miscellaneous factZ - The online home of Rufus Pollock

Last Tuesday I was at the RES Annual Conference to present my paper “Is Google the Next Microsoft? Competition, Welfare and Regulation in Internet Search”. I’ve uploaded my slides from the talk here and below is a recently prepared overview. The full paper can be online on the SSRN site at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1265521

Overview

Beginning from nothing twelve years ago, today online search is a multi-billion dollar business and search engine providers such as Google and Yahoo! have become household names.

While search has become increasingly ubiquitous it has also grown increasingly dominated by a single firm: Google. For example today in the UK Google accounts for 90% of all searches and in many other countries Google has a similar lead over its rivals.

In this paper I investigate why the search engine market is so concentrated and what implications this has for us both now, and in the future. I also look at whether search engines will require regulation and if so in what form. In doing so we also give a detailed explanation of the how the search engine market works, its history, and how it has come to be such a lucrative, and important, activity.

To summarize the main points:

(a) Though search engines provide ordinary users with a `free’ service they gain something very valuable in exchange: attention. Attention is an increasingly valuable good, being in ever more limited supply — after all each of us have a maximum of 24 hours of attention available in any one day (and usually much, much less). Access to that attention is correspondingly valuable especially for those who have products or services to advertise. Thus, while web search engines do not charge users, they can retail the attention generated by their service to those are willing to pay for access to it.

(b) The search engine market is already extremely concentrated. In many countries a single firm (usually Google) possesses of market share an order of magnitude larger than its rivals. As stated, in the UK Google already holds over 90% market share as. However, it is also noteworthy that there are some marked variations, for example in China Google trails the leaders.

(c) Competition issues are likely to become more serious as this dominance becomes established. It is important to realise that while search appears ‘free’ we do pay indirectly via the charges to advertises — who must in turn recoup that money from consumers. A dominant search engine may have incentives to distort its ‘results’ in ways that increase it owns profits but harm society — for example by suppressing organic search results that would substitute for or harm associated ’sponsored’ results (adverts).

(d) There are a number of approaches that regulators and policy-makers could take to protect against these adverse consequences. For example, policy-makers could look at ways to separate the ’software’ and ’service’ parts of a search engines activity, or less dramatically, they could set up a regulatory body to review search result rankings and choices.

Conclusion: it will be increasingly necessary for there to be some form of oversight, possibly extending to formal regulation, of the search engine market. In several markets monopoly, or near monopoly, already exists and there is every reason to think this situation will persist. Left unchecked by competition the private interests of a search engine and the interests of society as whole will diverge and, thus, left entirely unregulated, online search will develop in ways that are harmful to the general welfare.

It is therefore important that policy-makers begin now to develop their strategy in relation to this key area of the knowledge economy. The power rapidly accumulating in the hands of a few major search providers is a great one. It behoves to ensure that it is used in a way that brings the greatest benefit to society as a whole.

On March 18th I was in Brussels to give a talk as one of two “invited experts” (the other being from the Motion Picture Association) to a session on the topic of “Copyright Enforcement” held by the Working Group on Authors’ Rights of the European Parliament’s JURI Committee. Below is the slightly tidied up text of the talk I gave.

Talk Text

Good afternoon and thank-you for inviting me here today. To introduce myself I’m the Mead Fellow in Economics at Emmanuel College, University of Cambridge and an Associate at the Centre for Intellectual Property and Information Law also at the University of Cambridge. I believe that my colleague Professor Bently came here in October to speak to a similar gathering that time on the topic of copyright term extension.

To begin with I want to make a few general points before proceeding to the specific area — enforcement — that today’s meeting looks at.

The first point I would like to make is when we talk of copyright we must remember that it is not a single unified thing but, in reality, a bundle of different attributes. For example, there is the crucial distinction between:

• Economic rights: the ‘monopoly’ right to control reproduction and distribution of the work (and thereby to control, at least partially, its price). We should also note that in some cases this ‘exclusive’ right may be converted into a right for equitable remuneration.
• Moral rights: rights of attribution and integrity. These an exist separately and independently of any economic rights. Furthermore they are often norms that we respect irrespective of any copyright: I still credit Shakespeare for Romeo and Juliet even if it is in the ‘public domain’.

Furthermore these economic and moral rights have attributes such as:

• Term, i.e. the length that the right lasts.
• The breadth of the right. For example, in the US copyright for performers is ‘narrower’ than in the EU because certain uses of recording (notably broadcast on the radio) need not be paid for. There are also limitations and exceptions related to educational use or use for criticism where permission need not be sought from the rightsholder.
• Lastly there is enforcement. After all one can have very ’strong’ rights but then be permissive in enforcement, or, conversely, have more limited ‘rights’ but be very strict in the enforcement. I would also point out that enforcement is a social as well as legal matter: when I attribute an author the main reason I do it is not because I might get ’sued’ if I did not but because it is the right thing to do — people should be credited when their work is used wherever it is reasonable to do so.

The value of a right is determined by the interplay of all of these. Deciding on the level of enforcement is therefore the same problem as deciding on the level of copyright generally. And we can’t think about this without asking about the purpose behind copyright’s existence.

The answer here is a simple one: copyright is instrument created in order to promote the interests of society as a whole not to promote the interests of the producers of creative works. Of course we care about remunerating producers and artists both because they are members of society but also, and more importantly, because by remunerating them we ensure the creation of more works which society as a whole can enjoy.

Nevertheless, it is essential to keep in mind that the purpose of copyright is broader than to promote the interests of a single group. This fact then is central to any assessment of the form and level of copyright and it has important implications. For example if we have a proposal that will help artists but overall harm society we should not support that proposal. Moreover, it is also a fact that is sometimes neglected, for example this very working group is entitled “Working Group on Author’s Rights” not “Working Group on Copyright and Social Welfare”.

In using copyright to promote social welfare we are then presented with a basic trade off between the benefits of the monopoly in the form of the new work created as a result of the monopoly accrued rents, and its in the form of reduced access to creative works. We are therefore seeking a balance: we want enough copyright but not too much. And, returning to our point above, this logic applies to enforcement as much as any other aspect of the “copyright package”.

In particular: if there is already ‘too much’ copyright stronger enforcement will make things worse. If there is too little copyright then more enforcement will make things better. Now, I should make clear that my personal preference is for strong enforcement of fair rules.

Unfortunately, the rules currently aren’t fair — for example copyright is almost certainly far too long. As such it is hard to justify a push for strong enforcement. In addition, I would also argue that the unfairness of the current copyright regime is also a major reason why strong enforcement will be difficult, if not impossible, to achieve in practice. Why?

The reason is simple: the successful enforcement of any rule depends on that rule having public legitimacy — being considered reasonable by the majority of the populace. Currently that is not the case: copyright suffers from a serious lack of “respect” and a marked lack of public legitimacy.

If you wish to change that we need the rules to be fair and balanced — it hard to have respect and enforcement of an unfair system. For example, copyright term should be reduced and we should expressly avoid extensions, especially retrospective ones like that currently before Parliament in relation to sound recordings. Such policies appear to reflect nothing more than special interest lobbying and this can only make copyright’s “marked lack of public legitimacy” worse — I would note here the recent joint statement put out by European IP law centres who emphasized that retrospective term extension would seriously undermine respect for copyright and make “piracy the easy option”.

It will be almost impossible to enforce unjust rules. If we are to have strong enforcement it therefore must be of just rules. I would also argue that just rules must also be reasonable rules. For example, is it reasonable in an age of costless reproduction to continue to promote a model of copyright based on exclusive rights? Much of the “problem” of unauthorised file-sharing could be resolved if we moved to an alternative compensation system based on an equitable remuneration right approach. In one fell swoop we would eliminate the biggest “enforcement” problem going while also increasing the size of benefits to be divided between users and makers of creative works. Surely this is the more reasonable, and sensible, option!

As I am coming to the end of my allotted span let me conclude. Copyright must be designed to promote the welfare of society as a whole not one specific group. As such, in designing any aspect of copyright, including enforcement, it is important not to have too much as well as not to have too little. We must also remember that copyright, like any other rule or law, depends for its enforcement on willing compliance more than explicit punishment. As such the most important factor in ensuring better observance of copyright is to increase its legitimacy which it markedly lacks at present. To achieve that we need to create a more just, and more reasonable, copyright regime. Thank-you.

A couple of weeks ago I was back at City University’s Centre for Competition and Regulatory Policy for their winter workshop to present a new paper. Entitled Changing the Numbers: UK Directory Enquiries Deregulation and the Failure of Choice it looked at what happened when the UK deregulated its directory enquiries market in the early 2000s. From the abstract:

In 2003, the UK `liberalised’ its telephone directory enquiries service with the aim of introducing competition so as to improve quality and lower costs. Unfortunately the results did not match expectations. Proliferation of numbers led to consumer confusion and high price firms with no discernible quality advantages but which employed heavy advertising came to dominate the market. Consumer and total welfare appear to have declined. This example raises important questions for regulators. In particular, with limits on information and rationality, it may sometimes be better to limit choice but increase competition to supply that choice.

Link to Paper

Last Friday and Saturday I was at the 2008 European Policy for Intellectual Property (EPIP) conference, held this year in Bern. I presented my paper on the optimal term of copyright and discussed a paper of Luca Spinesi’s on ‘Imperfect IPR enforcement, inequality, and growth’. Below can be found ‘impressionistic’ notes from some of the other sessions I had a chance to attend.

Jim Bessen: How can and how should economics inform patent policy?

• What is aim of ‘Property Rights’
• Look at example of tradable permits for pollution
  1. Do institutions do their jobs
  2. Resources (is air cleaner)
  3. Social welfare
• For patent system, thanks to recent work, first two are within our reach (though not within our grasp)
• Institutions. Want:
  1. Specificity
  2. Searchability
  3. Predictability
  4. Transactability
  5. Enforceability
• Patent system is not doing so well
  1. Specify: reasonable but lots of debate about what claims mean (40% overturn rate on appeal of district court decision re. claim construction)
  2. Search: pretty poor (esp. in ICT). Many firms do not bother to search.
  3. Predictability: low (e.g. no defense insurance)
  4. Transact: can be anti-commons
  5. Enforce: pretty unpredictable
• Resources (Innovation)
  • Patent system is not doing so well due to overlapping claim (pooling problem)
  • Fuzzy boundaries: dispute costs
    • Value patents (upper bound from renewal, re-assignment, int’l filings, firm market value, surveys, case-studies)
    • Dispute costs (lower bound)
    • For pharma: value ~ $12 billion/year, costs ~ $1 billion
    • Other industries: value ~ $2 billion/year (from 80s to present), costs ~ $1 billion / year up until mid 90s since when they have spiked and now much higher than value — e.g. in late 90s costs 3x value
    • Could use fees to address this (raise from ~$5000 to ~$30000)

Reto Hilty: Enforcement of intellectual property rights on Enforcement of IPRs

• Huge figures circulate about losses from piracy
  • Most figures are (very) dubious and produced by the industry
• History of IPRED (and IPRED2)
• More intl stuff:
  • TRIPS+
  • FTAs (US)
  • EPAs (EU)
  • ACTA
• Why has this focus on enforcement happened
  • General mantra that strengthening IP rights is good for innovation
  • Patents: probably have over-protection
    • Full patent protection (EPC 1973) — i.e. patent covers subsequent uses even if not anticipated. (probably a mistake)
    • Biological substances — full patent protection particularly problematic
    • Software patents …
    • Drugs and developing countries
  • Copyright law
    • Internet users see constriction not justice
    • Entertainment + TPMs — “unjustified profits”
    • Scientific research: unnecessary constrictions (Open Access)
  • Industrial design
  • Trade-mark law — large extensions in the last 80s (protection of colours, shapes unjustified)
  • Eventually this constant extension generated such opposition that it is now at a standstill
  • Thus, rightsholders move focus to enforcement (focus on ‘efficiency’)
• But stronger enforcement also causes problems [ed: the strength of a right in fact is is product of enforcement and strength in theory]
  • will there be a backlash?
• Also extension of IP geographically — esp. to developing countries
• What justifications are there for IP enforcement
  • IPR not valuable without some enforcement, certainty …
• One size cannot fit all: whether for IP itself or for enforcement
  • If IPR is misused enforcement can make things worse
• Suggestions:
  • Decriminalize where too much IP protection
  • Strengthen enforcement where IP truly detrimental
  • Distinguish IP protection from consumer protection (counterfeiting not the same as IP protection)
  • [ed: one concern here is that it seems here we are using enforcement/non-enforcement to correct IP rights which are themselves wrong — enforce where good, don’t enforce where not good. But if that were agreed why couldn’t we correct the underlying problem]

Davis, Davis and Hoisl: Leisure time invention

• PatVal data (10.5k German patents sampled with survey of inventors)
• Leisure time has +ve impact on inventive output
• Leisure time invention +vely linked to interactions with co-workers and outsiders
• More leisure time invention in conceptual-based technologies rather than science-based technologies
• Incidence of leisure time invention will be -vely related to project size
• Most hypotheses confirmed

Ashish Arora: Patents and Innovation

• Evidence for benefits of patents on innovation is mixed
  • Example of early Swiss and German dye and chemical industries
  • Surveys main evidence which show there are rents from patents but with equivalent subsidy ratio that is not that high
• Kyle and McGahan: no inducement of research in diseases of poor countries after TRIPs
  • Even if patent protection is important no reason for developing countries to have them (already have protection in developed countries)
• Thickets, patent litigation and trolls
  • Cockburn MacGarvie and Mueller (2008): fragmentation increasing across all industries
  • Substantial litigation costs
  • Geraldin, … find no thicket problem in 3G telephony
• Anti-commons
  • Completely unpersuaded by the evidence
  • All examples came from universities: US research universities have made a mess of tech-transfer and patenting, alienating faculty and angering corporate partners (Bayh-Dole has had significant unintended bad consequences)
• Markets for technology (specialization)
  • The first order effect of patents may be on trade in technology
  • Having people whose business it is to sell technology is really important (particularly if you are a developing country)
  • Licensing flows in US: $66 billion in 2006 (Carol Robbins). Good proportion of domestic R&D
  • Hall and Ziedonis evidence on specialist semiconductor firms
  • Gambardella and Giarratana (2007): software security patents
• Making patents more useful
  • Much of the problem is bad patents due to:
    1. Invention is poorly understood (underlying knowledge base is poor)
    2. The claims are written with the intent of claiming as much while revealing as little as poorly understood
  • ‘Metes and bounds’ of the patent are unclear to all except handful of patent lawyers
  • Not new: cf. German chemical industry back in 19th century
  • Solution:
    1. Force patents to be written using (i) standard terms (ii) without legal jargon (whose only justification is a futile reach for precision)
    2. Patents should be (i) published expeditiously (ii) transactions (licenses, assignments, beneficial interests) in patents should be recorded and disclosed

Survey on Patent Licensing: Dominique Guellec (OECD)

• Why licensing out:
  • Value from unused inventions
  • Inventions with applications elsewhere
  • Fabless firms
  • Establishing technology as a standard (may raise Competition issues)
  • Cross-licensing deals (ditto)
• Expected Economics Effects (+ve)
  • Increases diffusion
  • Reduces duplication
  • Boost downstream competition
  • Facilitates specialization
• Can also be -ve (mirror image of +ve ones e.g. reduced duplication = less competition)
• Graph showing huge increase in royalty/license payments since mid 80s: ~$10B/year to ~$110B/year) (source: world bank)
  • But how much of this real (i.e. not tax manipulation etc) — and also includes copyright etc
• OECD survey implemented by EPO by JPO/University of Japan on licensing behaviour
  • focuses on licensing out
  • response rate: 42% in europe, 34% in japan [ed: japan responses are less reliable for reasons not entirely clear to me]
  • no questions on revenues (people don’t respond when you ask this — either don’t know or don’t what to tell)
• Results:
  • 35% of european companies license out, 59% of japanese firms
  • Licensing to non-affiliated companies: 20% of Eur, 27% of Japanese
  • U-shaped prob of licensing as a function of size
  • By tech field: highest in chemistry and electronics
  • Younger companies do it more (controlling for size) [ed: issues here though. Old firms which are small are not the same as young firms that are small]
  • Why do it?
    • Earning revenue: 60% EUR, 52% JPN; cross-licensing: 18%, 18%
  • Patents you would have licensed but could not/did not: ~20%
    • Why? Difficulty of finding a partner (25% of EUR and 18% of JPN)
    • Not important: problems of drafting contracts or technology not mature
• Difficulty of finding partners could be for several reasons but suggests could be role for more/better intermediaries to facilitate transactions (INPIT in Japan)

Patent Thickets and the Market for Ideas: Mark Schankerman (LSE)

• Market for ideas (patent licensing and sale of patents) [ed: this is obviously not the whole market for ideas …]
• Study market though new lens: settlement of patent infringement disputes
  • Do not know whether when settlements happen licensing actually occurs
• Focus on 2 key aspects:
  • Fragmentation of rights (’patent thickets’)
  • Certainty of enforcement (CAFC led to more certainty — not worrying here about pro-patent bias)
• Fragmentation:
  • Trad story: bad (higher transaction costs, bargaining failure …)
  • Dissenting voice (Lichtman 2006): greater fragmentation lowers the value at stake in each negotiation and this reduces the incentive to bargain hard. This speeds up settlement. Of course still leaves question of whether this reduces total negotiation time.
• Model gives us various hypotheses:
  • H1: more complementarity means longer negotiation
  • H2: more fragmentation means shorter negotiations
  • H3: Settlement negotiations will be shorter for patents litigated after CAFC (1982)
  • H4: Impact of fragmentation external rights will be lower after the introduction of CAFC
  • H5: CAFC has a bigger impact where the preceding circuit had more uncertainty
• Results
  • More fragmentation: leads to lower dispute duration (19.6 months for < 50th percentile frag vs. ~16 months for > 90th percentile)
  • CAFC has a big effect on dispute duration (~33 months to ~18months)
• Conclusion: looking at delay (not royalty stacking on other issues)
  • Certainty: good
  • Fragementation: not bad (and maybe good)

City University’s Centre for Competition and Regulatory Policy summer workshop took place today and yesterday and I was there to present The Control of Porting in Platform Markets. As well as presenting I had the chance to take some ‘impressionistic’ notes on some of talks which are included below.

Thursday

Session 1: Telecoms and Postal Services

PAUL SMITH - CEPA: Defining the universal postal service

CARLO REGGIANI – UNIVERSITY OF YORK: Network neutrality and non-discriminatory issues: An economic analysis

• 2 recent papers (2007): Economides and Yal + Yermelo and Katz
• 2 sided-model
• n-firms providing platform (telecoms)
• network externalities both sides
• Questions:
  • do telcos set prices on both side
  • What is form of the competition
  • net neutrality is always bad so why used

Session 2: Competition issues

RUFUS POLLOCK - CAMBRIDGE UNIVERSITY: The control of porting in two-sided markets

DAVID GILL – UNIVERSITY OF SOUTHAMPTON (with John Thanassoulis): The impact of bargaining on markets with price takers: Too many bargainers spoil the broth

• What happens if some consumers bargain a discount from list prices
• Some proportion of consumers z do not bargain
  • exogenous but endogenized later on
  • Cournot competition for these guys (with Bertrand this all goes wrong …)
• Of those that do bargain some get one quote some get multiple (Bertrand from multiple)
  • trade-off getting monopoly from single quote guys vs. purchase from multi-quoters
  • From Judd + Burnett 1983
  • [ed: is there a cost for getting quotes]
  • [ed: Very like Baye and Morgan and resulting in similar mixing results)
• Firms anticipate that higher list prices raises profits from bargainers
• So as number of bargainers go up firms raise list prices
• Results
  • As bargainers prop. increase price-takers do worse
    • Waterbed effect + fact that
  • Existing bargainers CS decreases as prop. bargainers rises
  • Swapping consumers (price-taking to bargaining) benefit
  • Overall effect: ambiguous
    • Overall negative and most bargainers get only one quote
    • Overall positive if most bargainers get multiple quotes

• Then endogenize number of bargainers by assuming some intermediate types who face cost c of bargaining

  • Results similar
  • Still do not endogenize choice of number of quotes — discussed in paper but not done

• Comments:

  • Waterbed effect: what if firm entry (i.e. zero profit condition) then better prices for bargainers => worse prices for price-takers
  • Baye, Morgan

Session 3: Electricity and Related Issues

GERT BRUNEKREEFT – JACOBS UNIVERSITY BREMEN: Ownership unbundling of the German electricity TSOs – A social cost benefit analysis

VINCENT RIOUS – SUPELEC (with Jean-Michel Glachant, Yannick Perez and Philippe Dessante): The diversity of design of TSOs

STEPHEN WOODHOUSE - POYRY: Wind generation – no limits?

• Everyone is signing up to incredibly optimistic renewable and CO2 targets.
• For UK wind is essential as we have a lot of it compared to any other renewable options
• However wind has major delivery issues and conventional wisdom is that its max penetration is 10%

• Problem is:

  • wind can be irregular
  • (more significant) demand shows pronounced fluctuations over the day while renewables don’t (on average). This means that your backup capacity to deal with peak load make renewables on avg. v. expensive.

• [ed]: Comments

  • why this debate about whether feasible or not — why can’t we simply price carbon efficiently
  • like a man who has a dislocated shoulder and spends all his time trying to fix the pain this causes in his hip rather than sorting out his shoulder

Session 4: Evaluation of Regulation and Competition Institutions

GORDON HUGHES – UNIVERSITY OF EDINBURGH: Efficiency frontiers, stranded assets and the X-factor for telecoms network operators

• Setting the X in RPI - X
• Stochastic frontier analysis
• Look at 68 US local exchange carriers (data from FCC)
  • Current costs from historic accounts
  • Stranded assets (from switch to digital)
• Structural break in 2000
  • To 1999 costs falling at -3.3%. From 2000 falling at -2.1%
• Stranded assets affect costs: cumulative impact of 5% annual decline in switched line equivalent to a cost increase of ~2.6% per year
• Slow convergence towards frontier: ~1.3% per year
• Accounting vs. economic cost important
  • Accounting cost: ~ -1.7% per year (post 2000)
  • Economic cost: ~ 1.7% per year (post 2000)
• RPI-X:
  • using accounting costs: X ~ 1.5-2.5%
  • using economic costs: X ~ -0.5 - 2.0% (i.e. -ve and prices rise faster than inflation)
  • In europe can justify + ~2.5% to X but this will all over time.

JOHN CUBBIN - CITY UNIVERSITY (with Jon Stern, Federica Maiorano and William Gboney): What can we learn from economic studies of infrastructure regulatory policies?

Friday

Session 1: Transport

ANNE YVRANDE-BILLON - UNIVERSITY PARIS SORBONNE (with Miguel Amaral and Stephane Saussier): Does competition for the field improve cost efficiency? Evidence form the London bus tendering model

• Competition for market
• Idea is that competition raises bids (whether charges for providing service or payment for right to run it)
• Little empirical testing
• Several confounding factors
  • Winner’s curse: can happen in common-value and in private value auctions if bidders systematically under-estimate their own costs (i.e. over-estimate their own values)
  • Renegotiation effect: a bid not be allowed if not good enough even if it wins (implies more aggressive bidding)
  • Entry effect: Larger number of expected bidders might discourage entry.
• Existing papers on impact of no. of bidders on outcome
  • Branman et al (1987), Thiel (1988), Dalen + Gomez-Lobo (2001), Hong + Shum (2002) — find strong winner’s curse, Nunez + Athias (2006)
  • Do not control for other extra factors
• France vs. London (Amaral, Saussier + Yvrande 2008)
  • French Urban Public Transport sector
  • declining productivity, huge deficit — basically a disaster
  • tendering model (for buses):
    • No clear selection criterion (intuitu personae) — right enshrined in law by vague definition of the ‘collective welfare’
    • No regulator
    • Few bidders (av 1.4)
    • 66% of auctions with only one bidder
    • Incumbent advantage (~88% renewed)
    • Collusion (fined by Comp. Commission 2005)
  • Bus auctions in France are for complete networks while for UK they are for routes
  • This excludes Paris as Paris directly administered
• UK model
  • Bus operation auctioned on route-by-route basis
  • Bids are annual price for service provision
    • Revenues occur to authority — so service provider has no demand risk (just ‘industrial’ risk)
  • Selection criterion ‘best economic value’ but:
    • Qualitative factors count (e.g. reputation, quality)
    • Discretionary power of the regulator (TfL) — may not select the lowest bidder if a) do not think firm can deliver b) would result in more than 20% market share c) …
    • A public benchmark exists (what was the old public operator)
  • Auction format: combinatorial first price auction. Aims to:
    • Encourage participation of small operators by unbundling the network
    • Benefit from coordination and scale and scope via package format
• Regarding initial concerns:
  • These are private value auctions so less risk of winner’s curse
    • Cantillon + Pesendorfer (2006): private information about opportunity costs
    • [ed: not sure here. would seem likely that there is a strong common component here]
  • No renegotiation of contracts: short term contracts and strong regulator
• Dataset: all auctions between March 2003 and May 2006 (294 individual routes)
  • all on the regulator’s website!
  • other information about the transport network
• Summary info:
  • Constant over time (unlike France)
  • Around avg 3 bidders per auction
  • Only 20% of auctions have one bidder
• Basic regression:
  • Av cost per mile (cpm) does decline with number of bidders
  • But clear endogeneity problem as av. bus miles correlated with number of bidders and costs
  • Deal with this by using predicted number of bidders based on number of operators in the vicinity of the route in the previous period.
  • However correlating actual and predicted number of bidders find -ve correlation (suggests people enter (and bid high) when the number of expected bidders is low and vice-versa)
    • confirms endogeneity of entry
• Results:
  • N effects bids in the way we would expect
  • Competition effect larger than (deterred-)entry effect
• Discussant comments:
  • Still carry some demand risk because demand may impact on cost of operation
  • Data on congestion would be useful

ALBERTO GAGGERO- UNIVERSITY OF ESSEX (with Claudio Piga): Pricing and competition on the UK- Irish aviation market

• Background
  • UK-Irish aviation market is largely dominated by Aer-Lingus (EI) and Ryanair (FR)
  • Ryanair launched takeover in 2006 but was blocked in 2007
• Test whether there is impact of competition
  • Plus a study with European data (most from US)
• Data
  • 84k flights
  • EI: 30%, FR: 55%, next biggest 10%
  • ~ 25 routes
  • Using web spider have full fares dataset
  • CAA: available seats, sold seats, flight frequency (aggregated)
  • Distance in km between 2 endpoints
• Put in most variables you could think of
• Endogeneity issues:
  • pricing and market structure may be simultaneously determined so do IV
  • IV approaches mostly based on the fact that the more likely one serves both ends of a route the more likely one serves that route
• Results:
  • (Surprisingly) market shares variables go wrong way (higher market share lower prices)
  • This holds with IVs or without
  • Different IVs do affect size of negativity but do not change the sign
  • (Route) market share up 1% reduces fares by 0.19% (Borenstein IVs) or 0.5% (their own IVs)
  • Check robustness (e.g. pooling all London airports)
  • All other regressors economically and statistically significant and of right sign

Session 2: Finance

ENRIQUE BENITO - FSA: Size, growth and bank dynamics

• Background
  • Banking in Europe has changed a lot (lots of deregulation)
  • Size in banking is important
  • Little examination of size of banks
  • General increase in concentration (more big banks)
  • Data on Spanish banks 1970-2006
• Traditional literature:
  • X-section regression to explain current sizes as function of underlying factors (and hence trends over time in size and concentration driven by these underlying factors)
• Here focus on classic Gibratian stochastic growth process (LPE)
  • S(i,t) = S(i,t)^beta exp(mu(i,t))
  • mu(i,t) = N(alpha(i) + delta(t), sigma)
• Predictions from LPE
  • P1: beta = 1
  • P2: No persistence in growth across periods (no correlation across periods)
  • P3: Variability of growth rates is independent of size
• If these hold (strong all 3, weak just P1) then growth rates of banks follow random walk with drift
• Data
  • Annual data for all banks
  • Reliable data maybe from 1980 so do everything both 1970-2006 and 1980-2006
  • Include firms that exit plus mergers [ed: not quite sure how they deal with mergers exactly]
• Results:
  • Beta less than 1 (significantly but not by much). Some (IMO) weak evidence that is has increased a little bit in more recent periods
  • Rho (measure of convergence) is significantly above 1 (which implies previous periods growth predicts growth today)
  • Heteroscedascity: yes (size matters)
  • Variability of growth: larger banks have more stable growth
  • So reject LPE over whole period but may be converging towards it over time
• Conclusion:
  • Size-growth relationships change over time
  • Converging towards LPE => more skewed size distribution in future (more concentration)

KAI KOHLBERGER - FSA (with Richard Johnson): Has MCOB regulation affected the suitability of subprime mortgage sales?

• Did introduction of new regulations (MCOB) affect mis-selling
  • Mortgages should be suitable (explicit defn)
• Approach
  • Look at arrears rate 12 months after sale
• Data
  • 15 firms, 590k mortgages
  • Regressions with 300k observations (due to missing values — check this is not systematic)
  • FSA Product sales database (PSD)
  • Macro vars
  • Subprime defined as in PSD
• Find no impact on arrears rates discernible from policy change

I’ll be giving a talk at Open Tech 2008 on Saturday (5th July) about some of the work I do at the Open Knowledge Foundation. The talk is entitled “Opening Data” and its rough subject is indicated by the blurb:

We all want more open data to analyse and mashup be it for urban planning or to better understand 12th Century Canon Law. But how do we go about reaching data ‘Nirvana’? What are the obstacles and why is openness so crucial to getting there? This talk explores these questions touching on some of the more prominent recent developments in the area along the way.

OpenTech/NotCon has been a great experience over the years and this time looks to be no exception.

Last week I attended FLOSS 2008, the second international workshop/network meeting on FLOSS (Free/Libre/Open Source software) in Rennes, France. I was presenting my paper Innovation and Imitation with and without Intellectual Property Rights (and would have offered discussant comments but the author of the paper I was scheduled to discuss had to pull out at the last minute). In addition to this I got to hear a variety of interesting talks. On some of these I was able to take notes which I have included below for the ‘delectation’ of anyone else who is interested.

Mikko Valimaki: IPR and Open Source Software

• Goodman and Myers (2005) — the 3G standard.
• Leveque and Meniere 2007: what does RAND mean
  • reasonable royalty is R = c (v1-v2)p where c is incremental costs of licensing, v1-v2 is gain from using this pattern over second-best.
• Other questions for royalty-setting
  • quality of volume of patents
  • early or late innovators
  • cumulative royalties or one-time fees
• But all models he knows of have non-zero royalty fees
  • [ed]: not surprising given that you will always get interior solutions
• Windows/Samba discussion
  • specific sets of terms
  • provide RF for the open source community
• Commission Decision para 783
  • “On balance, the possible negative impact of an order to supply on Microsoft’s incentives to innovate is outweighed by its positive impact on the level of innovation of the whole industry.”
• Nokia to acquire Symbian:
  • “a full platform will be available … under a royalty-free license … from the Foundation’s first day of operations … the Foundation will make selected components available as open source at launch.”
  • [ed]: Motivation here is clear: Nokia care about the hardware and for them software is a complementary good — which they therefore wish to be as cheap as possible. But this raises question as to what is being made open: is hardware patents or pure software patents (and if so how big a deal is this)

Stefan Koch: Efficiency of FLOSS Production

• Question of efficiency of open source development
• How much software did we get for our effort
  • Is OS a waste of resources?
• Discussion without much empirical basis
  • Claim: fast and cheap, high quality, finding bugs late is inefficient (actually large effort) — see IEEE Software 1999
• Completely unknown as no-one keeps time-sheets. So
  • Effort based on participation data
  • Effort based on product — look at software and ask how much effort would be needed in commercial environment
• Empirical research in open source
  • Mainly case studies
  • Helpful but need proper large-scale analysis
• Mined software repositories [ed: cf. today FLOSSMatrix, FLOSSMore]
  • 8,261 projects
  • 7,734,082 commits
  • 663M LOCs
  • resources and output is skewed: top decile of programmers: 79% of code base, second decile: 11%
• Effort estimation based on actual participation
  • active programmer months (define active as committing in a given month)
  • high correlation with LOC added in month
• Cumulate this number for each project
  • But not equal to a commercial person-month
  • How do we scale: use 18.4 h/w taken from stats for committers on Linux kernel
  • [ed:] this is the key assumption. The whole point is that FLOSS effort is not observed and they are using a measure of output (committing) and trying to infer actually activity
• Manpower function modelling:
  • Norden-Rayleigh model (1960)
  • Some set of problems N (unknown but finite)
  • Probs are solved independently and randomly (following Poisson)
  • This fits ok but has eventual decline in participation which does not occur
  • Modify this: in particular to allow introduction of new problems
    • Introduce in prop to original no. problems, in prop to current set of problems etc
    • Also have different learning rates
    • [ed: but isn’t the setup a little different. Really it is a question of success vs. non-success in terms of acquiring users + some kind of bound on amount of participation due either to fission or complexity]
• Product-based estimation
  • COCOMO 81 and COCOMO 2
• Results:
  • Comparison COCOMO - Norden-Rayleigh
  • For COCOMO 81 cannot find parameters favourable enough to explain Norden-Rayleigh curve
  • For COCOMO 2 can find parameters but very favourable
  • Suggest (roughly) that FLOSS very efficient (but not very rigorous)
• More formal estimation using all models etc
  • Norden-Rayleigh significantly below prodcut-based estimates (factor of 8 in mean)
• Interpretation
  • FLOSS v. efficient (self-selection for tasks etc)
  • Extremely high amount of non-programmer participation (1:7 relation …)
• [ed]: not sure about this generous view. Other explanations
  • No quality measurement (also mentioned by Koch)
    • OK: lot of code but low quality
  • (Related) Many sourceforge projects are incomplete, easy bit at the start
    • Later comes a lot of refactoring/writing documentation. This may display significant diminishing returns
  • Many FLOSS projects come from what were originally commercial projects. In that case:
    • code may have already been written
    • conceptual components have been done already
  • Trade-off of time vs. productivity
    • May be more productive to only work 10h a week but then product might not be ready for 10 years
• Form discussion
  • interesting point: Nokia thinking of moving to more FLOSS in-house because they can’t manage their 5-10k programmers centrally any more

Mickael Vicente: Shift to Competences Model: A Social Network Analysis of Open Source Professional Developers

• Robles 20007
  • Statistics on Debian showing increasing corporate involvement
• Social network extraction
  • Get repo logs
  • Create link between 2 developers if they have committed on the same file (non-directed graph)
    • Simplification: the best collaboration of each developer (directed graph) — pick other developer with whom they have committed most files in common
  • Longitudinal analysis
    • extract clusters
• Correlation with professional career
  • CV collected on Internet, personal web page etc (96% collected)
• Interesting data

Nicholas Radtke: What Makes FLOSS Projects Successful: An Agent-Based Model of FLOSS Projects

• Positive Characteristics of FLOSS
  • High quality (Low defect count: Chelf 2006)
  • Rapid development
  • Violates Brooks law (Rossi 2004)
  • Risky Business
• for every successful FLOSS project there are dozens of unsuccessful projects
• Corporate IT manager survey (2002)
  • 41% mention inability to hold someone responsible for software
• Attempts at Simulating FLOSS
  • SimCode (Dalle and David 2004)
  • OSsim (Waggstrom et al 2005)
  • …
  • K-Means stuff
• Simulate across landscape
  • Not social network
  • Focus on developer decision to join/contribute to projects (Agent-Based Modelling)
• Defining Success and Failure
  • Traditional metrics do not work well (on budget?)
  • Completion (Crowston et al. 2003)
  • Progression through maturity stages (Crowston and Scozzi 2002)
  • Number of developers
  • Mailing list activity
  • Project outdegree, Active developer count (Wang 2007)
• The Model Universe
  • Agents and projects
  • Agents:
    • Consumption: 0-1
    • Producer: 0-1
    • Resource: 0-1.5 (1=40h)
    • Memory: agents only aware of some subset of projects
    • Needs vector (preferences)
    • utility: linear sum of: similarity match + current popularity (current resources) + cumulative resources + download + f(maturity)
  • Projects:
    • resources needed
    • current resources
    • cumulative resources
    • download count
    • preferences: same as agent but converges towards those had by agents working on it
• Agents choose between projects each time period
  • have some randomness in that use multinomial logit: prob choose project i ~ exp(mu * Utility of project i)
• Results
  • Simulate over 250 time steps ~ 4 years
  • calibrate [ed: in a way I was not quite clear about]
  • compare simulation with empirical data from sourceforge
    • developers per project
    • projects per developer
  • Find that (from simulation data) downloads and cumulative resources are not important

Fabio Manenti: Dual Licensing in Open Source Software Markets

• Benefits of Going Open Source
  • feedback from community
  • network effects (usage)
  • competitive pressures (e.g. Netscape) [ed: not sure this is a benefit]
• Dual-licensing
  • Kosky (2007): 6% of representative sampl of European OSS business firms employ DL strategies

Alexia Gaudeul: Blogs and the Economics of Reciprocal (In-)Attention

• What blogs are
• Reasons for blogging
• Question: do you befriend (link) because of content produced or do you produce content because of friends
• General points
  • Market interactions only part of wider class of reciprocal relations
  • Time vs. money economics
  • Unique dataset, very detailed and complete, to test networked relations
• Model — but left out due to time
• Dataset: livejournal 2006
  • Sociology: teenagers to young adults (15 to 23), female (67\%), Americans (70\%)
  • Fast growth: created in 1999, 8M accounts, 1.3M active
  • FLOSS but for-profit (SaaS)
  • Great part from self-referential
  • Lively: 4 comments per post on average
  • Federated by communities: no. of communities per person 15
  • Journals updated for more than 2 years on avg
  • 70\% have posted in last 2 months
  • No. of entries: 1 every 2 days
  • No. of friends: 50 avg
  • Balance between friends and friends of
  • Balance between comments received / made
• Friendship patterns
  • May be balance but does not explain no. of friends of diff. individuals
  • Need to distinguish
    • Norm of reciprocity: more promiscuous bloggers accumulate friends
    • Content attractiveness
      1. Quality/freq. of posts
      2. Interactivity (comments per post)
• Regressions
  • Reciprocity: No. blogs read (friend) = b * number of readers (friend of) + error
  • Activity: No. readers = cX + error — X = matrix of ind. variables
  • Endogeneity issues [ed: all over the place)
  • Regress: ln(Friends) = ln(Friend of) + … (with instrumenting Friends Of on Activity so solve endogeneity issues)
    • Saturation around 400 friends seemingly (few with more)
  • Max no. of friendship when your no. friends = no. friends of (maybe)
    • A norm of reciprocity
  • Issues with endogeneity of activity (which was used to instrument friends of)

Sylvain Dejean

• Does ICT lead to the Internet lead to a global village or a cyber-balkan
• What leads to emergence of virtual commmunities
• Is the heterogeneity of contributions an impediment to self-organize
• How to manage virtual communities
• Agent-based model:
  • Individuals defined by some characteristics
  • Herfindahl index measures degree of self-organization [ed: why self-organization]
  • Communities change via selection and variation

Over the last couple of months for the purpose of my research on happiness/subjective-well-being I’ve been putting together some notes on theories of contextual judgement. The first part of these is now in a form suitable for public consumption and I’ve posted them at:

http://www.rufuspollock.org/economics/notes/theories-of-contextual-judgement/

For anyone with an interest in copyright issues, particularly in the online environment, there is an excellent event on today at the LSE organized by Ian Brown of the OII and at which I’ll be speaking (briefly) on the subject of “How can we maximise copyright’s return to society?” More details below.

Musicians, fans and online copyright

Wednesday 19 March 2008 14:00 - 17:00

• John Kennedy, CEO of IFPI
• Paul Sanders, Director of Strategy at Playlouder
• Becky Hogge, Open Rights Group
• Adrian Brazier, DBERR
• Lilian Edwards, Southampton University
• Rufus Pollock, Cambridge University
• Michelle Childs, Knowledge Ecology International
• Wendy Grossman, musician / freelance journalist

Location: Old Theatre, London School of Economics, Houghton Street, London, WC2A 2AE, United Kingdom.

This Wednesday afternoon we have a great selection of speakers for our free OII/LSE event on music and copyright. Come along to find out what the government, music industry, publishers and independent experts are thinking about ideas like 3-strikes-and-you’re-disconnected; scanning ISP traffic for copyright works; and notice and takedown regimes.

Full programme at: http://www.oii.ox.ac.uk/events/details.cfm?id=186

The second (or third depending on how you are counting) Open Knowledge Conference (OKCon) which is organized by the Open Knowledge Foundation and which I help coordinate is on tomorrow at LSE in London.

There are a lot of good sessions and so if you are interested in open knowledge and have Saturday free why not come along.