s3-varian - The Social Cost of Sharing Hal R. Varian...

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The Social Cost of Sharing Hal R. Varian University of California, Berkeley Consumers often share intellectual property. Sometimes sharing is facilitated by intermediaries such as libraries, li- cense servers, used-book shops or video rental stores. Some- times sharing is illicit, such as with pirated software or Napster. Sometimes sellers of intellectual property welcome sharing, as with site licenses or special prices for libraries, and sometimes they discourage it. Intellectual property that is intended to be shared nor- mally sells for a higher price than intellectual property that is meant to be consumed by individuals. Think, for exam- ple, of the diFerential pricing of journal subscriptions for libraries and individual users. In other cases, such as books, sellers cannot easily discriminate between shared and indi- vidual users, so pricing tends to reflect the dominant use. I have examined the pricing behavior of pro±t-maximizing sellers of intellectual property when sharing is possible in Varian [2000]. Here I examine a related question: what kinds of products are not produced due to sharing? That is, what is the social cost of sharing? 1. THE BASELINE CASE Suppose that there are n consumers, all of whom value a potential product at v . The product costs D to develop, and can be produced a marginal cost of zero. Let p be the price at which the product is sold to the consumers. Then ap r ice p is viable if it (1) leaves the consumers with non- negative surplus ( v p 0) and (2) leaves the sellers with non-negative surplus ( pn D 0). Letting d = D/n be the average development costs, we can write these conditions as v p (1) p d. (2) Any price in the interval v p d will result in the good being produced and sold. In particular, this includes the Research support from NS² grant SBR-9979852 is grate- fully acknowledged. Yacov Yacobi provided very helpful commentsonanear l ierdra ft . Prepared for the Workshop on Economics of Peer-to-Peer Systems, Berke- ley, California, June 5-6, 2003. monopoly price p m = v and the regulated, zero-pro±t price p z = d . 2. SHARING Now imaging that groups of consumers of size k form that share the price of the good among themselves, with each con- sumer paying p/k . This could occur because the consumers require equal payments for sharing, or there are competitive intermediaries such as video stores. Due to this sharing, the seller will sell at most n/k units of good in total. . We suppose that sharing is an inefficient technology, so that the shared consumption incurs some transactions costs t . This transactions cost is the cost of returning the book to the library, the video to the rental store, or waiting until an item becomes available. It could also reflect an inferior quality of a shared product, as with truncated recordings on Napster, or even feelings of guilt from using a shared copy. Below I examine an interpretation in which the t is the expected cost of a penalty.
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This note was uploaded on 12/08/2011 for the course CS 525 taught by Professor Gupta during the Spring '08 term at University of Illinois, Urbana Champaign.

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s3-varian - The Social Cost of Sharing Hal R. Varian...

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