Stocks, Networks, Tesla
Tesla is a company that is known for its technological claims, advancements, and volatility. From Elon’s fantastical claims of buying out multi-billion dollar companies to the company’s volatile nature, the stock market and the company itself can be thought of as a first price auction driven by network effects.
From its inception, Tesla relied on network effects to become the company it is now. In a market saturated with more mature vehicle manufacturers, its initial product, while successful, did even more than expected by building hype, brand recognition, and a vision that people could get behind.
The stock market can be thought of as a big auction that occurs every second across many items (companies) and buyers (consumers). Much like a first-price auction, a person can set a put option, which essentially is an agreement between the stock and individual that if the stock reaches a certain price, then the consumer will buy x amount of shares at said price. As a result, the individual will be able to buy it at a price that he believes is below the potential value of the stock.
Tesla in recent years has both played and helped individuals in the stock market due to their network effects and volatility in the market. Without network effects, the hype would not matter as everyone would have the same valuation of Tesla and would buy it at a price, and those that didn’t wouldn’t. Public influence, especially central banks’ interventions has played a vital role in the recovery illusions through stock buying. The sentiment of individual and institutional public investors plays a significant role in influencing market effects on the equity market.
Though ultimately, Tesla did deliver. Its products blew away early adopters and supported -even increased- the hype built around Tesla. The cars’ “cool factor” and their revolutionary design and technology supported the network effects that had built up earlier. Otherwise, Tesla could have very easily failed in its infancy if the sentiment of investors and the interest of consumers fell below a certain market equilibrium threshold, such that buyer expectations would be pressured downwards to a final equilibrium point of 0 people buying Tesla products.
Now looking to the present, we can understand, in part, why the stock price of Tesla is so volatile. Tesla’s empire is built upon customer sentiment. Network and market effects were the foundation upon which people built their valuations of the company.