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Published on November 6, 2007

Author: Ming

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An Economic Response to Unsolicited Communication:  An Economic Response to Unsolicited Communication Agenda:  Agenda Description of the problem From regulatory and technical perspectives From an economic perspective Application of the Coase Theorem plus Signaling & Screening from information economics Comparison against idealized perfect filter and perfect tax. Cover surrounding issues of adoption, spoofing, free speech, viruses & spam zombies. Data on the Spam Problem:  Data on the Spam Problem Estimated yearly loss to business $20 billion (Ferris Rsch) Federal ‘Can Spam’ Act enacted in 2004 with near unanimous support; superceding 8 State laws (NYT) …but no impact (Pew Internet Report)  55% (Brightmail 2003) ,  77% (CDT 2004) of all email is now spam 29% of Americans report curtailing e-mail use (Pew Internet report) Zombies send 50-80% of all spam (FTC), 25% of US pc’s infected (Symantec) No consensus definition: 92% adult, 74% political/religious, 65% charities, 32% unsolicited + prior biz relation, 11% unsolicited + granted permission to market. 1/3 users clicked on link, 5% admit to purchase, 3% provided pers. info. (Pew) Spammer Alan Ralsky vowed to carry on (NYT) Existing or Proposed Solutions:  Existing or Proposed Solutions Legislative/Regulatory: Banning, labeling Taxation, stamps Technological: Filtering: Rule based (static or dynamic), Bayesian Filters, collective/community classification Challenge Response: quasi-Turing tests, return address testing, computational challenge Economic computational challenge Bonds Problems with Legislative Solutions:  Problems with Legislative Solutions Defining spam Whose definition? Regulating: Banning and labeling Enforceability, jurisdiction? Costly to police and adjudicate Labeling lacks incentive compatibility Exemptions for prior biz relations, political groups, … Taxing: e-stamps Blocks wanted along with unwanted email Blunts cost-effectiveness of email as medium Problems with Existing Solutions:  Problems with Existing Solutions Whose spam definition? Banning and labeling Enforceability, jurisdiction? Costly to police and adjudicate Labeling lacks incentive compatibility Exemptions for prior biz relations, political groups Taxing & e-stamps Blocks wanted along with unwanted email Blunts cost-effectiveness of email as medium Filtering (Rules, Collaborative, Bayesian): False positives, false negatives Increases spam email traffic (attempts to penetrate) Costly arms-race Consensus definition Blocks automated correspondence Challenge-Response (Reverse Turing Tests) Cheaply hire real people Unrecoverable costs Legislation Technologyy We Hate Spam, Congress Says (Except Ours) :  We Hate Spam, Congress Says (Except Ours) NYT 12/28/03 At least 40 House members have bought email addresses for “email appending,” the process of linking addresses to voter registration files in member districts. Technology: Smart Infrastructure:  Technology: Smart Infrastructure TCP/IP pattern detection – TarPit tie up server: 451 – Your spam is important to us. Please stay online… 451 – Your spam is important to us. Please stay online… 451 – Your spam is important to us. Please stay online… 451 – Your spam is important to us. Please stay online… 451 – Your spam is important to us. Please stay online… 451 – Your spam is important to us. Please stay online… Source: Martin Lamb – MIT Spam Conference 1/16/04 Technology: Smart Infrastructure:  Technology: Smart Infrastructure SMTP pattern detection – TarPit reject incoming mail: Error 452 – I don’t need any Viagra. Go Away. Source: Martin Lamb – MIT Spam Conference 1/16/04 Problems with Pure Technology Solutions:  Problems with Pure Technology Solutions Filtering (Rules, Collaborative, Bayesian): False positives, false negatives Increases spam email traffic (attempts to penetrate) Costly arms-race Consensus definition Blocks automated emails Challenge-Response (Reverse Turing Tests) Cheaply hire real people Unrecoverable costs CAPTCHAs:  CAPTCHAs Completely Automated Public Turing test to tell Computers and Humans Apart But, clever pornographers have inverted the weapon, simply routing the test to people for free porn. Filter vs. Filter:  Filter vs. Filter berkshire marriott wireless © 2004 John Graham-Cumming “How to beat an Adaptive Spam Filter” Warning: risqué!:  Warning: risqué! Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? “… get a rod like a firehose.” Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? Where is “v1@grya” or <naughty-body-part> ever used?:  Where is “v1@grya” or <naughty-body-part> ever used? A Flexible Spam Definition:  A Flexible Spam Definition Analogy: “I can not define obscenity but I know it when I see it” – Justice Potter Stewart Spam is “any email received that, if given choice and advanced knowledge of its content, the recipient would choose not to receive” What is spam?:  What is spam? Improving Welfare:  Improving Welfare In economic terms, spam is “message pollution” a negative externality arising from sender attempts to reach a tiny group of people who want their products. The approaches to pollution are filters, regulation, and … The Coase Theorem – Property Rights:  The Coase Theorem – Property Rights Resolve why the market failed… Old: Pigou’s theory that gov’t should force private parties to “internalize” externalities by means of taxes. New: Coase argues that affected parties can do so via trade and negotiation, if (1) property rights are well defined and (2) transaction costs are negligible. Regardless of initial assignment, the social outcome is at least as efficient. Nobel 1991 – “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.” No unilateral solution can do better. Improving Welfare:  Improving Welfare In economic terms, spam is “message pollution” a negative externality arising from sender attempts to reach a tiny group of people who want their products. The Coase Theorem: one solution is to define attention rights, i.e. create a mechanism to charge those who create waste. But assign property rights to recipients! A sender right to waste recipient time encourages extortion. Spammers just threaten to send more. Seems obvious, but no. Also interpreted as right to be heard. If transaction costs are high, assign rights to the party with higher costs of avoiding waste. Modeling the Message Value:  Modeling the Message Value Recipient only knows her r value after reading and incurring cost cr Filtering results in a fraction  of messages not getting through Terminology & Assumptions:  [r, r] and [s, s] are bounds on reader and sender values. Sender knows own value s and cost cs before sending, won’t send when s < cs. There may be good SG and bad SB sender distributions, sender knows from which distribution he draws. Recipient only knows her r value after reading and incurring cost cr . Filtering results in a fraction  of messages not getting through. Terminology & Assumptions Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s Incentive Compatible for Sender message is sent when s > cs sender expects positive payoff region of positive probability Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s region of positive probability Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s region of positive probability Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s Unsent email unsent when s < cs sender expects negative payoff region of positive probability Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s region of positive probability Modeling Email Value:  Modeling Email Value cr cs r cost to receive cost to send s cr = cs = r s r s region of positive probability Modeling Email Value:  Modeling Email Value Examples: project update from colleague long lost high school buddy friend’s wedding announcement shipping update from vendor recruiting lead from a friend favorable press story Examples: market research & focus groups polling persuasion, “vote for X” pornography message with attached virus phishing, Nigerian scam key logger, password stealer Examples: personalized loan app custom news subscription content sales leads Google Answers credit score Examples: embarrassing news sent to wrong person old news accidentally telling your boss what you really think Specific modeling assumptions are robust:  Specific modeling assumptions are robust cr cs r cost to receive cost to send s region of positive probability cr = cs = r s r s Derivation of Payoffs 2 :  Derivation of Payoffs 2 Baseline Recipient Surplus is Where Derivation of Payoffs:  Derivation of Payoffs Baseline Recipient Surplus : Baseline Sender Surplus: Total Welfare: Derivation of Payoffs 2 :  Derivation of Payoffs 2 Baseline Recipient Surplus is Where Derivation of Payoffs 3:  Derivation of Payoffs 3 Similarly, we can determine the Sender Surplus (SS) and the Social Welfare (SW) Social Welfare Contribution:  Social Welfare Contribution Received email northeast of the diagonal line makes a positive contribution to social welfare cr r W+ positive contribution to W negative contribution to W cs Welfare (W) = RS + SS RS = Recipient Surplus SS = Sender Surplus s Interpreting Existing Solutions:  Interpreting Existing Solutions cs cs+ tax r Flat Tax, Stamps, Challenges, & Criminalization Penalties loss Unwanted Unsent loss Criminalizing Spam, Do-Not-Spam Lists cs+ avoidance cost r loss Unwanted Unsent loss cs Interpreting Existing Solutions:  Interpreting Existing Solutions cs cs+ tax r Flat Tax, Stamps, Challenges, & Criminalization Penalties loss Unwanted Unsent loss cr SW+ s cs cs/n r Filtered Waste Unsent Filtering (all types) Good mail blocked Bad mail passed Existing Solutions 2:  Existing Solutions 2 Good mail blocked Bad mail passed Existing Solutions 2:  Existing Solutions 2 Perfect Filter:  Perfect Filter cr r SW+ s cs cs/ Filtered Received Definition: A technological filter that: Operates without cost Makes no mistakes (no false positives, no false negatives) Intuits and internalizes all reader preferences Eliminates, prior to receipt, any email where r < cr Unsent No Solution Baseline:  No Solution Baseline cs Unsent r s W+ cr sent email with positive contribution to W sent email with negative contribution W not sent (s < cs) unwanted by recipient (r < cr) Wanted Unwanted Interpreting Existing Solutions:  Interpreting Existing Solutions cs Wanted cs+ extra cost gain Unwanted Unsent loss r s W+ cr Interpreting Filtering:  Interpreting Filtering cr Filtered Waste Unsent gain loss Good mail blocked Bad mail passed cs/ W+ cs r s  : 0 <  < 1 email gets through Sender decision: send when E(gross return) – cost > 0 No filter E(gross return) is s, cost is cs  send when s – cs > 0 or s > cs With filter E(gross return) is s, cost is cs send when s – cs > 0 or s > cs/ Perfect Filter:  Perfect Filter Definition A technological filter that: Operates without cost Makes no mistakes (no false positives, no false negatives) Intuits and internalizes all reader preferences Eliminates, prior to receipt, any email where r < cr Filtered Unsent gain loss Wanted cs/ W+ cs r cr With a Perfect Filter A Lot of Value is Wasted:  With a Perfect Filter A Lot of Value is Wasted A perfect filter: Operates without cost Makes no mistakes (no false positives, no false negatives) Discards any email where r < cr Unsent Wanted W+ cs r cr Sent & Filtered Sent & Pure Waste UnSent & Wanted But a filter: Allows no negotiation Never helps generate new content you do want And can’t transfer value from legitimate senders = unrealized positive value Reverse Signaling – Buying Leads:  Reverse Signaling – Buying Leads Judson Brady, the owner of Broad Street Flowers, pays Ingenio around $4.15 for each call from a prospect. NYT Feb 27, 2006 Google Answers lets you pledge your credit card as bond for getting answers to critical questions. Slide57:  “In terms of individual and aggregate social welfare, a system that facilitates valuable exchange will generally dominate a system that grants unilateral veto power to either party” Not all filtered email is waste:  Not all filtered email is waste cr r SW+ s = positive contribution to welfare = negative contribution to welfare = not sent (s < cs) Unwanted cs = unwanted by recipient (r < cr) Unsent Consider a “Quality E-Mail Guarantee”:  Consider a “Quality E-Mail Guarantee” A contingent liability with an expiration date. Limited credit. Initially, the sender has better information than the receiver on the probable value of the message… so, using principles of information asymmetry, force them to reveal that private knowledge: If it’s not waste, don’t destroy it:  If it’s not waste, don’t destroy it cr r SW+ s Unwanted cs Unsent filter nothing set warranty = 0 Problem: How do you reveal information without negotiation?:  Problem: How do you reveal information without negotiation? Signaling & Screening:  Signaling & Screening Signal: information conveyed by a knowledgeable party that is credible because it is costly to fake. Screen: a device used by uninformed parties to sort others in the market by offering them different options. A choice reveals the hidden private information. Nobel 2001 –“for their analyses of markets with asymmetric information” The right spam mechanism sorts based on intent not content. Akerlof Spence Stiglitz Consider an “Attention Bond”:  Consider an “Attention Bond” Simple screening mechanism applied to unrecognized senders. Challenge demands an escrowed bond fee of amount . Recipient has sole discretion to claim or return , with expected bond forfeiture b=p, all proceeds go to recipient Effects: A recipient-controlled variable ‘tax’ on senders, based on sender behavior Shift task from ex ante classification (hard) to ex post verification (easy). Compensates recipient directly for any wasted time Initially, the sender knows more about message content than the receiver, so force them to reveal that private knowledge: Consider an “Attention Bond”:  Consider an “Attention Bond” Recipient sets screen, chooses bond size bi. Unknown senders must post bond bi to get through. On reading message, recipient chooses to claim or return bi, with expected bond forfeiture i =pibi . Effects: Seized bonds are side-payments -- increase recipient willingness to accept low value messages. Bond choice functions as a (weak) price signal indicating recipient type. Willingness to post bond signals sender private knowledge of message value. Shift task from ex ante classification (hard) to ex post verification (easy). If the sender knows more about message content than the receiver, force him to reveal that private knowledge: The ABM in Action:  The ABM in Action No intervention baseline:  No intervention baseline Reader Surplus defined: Baseline surplus The Reader’s choice of screen:  The Reader’s choice of screen Reader Surplus defined: Warning: economics!:  Warning: economics! The Reader’s choice of bond:  The Reader’s choice of bond Reader Surplus defined: The Perfect Filter:  The Perfect Filter Reader Surplus defined: Reader Surplus: Bonding wins if: Perfect Filter: Send if: Social Planner’s choice of bond:  Social Planner’s choice of bond Welfare defined: Optimal bond: Always: The socially optimal bond depends only on reader attributes, providing a subsidy if reader surplus is positive and compensation if surplus is negative. It is the ideal Pigouvian tax for homogeneous senders and receivers. Choosing the expected bond size b = p.:  Choosing the expected bond size b = p. Recipient Payoff:  Unsent Recipient Payoff cr r s cs For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted W+ Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ Now transfer p where p >0,  > 0 Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r W+ p increasing… Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ p increasing… Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ p increasing… Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ Recipient Payoff:  Unsent Recipient Payoff For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p. Positive payoff to recipient Negative payoff to recipient Unwanted Wanted cs+p cr -p r s W+ Consider an “Attention Bond”:  Consider an “Attention Bond” A contingent liability with an expiration date. Limited credit. Initially, the sender has better information than the receiver on the probable value of the message… so, using principles of information asymmetry, force them to reveal that private knowledge: So why not just seize the bond all the time?:  So why not just seize the bond all the time? Policies:  Policies Let a policy be any decision rule that results in a specific ex post probability p of seizing the bond. Examples Always seize it. Only seize for spam. Only seize for the most offensive spam. Only seize it for your buddies… So let the expected b=p where  is the ex ante choice of bond fee and p is the ex post policy on seize rate. Policy Independence:  Policy Independence The seizure policy is self-correcting. In fact, the optimal choice is a bond and policy pair (, p) that are reciprocal. If others know you always seize the bond, you must choose a lower bond or you hurt yourself in terms of losing messages you would have preferred to receive. Claim: policy seize rate is self-correcting:  Claim: policy seize rate is self-correcting In fact, the optimal choice is a bond fee and policy pair (, p) that are reciprocal. If others know you always seize the bond, you must choose a lower bond or you reduce your welfare in terms of losing messages you would have preferred to receive. Proposition: Policy Independence (English):  Proposition: Policy Independence (English) Let there be an arbitrary number N of good and bad sender distributions, then… Subject to boundary conditions, it is possible to arbitrarily choose the bond size or the seize rate for any one distribution and still receive the maximum reader surplus. Proposition: Policy Independence (Math):  Proposition: Policy Independence (Math) and Subject to boundary conditions, Proof: Policy Independence:  Proof: Policy Independence where Policy Independence: Interpretation:  Policy Independence: Interpretation 1 0 1 0 A B C D Comparison of Bond to PF 2-Distribution Case:  G distribution expected to be mostly ‘Good’ B distribution expected to be mostly ‘Bad’ Sender does not know r Sender knows to which distribution (G or B) his email belongs Comparison of Bond to PF 2-Distribution Case Bond permits discriminatory costs:  Bond permits discriminatory costs More costly for spammers due to being collected more often Separating Equilibrium:  Separating Equilibrium if The expected bond forfeiture on distribution SG is less than SB, so long as the difference in max sender values is less than the difference in mean range of reader values. Consider classes of good G and bad B senders .:  Consider classes of good G and bad B senders . Distribution G:  G Distribution G cr r s cs “Good” W+ Distribution B:  B Distribution B cr r s cs “Bad” W+ G Sent with Attention Bond:  G G Sent with Attention Bond cr r s cs cs + pg For each distribution, the recipient can choose a policy with a seize probability px Unsent G W+ B Sent with Attention Bond:  B Sent with Attention Bond B cr r s cs cs + pb Unsent B For a mostly unwanted email distribution, the recipient is best off if they seize with a high probability (greater p product) W+ Welfare Basis - Attention Bond:  Welfare Basis - Attention Bond B cr r s cs cs + pb G cs + pg  W+ Welfare Basis - Perfect Filter:  Welfare Basis - Perfect Filter Welfare Basis – Good & Bad E-Mail:  Welfare Basis – Good & Bad E-Mail Attention Bond Perfect Filter Warranty vs. Computation:  Warranty vs. Computation Computation is a tax with no benefit to redistribute Transfers create the possibility of wealth through trade and it doesn’t need to be $. It can be frequent flyer points, credit, an option on computation, etc… Anything of value. Adoption effects are stronger, you’re getting paid! Readers can adjust screen to their own private value, why does the value of your wasted time depend on someone else’s costs? All in-bound mail treated equally but warranties promote higher penalties for the bad guys. Computation is more susceptible to viral attack: you may be able to steal CPU cycles without the victim noticing (like they do now!) but probably not $. Easily “signals” really important messages. What about e-stamps?:  What about e-stamps? A stamp can look like a quality email guarantee if the recipient gets the proceeds (not ISP or gov’t) the recipient chooses how much the postage costs the recipient can costlessly refund the postage a whitelist exempts familiar senders … but then why not just use a guarantee? But what about…:  But what about… Infrastructure Solvable: Already demonstrated by phone systems that bill to the minute, millicent, PayPal, etc. Micropayment failure Reasons weren’t technological but economic Par value Opportunity costs Inefficient 2-sided network effects Fraud and Viruses Easy: there’s so much value, indemnify users just like credit card companies do. Policy Independence:  Policy Independence Choose any one p or choose  (subject to boundary conditions) No social inefficiency for adding as many distributions as you want (true for readers and senders). Each distribution can be separately optimized Policy can be adjusted to individual senders, not just “spammers” and “good-guys” Contrast to filter, which suffer from dramatically increased type 1 and type 2 errors with more distributions There is no incentive to misappropriate the bond ex-post Caveats and Adoption Issues:  Caveats and Adoption Issues “Bottom Chop” for risk-averse Email with high r but low s not sent (similar to a tax) Infrastructure Escrow service(s), payment network Protocol modifications (SMTP/S-MIME) Server infrastructure, Whitelist management Strong or “stronger” identities, authentication required Info bond infrastructure Transaction Costs Low-cost, high-volume transaction system (self contained?) Network Effects Market fracture could slow adoption How about the perfect Pigouvian tax for heterogenous senders & receivers?:  How about the perfect Pigouvian tax for heterogenous senders & receivers? Interpreting Existing Solutions:  Interpreting Existing Solutions cs cs+ tax r Flat Tax, Stamps, Challenges, & Criminalization Penalties loss Unwanted Unsent loss cr SW+ s cs cs/n r Filtered Waste Unsent Filtering (all types) Good mail blocked Bad mail passed Introduce Recipient Hetereogeneity:  Introduce Recipient Hetereogeneity Two kinds of Senders, G and B’s (GM & BMW cars, Girls & Boys, Green & Blue) For T sender types, have (2T-1) who like any given subset. The message prevalence is  for G and (1-) for B Three kinds of Recipients: Type G Likes G’s messages Type B Likes B’s messages Type U Likes all messages User prevalence is  for G,  for B, and (1- -) for U WLOG, let welfare of G ≥ welfare of B transactions. Recipients can act strategically. Slide110:  cs cr r s cs cr B cr r s cs cr G B cr r s cs cr G G B Type B Recipients Type G Recipients Type U Recipients Received value depends on match Total Baseline Welfare:  Total Baseline Welfare All G transactions: All B transactions: Misdirected G & B mail: If G and B senders mail the population, surplus from all G, B and U transactions is: A tax is only effective when Waste from misdirected mail exceeds the value of B transactions Tax hits B senders first: (1-)sB – cs < (1-) sB – cs Slide112:  cs cr r s cs cr B cr r s cs cr G B cr r s cs cr G B Type B Recipients Type G Recipients Type U Recipients Tax eliminates B senders and recipients tax tax G Slide113:  cs cr r s cs cr cr r s cs cr G B cr r s cs cr B Type B Recipients Type G Recipients Type U Recipients The ABM facilitates targeting G Alternative Model – Flat Tax:  Alternative Model – Flat Tax cr r Messages that type B like Messages that type G like cs Two classes of Senders, G and B s cs cr B Messages that are not liked Three classes of Recipients: Likes G’s messages Likes B’s messages Likes all messages (same values) tax tax Alternative Model – ABM:  Alternative Model – ABM Distinct bond values uniquely distinguish recipients, allow senders to perfectly target, eliminating all mistargetting (spam) costs Strategic Decisions Recipients can set bond value to that of another type to get messages (and bonds) of that type This causes mistargetting (spam) costs ABM vs. Pigouvian Flat Tax:  ABM vs. Pigouvian Flat Tax Proofs of separating and pooling equilibria available in the paper. Bond vs. Tax:  Bond vs. Tax †There exist specific exceptions. Proofs of separating and pooling equilibria available in the paper. ABM:  ABM Proposition: If recipient types choose distinct bond values, then the ABM results in first-best welfare. Intuition: No unnecessary costs from mistargetting, all transactions complete, separating equilibrium. Conditions: When bond values are low relative to message values (test condition inequalities available) ABM:  ABM Proposition: If either bB or bG are distinct, then welfare under the ABM dominates that under a flat tax. Intuition: Choosing to pool internalizes the costs of mistargetting caused by pooling, else you could choose “limit bonds” Welfare Analysis:  Welfare Analysis Proposition: Social welfare under attention bonds exceeds that under a tax, unless type B recipients forgo B messages solely to poach G bonds. Intuition: If either {B} or {G} separate then targeting improves sufficient to improve welfare. If {B, G} pool, both must consent. G recipients can always separate by choosing a “limit bond.” If B senders mail to a {G,B} pool, B transactions value must exceed the waste. A tax destroys welfare. If B senders do NOT mail to a {G,B} pool, mail from G to B creates uncompensated waste. A tax improves welfare. ABM:  ABM Proposition: Only if type B recipients are completely willing to forgo their own message value in favor of G’s, can the ABM create less welfare than the ideal tax. Intuition: The only time it can lose occurs when no type B matches happen and G senders waste bonds on B recipients. Why Not Seize the Bond?:  Why Not Seize the Bond? First Contact Moral Hazard Releasing the bond is also a signal Credibly distinguish your type in any pooling equilibrium. In computer science vernacular, to separate yourself from a “honeypot.” Investment in reputation, Competition, Bi-directional communications, etc. Information Entering the Market:  Information Entering the Market Recipient: bond choice bi serves as a (weak) price signal of recipient type. Sender: posting bond bi serves as a credible signal of sender belief in a match. Recipient: For pooling equilibria, refund i =pibi is a credible signal of a match. Adoption, Infrastructure & Policy Issues:  Adoption, Infrastructure & Policy Issues Slide125:  Product Category Mkt 1 Product Intermediary Mkt 2 Product * Indicates which market is discounted, free or subsidized. Source: Parker & Van Alstyne 2002 2-Sided Network Effects are Common Managing 2-Sided Network Effects:  Managing 2-Sided Network Effects Region I  Charge Consumers  Charge Producers Region II  Subsidize Consumers  Charge Producers Region III  Charge Consumers  Subsidize Producers Region IV – Subsidize both (bad idea) Adobe PDF E-Bay Classifieds Credit Card Issuers TV & Radio Magazines Newspapers Games Operating Systems Consumers Providers I II III IV Platform intermediary should: Consider Advantages for Commerce: Direct Marketing:  Consider Advantages for Commerce: Direct Marketing Cheaper than traditional mail channels Receiver gets the benefit, not printer or mailer, no environmental waste. More information & preference feedback than TV, Radio, Snail Mail, or Magazines Lists are self-cleaning Consider Advantages for Users:  Consider Advantages for Users When someone outside the ABM network 1st reaches someone inside, they get a challenge saying “adopt this and get”: Your message delivered Your spam eliminated No need to do this again ever for anyone in the network And a free bank account where marketers can drop nickels. Steps to Adoption:  Steps to Adoption Convergence on standard (e.g. Peppercoin, Millicent, Digicash, Vanquish) Establishment of financial intermediaries (e.g. PayPal, Credit Cards  ISPs, Microsoft, Google, Amazon) Consumer client & server rollout MS adopts IronPort “bonded sender” program for MSN & Hotmail:  MS adopts IronPort “bonded sender” program for MSN & Hotmail $500 bond / 500,000 messages, $20 debit / complaint > threshold. With “application” fee, Generic Viagra no longer economical. But Closed system Not challenge all strange email 3rd party gets bond No individual tailoring Reuters May 5, 2004 Top E-Mail Senders:  Top E-Mail Senders Source: Ironport < www.senderbase.org > Rebuttals:  Rebuttals All truth passes through three stages.  First, it is ridiculed.  Second, it is violently opposed.  Third, it is accepted as being self-evident. :  All truth passes through three stages.  First, it is ridiculed.  Second, it is violently opposed.  Third, it is accepted as being self-evident.  Arthur Schopenhauer 1788-1860 Obj: Great! I’ll set up a honeypot and retire.:  Obj: Great! I’ll set up a honeypot and retire. Q: As a marketer, what’s your incentive to indiscriminately mail bonds to buyers in the presence of honeypots? A: None. Rather you’ll target bonded messages to prospective buyers with the highest interest. This is exactly what should happen. Forcing marketers to internalize the costs of wasteful messages causes them to produce less waste. Obj: If you can spoof it won’t work; if you can’t spoof you don’t need it.:  Obj: If you can spoof it won’t work; if you can’t spoof you don’t need it. False on both counts. If you can spoof, all messages look like 1st contact. If you can not spoof, do not confuse (i) verifying an address with (ii) authenticating a user Cannot work (see “Social Cost of Cheap Pseudonyms”). Undesirable! You lose Pentagon Papers, Watergate, Enron whistle- blowing, Halloween document… any free speech where the sender doesn’t want to be identified! Obj: Doesn’t risk limit free speech?:  Obj: Doesn’t risk limit free speech? Free speech is the only criterion on which no intervention beats bonds, filters and taxes. Perfect Filter: given 74% think political & non-profit speech is spam, much never gets through. Perfect Tax: always collected ex ante vs. 74% who collect under ABM – and always get through. Would you want Yahoo!, AOL-Time-Warner, or Microsoft determining the content you receive? The ABM is completely decentralized and content neutral; no one person, institution, or policy determines the content you hear. Legitimate senders face lower barriers than under filters or taxes. Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare!:  Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare! The FTC weighs in:  The FTC weighs in Address the problem before it starts!:  Address the problem before it starts! In economic terms, this is a moral hazard problem. Not bearing the costs of the waste their infected machines create, owners are insufficiently motivated (or able) to clean them. We need fraud protection… Just like credit cards, ISPs can afford to offer say $5 insurance provided ISPs can keep users’ antiviral software up to date. Attacks are detected faster. Virus propagation slows. Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare!:  Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare! In economic terms, this is a moral hazard problem. Not bearing the costs of the waste their infected machines create, owners are insufficiently motivated (or able) to clean them. We need fraud protection… Just like credit cards, ISPs can afford to offer say $5 insurance provided ISPs can keep users’ antiviral software up to date. Policy & Enforcement Issues:  Policy & Enforcement Issues Applicable to Do-Not-Call / Do-Not-Spam lists. Need consumer fraud protection analogous to that for Credit Cards Severe penalties for spoofing and misuse of 3rd party IDs Need escrow account clearing analogous to Automated Clearing House (ACH) for checks Need pro-competitive open standards Need for privacy regulation on transactions Boon to commerce: replace threat of communications veto with option for fruitful exchange Additional Social Benefits:  Additional Social Benefits Direct marketing Cheaper than traditional mail channels Receiver gets the benefit, not printer and mailer Provides information feedback & self-cleaning lists Avoids harmful reputation effects Recipients have reason to publish contact information, not hide it Shifts arms race to crypto. Permits communication otherwise filtered (e.g. political speech) Allows anonymous and whistleblower communication not possible with strong identity systems. Tailors to an individual’s unique preferences. Reclaims the value of your address for you rather than the marketers. Helps you get off any list you don’t want to be on. Conclusions:  Conclusions Screening action of bond forces senders to reveal their intentions. Bond size & seizure functions as signal to senders. Creates possibility of greater trade volume, with both parties wanting to participate -> win-win communication. Facilitating wealth transfers benefits readers more than unilateral veto. Can beat a Perfect Filter & Perfect Tax. Shifts the arms-race to crypto Content neutral and decentralized with respect to free speech. Returns control of the mailbox to its owner Can reduce spread of viruses and spam zombies Concluding Remarks:  Concluding Remarks Define “spam” as information pollution. Property rights then provide price signals and let one side purchase a fraction of the other side’s call externality. Revealed information can potentially include (i) recipient type (ii) sender type (iii) successful 3rd party match (not modeled). Taxes and filters, in contrast, block communication and provide no information to the market. Filters offer no side-payments. Side-payments can cause recipients to act strategically. Combined with a 2-sided insurance market, can reduce spread of viruses and spam zombies Questions?:  Questions? For further info see: “An Economic Response to Unsolicited Communication,” Loder, Van Alstyne, Wash. http://bepress.com Popular article – on request. Slide147:  This email was just   sent to 10 million people.    You and about 2 million others just clicked on it without having any idea what it was about. That means that some  2 million-odd people are reading this email, looking at a stupid cow and witnessing firsthand the udder power of email marketing. We want to offer you the Right System: one that's Affordable, Duplicatable, and really pulls Results: Create hundreds of interested Customers per week for any business 98% Automated Marketing Pays in your Sleep Looking for your own business? We'll work with you 24/7 to make you $10k per month, AVERAGE $3000 your first week. CLICK HERE RIGHT NOW

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