Wednesday, January 28, 2009
That question will be discussed at a Public Symposium on Author Deposit Mandates for Federal Research Grantees at the National Academies in Washington, D.C. tomorrow afternoon, January 29, 2009. The symposium, which is open to the public and will be netcast (audio only), will begin at 4:30 EST (Washington, DC time) on the afternoon of Thursday, 29 January. Comments and questions from remote participants will be possible. Information about the symposium is available under "Upcoming Events" on the upper right corner of the website of the newly formed Board on Research Data and Information (BRDI), of which I'm a member.
Monday, January 26, 2009
This lesson is emblematic of the deep skepticism that economists trained in liberal democracies harbor about any business model that relies on providing goods or services for "free".
So when economists decide to go open access and build a service business on the basis of free content, pay close attention. That's what economists John Conley and Myrna Wooders at Vanderbilt University have done with Access Econ.
Not only are they willing to host new open access journals in economics, they also are willing to provide the journal management software they've written to do the job. This creates some competition for Open Journal Systems, which is currently the dominant open source solution for open access journals. I think OJS is a great project, and I salute all the developers who worked on it and who maintain it. But, we're too early in the evolution of open access publishing to lock in on a standard. So the competition from Access Econ should be welcome as it should spur further innovation in this field.
There are plenty of proprietary packages for journal management software, so why did these smart economists pass up the opportunity to charge and offer their services for "free"? Here's their explanation to their skeptical colleagues:
Why “Free” is a good business modelWell said!
As economists, you should be asking: why is “ free” a sensible business model? There are several reasons. First, our purpose in writing this software to begin with was to support JPET, APET, and EB. Thus, we would have incurred the fixed cost of creating this software in any event. There are very few additional fixed costs to recover. Second, the marginal cost of allowing others to use the system is very close to zero. We are good enough public economists to know that the efficient price is zero in this case. The only marginal costs to us are the time it takes to help get others started on the system. This is the reason for the “ mutual support” condition. Third, after careful reflection, we realized that we simply are not business people. The cost in terms of time away from research of shilling, billing and advertising is just not worth the potential financial benefit. To mangle the old joke about arbitrage: if there are five dollar bills lying on the ground it must cost ten dollars to pick them up. Finally, because of our experience at JPET and EB, we sincerely want open-access to spread as rapidly and widely as possible, especially in economics. To nickel and dime people who share this vision seems completely self-defeating.
Saturday, January 17, 2009
I am very interested to see what happens with the recent deal between Apple and the recording companies to allow variable pricing on music files distributed by iTunes. This may or not be price discrimination depending on whether the good is "music" or particular songs because everyone will still pay the same price for particular songs.
Here, I just want to make two related theoretical points about the way that economists and legal scholars who use economic models talk about price discrimination.
Point 1. Most economic or law-and-economic analysts who talk about price discrimination say that the policy goal is to maximize people's welfare. I'm at the Penn Law Review symposium on the Foundations of Intellectual Property, and just watched Christopher Yoo make this point about his paper with John Conley on intellectual property and impure public goods.
For these analysts, whether price discrimination is good or bad for society depends on who wins and loses and by how much. But they model this trade off using people's willingness to pay for intellectual property goods as a signal for how much having a copy of a song or book or movie is going to improve their welfare. And these models get pretty complicated quickly, but they all are built on this foundation.
The problem is the gap between ability-to-pay and willingness-to-pay. If you care about welfare, ability-to-pay is a poor proxy for utility or welfare because the marginal value of a dollar depends on how many dollars you have. When iTunes charged you 99 cents a song, how does a consumer decide when it is worth paying that price? Imagine two people who value owning a legal copy of a particular song exactly the same, but one is wealthy and the other is struggling. At certain values, the wealthy person buys the song and the struggling person won't even though they both would get exactly the same amount of pleasure from the song because the relative cost to each person is quite different. So their respective decisions to buy or not are not really telling you how much they value owning a copy of the song.
So, in my view, analysts need to defend the proposition that their models tell us something about the effect of variable pricing on people's welfare when they have not accounted for the gap between wealth and welfare in the model. (Of course, this is a more general point about neoclassical economics, but it has particular salience in this context.)
Point 2. Those who have a reflexive antagonism to price discrimination need to be careful about form and substance. Some folks who have this reflex are reacting to the underlying market power that gives a seller the ability to engage in variable pricing without losing all of its customers to a competitor. I agree that market power is something to watch.
But firms with market power also engage in uniform pricing, as Apple has done with iTunes. In such a case, uniform pricing functions as a form of value discrimination or cost discrimination. Because the marginal value of a dollar varies across people, the price may be the same, but the relative cost of the song from the buyer's perspective varies. So if you want greater equality in the market place, you may actually want to encourage variable pricing if it has the economic effect of equalizing relative cost. I agree that this is very difficult to do in practice, but remember this is a theoretical point. In practice, though, this point about variable cost is what progressive taxation is all about.
So, if copyright is a tax on readers, should it be a progressive tax?
Tuesday, January 06, 2009
NIN’s Creative Commons licensed Ghosts I-IV has been making lots of headlines these days.
First, there’s the critical acclaim and two Grammy nominations, which testify to the work’s strength as a musical piece. But what has got us really excited is how well the album has done with music fans. Aside from generating over $1.6 million in revenue for NIN in its first week, and hitting #1 on Billboard’s Electronic charts, Last.fm has the album ranked as the 4th-most-listened to album of the year, with over 5,222,525 scrobbles.
Even more exciting, however, is that Ghosts I-IV is ranked the best selling MP3 album of 2008 on Amazon’s MP3 store.
Take a moment and think about that.
NIN fans could have gone to any file sharing network to download the entire CC-BY-NC-SA album legally. Many did, and thousands will continue to do so. So why would fans bother buying files that were identical to the ones on the file sharing networks? One explanation is the convenience and ease of use of NIN and Amazon’s MP3 stores. But another is that fans understood that purchasing MP3s would directly support the music and career of a musician they liked.
The next time someone tries to convince you that releasing music under CC will cannibalize digital sales, remember that Ghosts I-IV broke that rule, and point them here.
Here's what's familiar to some. In a famous article, Ronald Coase suggested that in a capitalist economy, productive activities are organized either by a hierarchically-managed firm or through market exchange. The firm manager has to decide whether to "make or buy" a resource, and that choice will be guided or governed by the relative transaction costs associated with each option. See http://en.wikipedia.org/wiki/Theory_of_the_firm.
Recently, Yochai Benkler, generalizing from the experience with Linux and other large-scale free or open source software projects, argues that a third mode of production - "commons based peer production" - has been made feasible by the Internet and is superior to the firm or market exchange for the production of information and cultural goods.
Benkler acknowledges that projects such as Linux and Wikipedia have hierarchical structures, but these are more flexible and are designed to manage contributions from a large set of producers who need not have a relation to the project that is governed either by an employment or purchase contract.
I see a hybrid development in which the boundaries of the traditional, hierarchically managed firm are becoming more porous. While there is nothing new in firms' soliciting suggestions from consumers or responding to unsolicited suggestions, the scale of this activity has increased noticeably and the economic theory of these kinds of transactions has become more sophisticated.
On the economics, Eric von Hippel's book Democratizing Innovation moves us in the right direction. He points out that users face an innovate-or-buy decision when they need/want customized products. In his concluding chapter, he remarks about the failure of managers who rely on user innovation to acknowledge these inputs and a corresponding failure in management training to formalize processes for soliciting and managing user contributions to product development. Kathy Strandburg is doing interesting work on how patent law should respond to these insights.
I think we need to generalize von Hippel's insight further. User generated inputs extend beyond product development. How about marketing? Should the brand manager hire an advertising firm to develop a campaign, to manage a user-generated campaign, or should the campaign be fully outsourced to consumers? Are "consumers" inside or outside the boundary of the firm in options 2 and 3?
It seems to me that forward-looking firms are co-opting Benkler's and von Hippel's insights, and I suspect the future of management training will not limit the manager's choice to make or buy, but instead to extend the choices to make, buy, receive (user contributions) or collaborate (with user innovators). The last two options come with their own transaction cost structures, and so the initial Coasean insight remains valuable. Since many of these user contributions are likely governed by copyright, and reliance on user contributions may be incompatible with some firms' trade secret or patenting strategies, there is plenty of room for those concerned about the role that intellectual property law plays in managing these transaction costs to take these into account more explicitly in discussions about how to adapt/tailor IP law in these settings. (Paul Heald and Dan Burk also have done good work on the transaction cost perspective on IP).