in general the case for many firms: Specialization and fewer transaction costs for hiring/making deals with consulting agencies.