There’s a truism that bothers many (except economists): if there is a good or service that has value to some and can be produced at a cost below that value by someone else, there will be a market. This is disturbing to many because it is as true for areas of dubious morality such as sexual transactions, clear immorality (human trafficking and slavery) as it is for lawn mowing and automobiles.
Likewise for online activities, as I’ve documented many times here. You can buy twitter followers, Yelp reviews, likes on Facebook, votes on Reddit. And, of course, Wikipedia, where you can buy pages or edits, or even (shades of The Sopranos), “protection”.
Here is an article that reports at some length on large scale, commercialized Wikipedia editing and page management services. Surprised? Just another PR service, like social media management services provided by every advertising / marketing / image management service today.
This is not a profound observation, but one that is useful to keep in mind: if there’s a transaction that is of some value to more than a handful of people, there’s likely to be a market for it. This is more true than ever in the Internet age, because the costs of finding potential traders, and of executing trades, is much lower than it was just 10 or 15 years ago. The lower the costs of trading, the lower the value of things that will find markets.
One well-known example: text and banner ads that may sell for only a few cents a click.
But there are always new and fun examples. Today’s: a New York Times article about the market for buying Twitter followers. Want to be as popular as Ashton Kutcher?
This isn’t so much a specialized incentive-centered design story as a good example of a central problem in information economics: information may “want to be free” (Barlow 1996) but it isn’t free to maintain or distribute. Who is going to pay?
The arXiv project was started in the 90s as an e-print archive for rapid (pre-journal publication) of research papers in high-energy physics. Paul Ginsparg, a physicist at Los Alamos National Lab, started and maintained it for a number of years. It became a vital service for not just the original community, but for many other scholarly fields (including math, statistics and computer science). It currently houses about 600,000 articles, all freely available to anyone with an Internet connection.
Cornell University took responsibility for the project several years ago. The university librarian reports that Cornell spends about $400,000 a year to maintain and enhance this ever-growing resource, which benefits researchers across the world. It earns no direct revenue from the project. How long is that sustainable?
According to this posting in The Chronicle of Higher Education, Cornell is now asking the 200 institutions whose researchers account for about 75% of the downloads to voluntarily pay $4000 a year to support the project. Not a lot perhaps (the cost of a handful of subscriptions to journals in the related fields), but a request for an ongoing commitment to a charitable contribution. How likely is that to work? How sustainable? National Public Radio in the US receives some government funding, and fully 23% of its budget from corporate advertising. (It is called “sponsorship” because the corporations only get “announcements” and not “advertisements”, but as someone whose father made his living in a Madison Avenue advertising firm doing “corporate image advertising”, this is advertising. Corporations spend the money to enhance their brand image and reputation, on the belief that this increases their sales.)
Here is a nice article in Wired about Googlenomics, featuring my co-author and friend Hal Varian. This describes a number of ways that Google has combined vast data mining resources with economics to do some incentive-centered design.
Hal is a micreconomist par excellence, who has made important contributions to both theory and empirical work. He was one of the first economists who took the study of the Internet and related phenomena seriously.
He was my colleague at Michigan, and involved in some of the early meetings in which a group of us developed the plan to create the School of Information. The year we launched, however, he departed for Berkeley, where a year later he was dean of their new School of Information (called SIMS at the time, but since renamed). For the past few years he has been on leave from Berkeley to be the Chief Economist at Google.
On the first day of college, the Dean addressed the students, pointing out some of the rules: “The female dormitory will be out-of-bounds for all male students, and the male dormitory to the female students. Anybody caught breaking this rule will be fined $20 the first time.”
He continued, “Anybody caught breaking this rule the second time will be fined $60. Being caught a third time will cost you a fine of $180. Are there any questions?”
At this point, a male student in the crowd inquired: “How much for a season pass?”
From: “School Jokes“, Wednesday, February 6, 2008
For years, economists doing incentive-centered design have thought airport landing slots were a natural application. Indeed, one of the seminal research papers on “smart markets” (combining high-powered computation with incentives for resource allocation) was Rassenti, Stephen J., Vernon L. Smith, and Robert L. Bulfin (1982), “A Combinatorial Auction Mechanism for Airport Time Slot Allocation,” Bell Journal of Economics, 13, 402-417 (Smith later won the Nobel Prize for his pioneering work in experimental economics and market design). Economists have been advising the Federal Aviation Administration for the past several years on the design of auctions for landing slots at New York metropolitan area airports (JFK, La Guardia, Newark), and this spring the Dept. of Transportation announced it was implementing a scheme to auction a small number of slots at each airport.
Today, the N.Y. Port Authority announced it would block the use of auctioned slots. Opponents claim that the auctions would raise prices and not reduce delays. Supporters claim that creating a market for scarce slots would increase competition, which would keep prices down, and put the slots in the hands of airlines who at a given time have the busiest schedules, thus reducing delay. The opponents argue that the best solution is to spend money to modernize the air traffic control system and hire more controllers.
This battle over an incentive-centered design scheme highlights key issues in many market-based allocation schemes. It is quite typical for market opponents to argue we should simply increase supply: but without some sort of value-based mechanism to allocate supply, simple economics and lots of history show us that increasing supply will just lead to more overuse and continuing congestion. (See urban highway development; see the continued overload of Internet capacity.)
It is also common for market opponents to argue that creating a market will increase prices. This is rarely true for a well-designed market. By increasing the efficient use of the scarce resource, waste and cost should be reduced, and overall, assuming some degree of competition, prices tend to come down. In the case of landing slots, the slots that will charge high prices are presumably during peak times: airline prices are already higher then, and even if they do raise a bit, we should see prices during off-peak times fall as those who don’t get peak slots compete for passengers off-peak. Higher peak prices and lower off-peak is one of the oldest, and most effective ways to smooth demand over limited capacity, and leads to better use of an expensive facility (and lower overall costs to consumers).
I haven’t seen what DOT (or whoever would run the auctions) would do with the revenue. Fundamentally, though, this is not a cost: no resources are being used up by the auction (well, a few people to run them). The revenues could be transferred right back to the airline industry (say through reduced landing taxes) to keep the overall cost of running airlines the same.
I don’t know that the particular design of the slot auctions was good: that is, how much it would increase efficiency, what would be done with the revenues, whether they would be run with a lean team rather than a bulging bureaucracy. But the arguments that have been raised by opponents seem to be a mix of misunderstanding about resource allocation, and the anguished cries of those who have market power and control over existing slots that they might actually face more competition.