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January 03, 2005

Extent of the Market vs. Economies of Scale

My father hopes that buying used books over the internet will allow him to procrastinate and avoid doing his day job, which is thinking about how to ensure a good fit between property law, social convention, and technology in the future age of internet cornucopia. He fails: he does his day job anyway:

IPcentral Weblog: Saved!: I was about to do some serious thinking about the amicus brief we are going to file in Grokster, just as soon as I finished reading the _Wall Street Journal_, of course, when I was saved by abebooks, the used book website.

It delivered my copy of Poul Anderson's _The Time Patrol_, the almost-complete story of hero Manse Everard's "duty to save human history from the chaos of paradox, no matter what sort of human suffering this forces him to 'preserve.'" The copy was discarded by the Albuquerque public library (the fools!).

Then, to complete my ruin, I received from Gallowglass Books in British Columbia (also via abe) the first four volumes of Maurice Druon's _The Accursed Kings_, the greatest series of historical novels ever written, and yes, I have read all of Patrick O'Brian, twice.

There is a serious point here: the incredible effect of the Internet in making markets efficient and world-wide. A mere couple of years ago, Albuquerque would have thrown out _Time Patrol_, or sold it for a quarter to some unappreciative browser, and the Druons would have sat forever on a shelf in British Columbia, since the author is not a household name, or been re-distributed slowly and at high cost through the networks of book dealers' newsletters.

But the key is that it is a market, in which people make money. I do not have to rely on someone who wants to do good by bringing readers into contact with surplus books located in other places, or on some foundation grant. I rely on the greed of the people who founded abebooks and saw a market opportunity (bless them all), and on the opportunities they created for people in Albuquerque and B.C. to better their own economic lot.

So maybe I'll do Grokster tomorrow. It's a holiday; no deliveries.

BTW - battered paperbacks of the individual books in The Accursed Kings series sell for $20 and up, so there is a market opportunity for some publisher to get the rights and bring out a new edition.

Dad is moving toward a "Tough Love" position on these interconnected issues. The key virtue of the computerization of everyday life and communication that he sees is that it opens markets that transactions costs and information costs had kept closed before--the market for, for example, first-edition hardback copies of English translations of Maurice Druon's wonderful Les Rois Maudits series--The Iron King, The Strangled Queen, The Poisoned Crown, The Royal Succession, The She-Wolf of France, and The Lily and the Lion,--for $70 each. This opening-up of markets in what Chris Anderson calls The Long Tail is indeed a wonderful thing, my father's life will be enriched by his finding and again reading the story about how the struggle between Robert and Mahaut over the County of Artois brings on the Hundred Years' War; and the lives of the workers and proprietors of Gallowglass Books will be enriched by their possession of my father's money.

But in order to make these markets work, you need to apply "Tough Love" to the internet. You need secure and transparent micropayments systems to create the zero-transactions-costs environment needed to open all these markets. You need powerful and comprehensive search tools so that you can find what you want, even if you do not yet know that you want it. You need powerful and effective antifraud measures for when the micropayments system glitches, or when somebody unwisely clicks on one of the links in the emails that purport to be but are not from PayPal. And you need powerful, effective, and brutal Digital Rights Management to make sure that the only commodities transfered are those that the transferer has the right to sell and that the transferee has the right to acquire.

Our current system of property rights and legal constraint does indeed create a world in which my father does not have to rely on the benevolence but can use the more effective lever of self-interest to induce abebooks and Gallowglass Books to give him his medieval-historical-fiction print fix, and in which the extent of the market--and hence the division of labor, and the productivity of society--has advanced far, far beyond the wildest dreams of Adam Smith. All this is very true. And I teach all this at least twice a semester. And yet, and yet...

And yet the story as he tells it feels incomplete. So let me shift over into an alternative universe, and report on an analogous post to his, one that I found on the parallel-universe web, from the weblog at fairusecentral.info:

IPcentral Weblog: Saved!: I was about to do some serious thinking about the amicus brief we are going to file in Grokster, just as soon as I finished reading the Wall Street Journal, of course, when I was saved by Project Gutenberg, the rapidly-growing volunteer-maintained free library of electronic books.

In the aftermath of Judge Posner's radical expansion of the idea of "fair use," the collected science-fiction fans of Orinda, CA have typed up, proofread, and uploaded the collected works of the late Poul Anderson, including his _Time Patrol_, the almost-complete story of hero Manse Everard's "duty to save human history from the chaos of paradox, no matter what sort of human suffering this forces him to 'preserve.'" I learned of this through my daily email of uploads.

Then, to complete my ruin, I scanned further down and learned that Project Gutenberg's servers also now included the first four volumes of Maurice Druon's _The Accursed Kings_, the greatest series of historical novels ever written, and yes, I have read all of Patrick O'Brian, twice.

There is a serious point here: the incredible effect of the Internet in making distribution efficient and world-wide. A mere couple of years ago, before Posner's landmark decision, it would have been illegal--a theft of intellectual property--for them to have uploaded either _The Time Patrol_ or _The Accursed Kings_--never mind that there are no plans to reprint either of these, even though battered paperbacks of the individual books in _The Accursed Kings_ series sell for $20 and up. This would not have hurt me much--I could afford to find and buy a used copy, even if a good-quality hardback would cost me $70. But what about the fifteen year olds with little disposable income who would be rationed out of the market by high prices? The key is that these days ebooks cost nothing to distribute--less than pennies in electrons and magnet domains--while society loses $15 for everyone who would gladly pay $15 but can't find one of the limited supply of used books for less than $20.

The key to the internet is that it is not a market in which each download is expected to make money. The key is that we upload things once, and they are then universally available. Because there are sufficient do-gooders typing and uploading text and foundation grants funding the backbone servers of the growing universal free library of humanity, we don't have to rely on the market, in which the only transactions that can take place are those that are expected to be profitable for somebody. Markets simply do not work very well in situations in which there are mammoth economies of scale, and are vastly inferior to systems of free distribution--as long as there is funding to cover the initial up-front fixed costs,* as long as there are mechanisms to ensure that what is uploaded is in fact a high-priority upload,* and as long as the ability to freely distribute is not blocked by inappopriately restrictive systems of intellectual property "rights." But if the way is clear, then we don't have to rely on greed. We can rely on natural benevolence and on the extraordinary powers of technologically-produced economies of scale to bring us what is useful and convenient--and bring it to us with much more efficiency than if the only way to get a copy of _The Time Patrol_ was to scrounge for a tattered used paperback that has wound up in Albuquerque.

Maybe I'll do Grokster tomorrow. They're rewiring our office. No global connectivity.

Now I don't want to fully endorse either the ipcentral.info or the fairusecentral.info position. Markets are extraordinarily powerful, yes; but in situations of low marginal costs and massive increasing returns they leave enormous amounts of money on the table. Modern technologies open up scope for distributed volunteer efforts to accomplish collective social projects that it would have been impossible to imagine without either the carrot of the market or the stick of the government in past ages, yes; but it is hard to find a durable open source project that doesn't have a charismatic leader at its head--and for more than a century sociologists have known that truly durable social institutions cannot be based on raw charisma, but must find some way to routinize it so that it doesn't decay and the sect doesn't dissolve.

The hard tasks at social institution design over the next generation require finding the right point of balance, and that requires understanding that the insights of ipcentral.info and fairusecentral.info are both true.


*These are, of course, the weasel phrases. "Who covers the fixed costs?" and "What social mechanisms ensure that the particular fixed costs covered are in fact the particular fixed costs we want covered?" are the big--and unresolved--problems here.

Posted by DeLong at January 3, 2005 12:28 PM

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Brad DeLong (who knew he had a dad?) has an interesting and wide-ranging post about markets, intellectual property, and economies of scale.

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Tracked on January 3, 2005 01:16 PM

Comments

bibliophile is a good place to hunt for books too.

Posted by: Big Al at January 3, 2005 12:38 PM


wow
some people read, some people Read and JBDl READS.

Posted by: skipwalkdc at January 3, 2005 01:04 PM


You have a dad?

Posted by: praktike at January 3, 2005 01:16 PM


Yeah, and we were thinking that he sprung fully formed from Zeus' forehead rather than having been generated in the more conventional way! You'd think he'd have come up with a more efficient and cleaner way to achieve existence.

Next you'll be telling me he has a mom! And that he's married with kids! Geez!

Posted by: Mandos at January 3, 2005 01:34 PM


It is an empirical fact that Hollywood is quite happy with a situation in which DRM prevents people from utilizing fragments of movies to produces free items, whether those be parodies, mashups, political satire, love offerings or whatever.
This is not simply an issue of immature technology, neither is it simply an issue of perceived or actual monetary loss. We see the same behavior in the threatening and tearing down of web sites, or going to even lower technology, fanzines and stories written by enthusiasts.
The facts make one thing quite clear: Hollywood's primary aim here is not the control of commercial piracy (which happens anyway); it is the control of source material and the prevention of the use of its material in various "fun" but unauthorized ways.

Now you may not have a problem with that.
But if, like me, you think this is a godawful shame, a massive dog-in-the-manger, a vast lessening of human utility to pretty much no useful end, then you need to consider your support for DRM carefully.

DRM does NOT, as a real-world matter as opposed to some theoretical fantasy, ONLY provide a way for well-deserving companies to earn some cash for their labors. It also provides a mechanism whereby they prevent any "unauthorized" use of their material, from the examples I gave already to being able to skip over anything you like on a DVD or PVR (starting with ads now, but later including those sex scenes or gore that you don't want to see) to who knows what future abominations. When you buy into DRM, you are not only buying into todays set of restrictions (the extent of which set you probably don't fully know), you are buying into an open-ended set of restrictions to be imposed in the future as technology makes things possible.

And none of this is just theoretical scare tactics. These things have already happened. DVDs with commercials that cannot be skipped over are common. Rights that a PVR or an iPod could provide in the past have been taken away through stealth "upgrades" of the relevant software, either in a fashion that you might barely control (the iPod --- just make sure you never ever update the firmware) to a fashion you simply could not control (the update comes in silently over the network, and if you disconnect the device from the network for a long enough period of time it stops working).

Posted by: Maynard Handley at January 3, 2005 01:39 PM


Thanks for the heads up on Druon's books. I lived in France for years in th 90s, but did not come across them. Like many other fine French works there seems to be little interest in translating them.

Anyhow, you can still get them new in French on Amazon.fr for under 5 Euros, about 8 bucks. Used they go for $3. So I think I will spring for them.

cheers

JHH

Posted by: Jeffrey Harris at January 3, 2005 01:57 PM


That balance is going to be tough to determine, to be honest. We need either one of two things.

#1. Copyright holders, at the end of their direct manafacture at a competitive price of said good, to release the work into the public domain.

OR

#2. Legislation to force that as such.

When it comes to the Grokster case, of course, that's a bit of a different animal. What people don't realize is that Grokster is NOT competition for the RIAA. People still buy CDs and reward their artists (though that more and more choose to purchase used CDs is and should be a major concern...one much much MUCH more than is normally voiced).

It's competition for Clear Channel. People use MP3 downloading like an at-will radio. They'll surf through seeders like people used to surf the dial. Seeing similar tastes, and browsing through trying to find new sounds to listen to. It's the new radio. I am the radio. You are the radio. We are the radio.

The iTunes model is a good replacement on the album side, but NOT on the promotion/library side. It loses practically all of the community appeal that really brought people to use the Napster clones a whole lot.

For movies, software and books, something else comes into play, simply, copyright holders just hold on to things to prevent people from seeing them, so they're lured into the latest and greatest. Once a company stops manafacturing/selling the product at a competitive price, (including price degradation) after a retail grace period...lets say one year? It should drop into the public domain. Period. Don't like it? Ok, keep on offering it. I mean, it shouldn't be too much to offer it at your website. But when it's sold out? Make more. Don't want to? Would it be too expensive? Tough. You had copyright to protect it, now you have the responsibility of copyright to live up to.


Posted by: Karmakin at January 3, 2005 01:59 PM


When the cost of copying and distributing music is measured in pennies (or mils), we should not be paying $15 for a CD!!!

$0.10 per song, with sales of 100,000, is still $10,000 -- plenty of "incentive" for someone to sing a song -- I would not worry too much about whether the world will still have music, after we use technology to make music distribution cheap.

If we continue to write the laws to enable parasites like Michael Eisner to "earn" $10 billion, we're fools.

Posted by: Bruce Wilder at January 3, 2005 02:01 PM


Good grief. DeLong the elder is conservative. Very conservative. Very very conservative. V. . .

Posted by: Max at January 3, 2005 02:07 PM


I could buy an argument that IP is free (in alternate universe where I could also buy an argument that oil rights are free). However if it is not free, I do not understand how free distribution is more efficient in allocating the resources than the market.

Posted by: a at January 3, 2005 02:12 PM


I was about to say "Damn, my Druouns are worth that much?" And then a helpful reader reassured me that no I'm not rich. :-)

Posted by: sm at January 3, 2005 02:13 PM


Coincidentally, only yesterday I, um, liberated/borrowed from my parents' bookshelves a copy of _The Poisoned Crown_, the only Druon I've read -or indeed heard of- so far being _Alexander the God_ and was just about to start it when I read this. Now I know they're tolerably rare I shall have to remember to return it to them. More to the point, there are stacks and stacks of books of this ilk lying around my parents house, and though I'm tolerably well-read I don't recognise half of them, and certainly don't know enough to put a market value on them.

Posted by: Liadnan at January 3, 2005 02:34 PM


"The hard tasks at social institution design [...]"

I think that it's more likely to be a big loud fight, with the winners being whoever is left standing, rather than anything like design.

Posted by: Randolph Fritz at January 3, 2005 02:40 PM


Holy sh*t! He has a sister, too!

Posted by: praktike at January 3, 2005 02:40 PM


We are rich, the fixed costs are paid for by our entertainment/hobby money. Interesting books are provided by the mechanism of an upload requiring an interested party willing to contribute their time to a particular book. The whole endeavor is reinforced by the multiplication of benevolence. Because the costs of providing the books are so low, only a fraction of users need to donate a fraction of their time or money to sustain the project.

Posted by: Jim Lund at January 3, 2005 02:41 PM


Its all great, but can it build a house, grow a bushel of wheat, supply a gallon of clean water or keep a family warm for the winter?

The new technological economy is great. it redistributes some second rate books and obscure music. My sister makes $100 a month extra selling books on eBay.

But isn't it all a distraction?

Posted by: pragmatic_realist at January 3, 2005 03:17 PM


You need secure and transparent micropayments systems to create the zero-transactions-costs environment

Ahem

1. Secure
2. Transparent
3. Zero-cost

Pick two.

(and probably get one and a half).

Love,

The payment systems community.

PS: We've been saying this for a while but nobody seems to listen.

Posted by: dsquared at January 3, 2005 04:04 PM


"Powerful, effective and brutal digital rights management?" If someone can come up with this, they will make a lot of money. It's not at all clear how this could work at the moment, though. I think your Dad might be waiting a long time for his ideal, if that's truly necessary.

Posted by: Alex at January 3, 2005 05:58 PM


Bookfinder.com is absolutely the best place for finding used books online.

I love this subject, by the way, and I think the potential of the internet in this regard has barely been tapped. Small vendors/artists/dealers, etc of a great many things still have yet to find ways of coming together in ways that are easily searchable. For example there ought to be a kind of worldwide artisans' "mall" where I'd be able to buy Navajo blankets, Buddhist statuary from Bhutan, and sexy ceramic bowls from Norwegian postmodern lesbian feminist potters. The book vendor model is terrific, but there's so much left to do...

Posted by: Robin the Hood at January 3, 2005 08:54 PM


1. DRM doesn't work. It can't work. See: http://www.craphound.com/msftdrm.txt


2. Successful OSS projects rely on charismatic leaders. OK. And this is different from for-profit companies how? Most successful OSS projects are what, 5-10 years old? Maybe 15? The movement only dates to the mid-1980s. Point being, most OSS projects are still in a stage where they're being led by their founders -- as they would likely be if they were for-profit companies. How many 'successful' (by the mass-market standards presumably being used to determine success of OSS projects) for-profit companies do not have a charismatic founder?

3. What Maynard Handley said. When HBO decides I can't skip through their ad on the DVD edition of Oz, I can't go find another vendor to sell me a copy without such restrictions. Copyright grants a monopoly on a non-substitutable good. If the (perceived) benefit of restricting customers' behavior is higher than the (estimated) profit to be obtained by charging them extra to remove the restrictions, the removal won't happen. And where one entity has a monopoly, if the perception/estimate is wrong there are no market forces available to correct the error.

Posted by: setmajer at January 4, 2005 12:32 AM


Your 3) is inconsistent with your 1). If HBO can manage their rights so as to make you watch their ad, then DRM works, shurely?

Posted by: dsquared at January 4, 2005 02:47 AM


If you (or your Dad) are into historical fiction, I strongly recommend the books by Dorothy Dunnett, especially the House of Niccolo' series (althought the Lymond Chronicles are more popular). Definitely the best and most detailed historical series I have ever read, especially if one is interested in the 15th century mercantilistic Europe.

Posted by: Hannibal at January 4, 2005 05:31 AM


>Good grief. DeLong the elder is conservative.

Yeah, really. I'm betting that these people aren't supplying him obscure books out of "greed" but because if they were doing something else with their time it would make them unhappy. Collectors get a certain obsession going and not only do they spend every off hour chasing it, but eventually it creeps into their on-clock life and the boss notices.

And not in a good way.

So most of them, with varying success, try to turn their obsession into something that will feed and clothe them.

Posted by: a different chris at January 4, 2005 06:46 AM


dsquared: I think that setmajer was (for #3) speaking either hypothetically, or taking into the account the annoyance of having to break the DRM, as the articles setmajer posted also does. That's not all that DRM does anyway.

Posted by: Mandos at January 4, 2005 08:49 AM


I'm not sure I agree on the micropayments issue (though I realize it's a small part of your point). Most services that do such things use bundling (Netflix, Rhapsody), which is both inherently more efficient and reduces the psychic cost of individual transactions.

Posted by: Kevin Laws at January 5, 2005 03:49 PM


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