The Social Cost of Sharing
Hal R. Varian
University of California, Berkeley
Consumers often share intellectual property.
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 . 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?
THE BASELINE CASE
Suppose that there are
consumers, all of whom value
a potential product at
. The product costs
and can be produced a marginal cost of zero. Let
price at which the product is sold to the consumers. Then
if it (1) leaves the consumers with non-
negative surplus (
0) and (2) leaves the sellers with
non-negative surplus (
average development costs, we can write these conditions as
Any price in the interval
will result in the good
being produced and sold. In particular, this includes the
Research support from NS² grant SBR-9979852 is grate-
Yacov Yacobi provided very helpful
Prepared for the Workshop on Economics of Peer-to-Peer Systems, Berke-
ley, California, June 5-6, 2003.
and the regulated, zero-pro±t price
Now imaging that groups of consumers of size
share the price of the good among themselves, with each con-
. 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
units of good in total.
We suppose that sharing is an ineﬃcient technology, so
that the shared consumption incurs some transactions costs
. 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
the expected cost of a penalty.