All research
Papers
Incentive-Centered Design for Security (Download full paper)
Jeffrey MacKie-Mason
Published on: July, 2009
Using Uncensored Communication Channels to Divert Spam Traffic (Download full paper)
Chiao, Benjamin and MacKie-Mason, Jeffrey K.
Published on: March, 2009
Abstract: We offer a microeconomic model of the two-sided market for the dominant form of spam: bulk, unsolicited, and commercial advertising email. Most most spam is advertising, and thus should be modeled as a problem in the market supply and demand for advertising, rather than the usual approach of modeling spam as pure social cost to be eliminated. We adopt an incentive-centered design approach to develop a simple, feasible improvement to the current email system using an uncensored (open) communication channel. Such a channel could be an email folder or account, to which properly tagged commercial solicitations are routed without any blocking or filtering along the way. We characterize the circumstances under which spammers would voluntarily move much of their spam into the open channel, leaving the traditional email channel dominated by person-to-person, non-spam mail. We show that under certain conditions all email recipients are better o when an open channel is introduced. Only recipients wanting spam will use the open channel enjoying the less disguised messages and cheaper sale prices, and for all recipients the dissatisfaction associated with both undesirable mail received and desirable mail filtered out decreases.
A Social Mechanism for Supporting Home Computer Security (Download full paper)
Rick Wash and Jeffrey K. MacKie-Mason
Published on: October, 2008
Abstract: Hackers have learned to leverage the enormous number of poorly protected home computers by turning them into a large distributed system (known as a botnet), making home computers an important frontier for security research. They present special problems: owners are unophisticated, and usage profiles are varied making onesize-fits-all firewall policies ineffective. We propose a social firewall that collects security decisions and both user and usage characteristics, and provides users with personalized information to assist with allow/deny recommendations. To succeed, a social firewall must deal with at least three user behavior issues: why contribute private information? why make effort to provide quality information? and, how to prevent manipulation by adversaries? We sketch an incentive-centered design approach to each problem. We provide an economic model and some analytic results for a solution to the fundamental problem: why contribute? We show that an excludable public goods mechanism can achieve a better outcome than a system without social motivators.
Why Share on Peer-to-Peer Networks? (Download full paper)
Lian Jian and Jeffrey K. MacKie-Mason
Published on: August, 2008
Abstract: Prior theory and empirical work emphasize the enormous free-riding problem facing peer-to-peer (P2P) sharing networks. Nonetheless, many P2P networks thrive. We explore two possible explanations: private provision of public goods and generalized reciprocity. We investigate a particular form of private incentives to share content: redistributing traffic in the network to the advantage of the sharing peer. Our preliminary model suggests that this incentive is likely insufficient to motivate equilibrium content sharing in large networks. We then approach P2P networks as a graph-theoretic problem and derive sufficient conditions for sharing and free-riding to co-exist in the absence of direct sharing benefits or an explicit incentive mechanism.
Bidding Strategies for Simultaneous Ascending Auctions (Download full paper)
Michael P. Wellman, Anna Osepayshvilli, Jeffrey K. MacKie-Mason and Daniel Reeves
Published on: January, 2008
Abstract: Simultaneous ascending auctions present agents with various strategic problems, depending on preference structure. As long as bids represent non-repudiable offers, submitting noncontingent bids to separate auctions entails an exposure problem: bidding to acquire a bundle risks the possibility of obtaining an undesired subset of the goods. With multiple goods (or units of a homogeneous good) bidders also need to account for their own effects on prices. Auction theory does not provide analytic solutions for optimal bidding strategies in the face of these problems. We present a new family of decision-theoretic bidding strategies that use probabilistic predictions of final prices: self-confirming distribution-prediction strategies. Bidding based on these is provably not optimal in general. But evidence using empirical game-theoretic methods we developed indicates the strategy is quite effective compared to other known methods when preferences exhibit complementarities. When preferences exhibit substitutability, simpler demand-reduction strategies address the own price effect problem more directly and perform better.
User cost, usage and library purchasing of electronically-accessed journals (Download full paper)
Robert S. Gazzale and Jeffrey K. MacKie-Mason
Published on: January, 2008
Security When People Matter: Structuring Incentives for User Behavior (Download full paper)
MacKie-Mason, Jeffrey K. and Wash, Rick
Published on: January, 2007
Abstract: Humans are “smart components” in a system, but cannot be directly programmed to perform; rather, their autonomy must be respected as a design constraint and incentives provided to induce desired behavior. Sometimes these incentives are properly aligned, and the humans don’t represent a vulnerability. But often, a misalignment of incentives causes a weakness in the system that can be exploited by clever attackers. Incentive-centered design tools help us understand these problems, and provide design principles to alleviate them. We describe incentive-centered design and some tools it provides. We provide a number of examples of security problems for which Incentive Centered Design might be helpful. We elaborate with a general screening model that offers strong design principles for a class of security problems.
Incentive-Centered Design for Information Security (Download full paper)
Rick Wash and Jeffrey K. MacKie-Mason
Published on: July, 2006
Abstract: Humans are "smart components" in a system, but cannot be directly programmed to perform; rather, their autonomy must be respected as a design constraint and incentives provided to induce desired behavior. Sometimes these incentives are properly aligned, and the humans don't represent a vulnerability. But often, a misalignment of incentives causes a weakness in the system that can be exploited by clever attackers. Incentive-centered design tools help us understand these problems, and provide design principles to alleviate them. We describe incentive-centered design and some tools it provides. We provide a number of examples of security problems for which incentive- centered design might be helpful. We elaborate with a general screening model that offers strong design principles for a class of security problems.
Online Fund-Raising Mechanisms: A Field Experiment (Download full paper)
Yan Chen, Xin Li, and Jeffrey K. MacKie-Mason
Published on: January, 2006
Abstract: We implemented one of the first web-based online field experiments of fund-raising. We embedded our experiment in the Internet Public Library to test comparatively four mechanisms: Voluntary Contribution (VCM), Premium, Seed Money and Matching. The Premium and Matching mechanisms each generate higher contribution rate than VCM, while the gift size is not significantly different across mechanisms. Because this is one of the earliest embedded, web-based field experiments we report our methodology findings in some detail. Using pop-up windows and asking for non-privacy-invasive geographic information were ineffective as participant assignment techniques. Evidence of desire to donate inferred from participant clickstream data is a poor predictor of actual giving.
Manipulating Interface Standards as an Anti-Competitive Strategy (Download full paper)
Jeffrey K. MacKie-Mason and Janet S. Netz
Published on: January, 2006
Abstract: The creation of interface standards enables competition at the level of components, rather than competition in complete systems. Consumers often benefit from component competition. However, the standard-setting process might be manipulated to achieve anticompetitive ends. We consider the conditions under which a standards consortium could impose anticompetitive burdens on the market, and several strategies such a consortium might employ to achieve anti-competitive objectives. We present a new strategy -- one-way standards -- and discuss the conditions under which it can be anticompetitive.
Self-Confirming Price Prediction for Bidding in Simultaneous Ascending Auctions (Download full paper)
Anna Osepayshvili, Michael P. Wellman, Daniel M. Reeves, and Jeffrey K. MacKie-Mason
Published on: July, 2005
Abstract: Simultaneous ascending auctions present agents with the exposure problem: bidding to acquire a bundle risks the possibility of obtaining an undesired subset of the goods. Auction theory provides little guidance for dealing with this problem. We present a new family of decisiontheoretic bidding strategies that use probabilistic predictions of final prices. We focus on selfconfirming price distribution predictions, which by definition turn out to be correct when all agents bid decision-theoretically based on them. Bidding based on these is provably not optimal in general, but our experimental evidence indicates the strategy can be quite effective compared to other known methods.
Automated Markets and Trading Agents (Download full paper)
Jeffrey K. MacKie-Mason and Michael P. Wellman
Published on: April, 2005
Abstract: Computer automation has the potential, just starting to be realized, of transforming the design and operation of markets, and the behaviors of agents trading in them. We discuss the possibilities for automating markets, presenting a broad conceptual framework covering resource allocation as well as enabling marketplace services such as search and transaction execution. One of the most intriguing opportunities is provided by markets implementing computationally sophisticated negotiation mechanisms, for example combinatorial auctions. An important theme that emerges from the literature is the centrality of design decisions about matching the domain of goods over which a mechanism operates to the domain over which agents have preferences. When the match is imperfect (as is almost inevitable), the market game induced by the mechanism is analytically intractable, and the literature provides an incomplete characterization of rational bidding policies. A review of the literature suggests that much of our existing knowledge comes from computational simulations, including controlled studies of abstract market designs (e.g., simultaneous ascending auctions), and research tournaments comparing agent strategies in a variety of market scenarios. An empirical game-theoretic methodology combines the advantages of simulation, agent-based modeling, and statistical and game-theoretic analysis.
Exploring bidding strategies for market-based scheduling (Download full paper)
Daniel M. Reeves, Michael. P. Wellman, Jeffrey K. MacKie-Mason, and Anna Osepayshvili
Published on: March, 2005
Abstract: A market-based scheduling mechanism allocates resources indexed by time to alternative uses based on the bids of participating agents. Agents are typically interested in multiple time slots of the schedulable resource, with value determined by the earliest deadline by which they can complete their corresponding tasks. Despite the strong complementarity among slots induced by such preferences, it is often infeasible to deploy a mechanism that coordinates allocation across all time slots. We explore the case of separate, simultaneous markets for individual time slots, and the strategic problem it poses for bidding agents. Investigation of the straightforward bidding policy and its variants indicates that the efficacy of particular strategies depends critically on preferences and strategies of other agents, and that the strategy space is far too complex to yield to general game-theoretic analysis. For particular environments, however, it is often possible to derive constrained equilibria through evolutionary search methods.
Price Prediction Strategies for Market-Based Scheduling (Download full paper)
MacKie-Mason, Jeffrey K. Osepayshvili, Anna Reeves, Daniel M. Wellman, Michael P.
Published on: June, 2004
Abstract: In a market-based scheduling mechanism, the allocation of time-specific resources to tasks is governed by a competitive bidding process. Agents bidding for multiple, separately allocated time slots face the risk that they will succeed in obtaining only part of their requirement, incurring expenses for potentially worthless slots. We investigate the use of price prediction strategies to manage such risk. Given an uncertain price forecast, agents follow simple rules for choosing whether and on which time slots to bid. We find that employing price predictions can indeed improve performance over a straightforward baseline in some settings. Using an empirical game-theoretic methodology, we establish Nash equilibrium profiles for restricted strategy sets. This allows us to con- firm the stability of price-predicting strategies, and measure overall efficiency. We further experiment with variant strategies to analyze the source of prediction's power, demonstrate the existence of self-confirming predictions, and compare the performance of alternative prediction methods.
Electronic Scientific, Technical, and Medical Journal Publishing and Its Implications (Download full paper)
MacKie-Mason, Jeffrey K. and Committee on Electronic Scientific, Technical, and Medical Journal Publishing
Published on: January, 2004
Abstract: The Symposium on Electronic Scientific, Technical, and Medical (STM) Journals and Its Implications addressed five key areas. The first two areas addressed--costs of publication and publication business models and revenue--focused on the STM publishing enterprise as it exists today and, in particular, how it has evolved since the advent of electronic publishing. The following section reviewed copyright and licensing issues of concern to the authors and to universities. The final two sessions looked toward the future, specifically, at what publishing may be in the future and what constitutes a publication in the digital environment.
What to do About Unilateral Refusals to License? (Download full paper)
Jeffrey K. MacKie-Mason
Published on: January, 2002
Abstract: There are well-known circumstances under which unilateral refusals to license will cause harm to competition, that is, will lower consumer welfare. However, when the strategy is profitable, refusals to license also increase the returns to intellectual property, and thus limitations on them will reduce the incentives for firms to invest in innovation. The optimal balance between innovation incentives and protection against static monopoly harm is not knowable to any reasonable degree of precision. Economists may be able to identify some special cases in which the desired rule is unambiguously knowable, but these cases will be few. Given a policy or legal rule, economists can help interpret and apply the rule. Analysis of recent legal statements on the treatment of refusals to license shows that some of the current confusion and frustration in this area can be attributed to failure to formulate the rules in terms of the economic purposes of the underlying statutes. Some attempts to delineate a boundary between cases in which intellectual property protection is absolute and those in which antitrust restrictions may be imposed are based on logical or semantic distinctions that are not related to the economic issues. These attempts will fail to resolve the confusion.
Auction Protocols for Decentralized Scheduling (Download full paper)
Wellman, M. P., W. E. Walsh, P. R. Wurman and Jeffrey K. MacKie-Mason
Published on: January, 2001
Abstract: Scheduling is the problem of allocating resources to alternate possible uses over designated periods of time. Several have proposed (and some have tried) market-based approaches to decentralized versions of the problem, where the competing uses are represented by autonomous agents. Market mechanisms use prices derived through distributed bidding protocols to determine an allocation, and thus solve the scheduling problem. To analyze the behavior of market schemes, we formalize decentralized scheduling as a discrete resource allocation problem, and bring to bear some relevant economic concepts. Drawing on results from the literature, we discuss the existence of equilibrium prices for some general classes of scheduling problems, and the quality of equilibrium solutions. To remedy the potential nonexistence of price equilibria due to complementarity in preference, we introduce additional markets in combinations of basic goods. We present some auction mechanisms and bidding protocols corresponding to the two market structures, and analyze their computational and economic properties. Finally, we consider direct revelation mechanisms, and compare to the market-based approach.
Exercising Market Power in Proprietary Aftermarkets (Download full paper)
Borenstein, Severin, Jeffrey K. MacKie-Mason and Janet S. Netz
Published on: January, 2000
Abstract: In many recent antitrust cases, manufacturers of complex high-technology equipment have been accused of exercising market power in the sale of proprietary service or parts necessary to maintain the machines they produce. The manufacturer generally concedes that it has market power in selling the aftermarket service or parts, but argues that it would not exercise such power because high aftermarket prices would cause consumers to select a different brand in the competitive market for the original equipment. We study the incentive to exercise market power in aftermarkets when the original equipment market is perfectly competitive, a differentiated duopoly, or monopolized. In all cases, we show that the price in the aftermarket will exceed marginal cost. Furthermore, our analysis indicates that aftermarket prices may actually be higher when the equipment market is more competitive. Nonetheless, we suggest that in a richer model P in which equipment sellers might want to price discriminate, create barriers to entry, or influence the pace at which users upgrade to newer models P firms in less competitive equipment markets are likely to have a greater incentive to maintain a monopoly position in the sale of their aftermarket products.
Economics and Electronic Access to Scholarly Information (Download full paper)
Jeffrey K. MacKie-Mason and Juan F. Riveros
Published on: January, 2000
Abstract: Dramatic increases in the capabilities of computers and communication networks, accompanied by equally dramatic decreases in cost, have fomented revolutionary thoughts in the scholarly publishing community. This paper concerns a controlled field experiment to investigate the effects of product bundling and pricing structures for electronic access to scholarly literature. We begin by providing background on the market economics of the publishing business, and describe some important economic problems facing both research libraries and scholarly journal publishers. We then explain how the opportunity provided by electronic access to use innovative bundling and pricing structures offer some hope of easing the library and publisher problems. We then describe our utility-theoretic framework for analyzing the consumer response to the trial conditions, and then briefly survey some related literature on bundling and nonlinear pricing. In the final section, we describe the main features of the experiment, and the rationale behind the design.
The Case for Market-based Push Caching (Download full paper)
MacKie-Mason, Jeffrey K. Chan, Yee Man Womer, Jonathan Jamin, Sugih
Published on: November, 1999
Variable QoS from Shared Web Caches: User-Centered Design and Value-Sensitive Replacement (Download full paper)
Terence P. Kelly, Sugih Jamin and Jeffrey K. MacKie-Mason
Published on: June, 1999
Abstract: Due to differences in server capacity, external bandwidth and client demand, some Web servers value cache hits more than others. Assuming that a shared cache knows the extent to which different servers value hits, it may employ a value-sensitive replacement policy in order to generate maximum aggregate value for servers. we consider both the prediction and value aspects of this problem and introduce a novel value-sensitive LFU/LRU hybrid which biases the allocation of cache space toward documents whose origin servers value caching most highly. We compare our algorithm with others from the Web caching literature and discuss from an economic standpoint the problems associated with obtaining servers' private valuation information.
A Report on the PEAK Experiment: Context and Design (Download full paper)
MacKie-Mason, Jeffrey K. Bonn, Maria S. Lougee, Wendy P. Riveros, Juan F.
Published on: June, 1999
Bilateral Negotiation With Fees (Download full paper)
Anderson, A., I. Birgean and J. MacKie-Mason
Published on: March, 1999
Abstract: Bilateral negotiation over a single good or service is a fundamental problem for automated systems, and is surprisingly resistant to general solutions. In this paper we offer advice and new results for the design of electronic negotiation and market systems. We review the theoretical and experimental literature as guide to pragmatic design. We then investigate how some well-studied simple mechanisms could be extended with transaction and entry fees to improve their efficiency or their budget balance. The goal is to support pragmatic design for online automated transactions. We find that an iterated Generalized Vickrey Auction with fees can maintain budget balance and improve trading efficiency over a single-shot GVA. For k-double auctions we find that when processing costs are a function of the number of bids then efficiency favors entry fees, while transactions fees are favored if processing costs are a function of the number of transactions. We present simulations to support our theoretical conclusions.
Inducements to Advocacy: The Economist as Independent Expert (Download full paper)
MacKie-Mason, Jeffrey K. and Richard A. Pfau
Published on: January, 1999
Abstract: The appropriate role of the economic expert in antitrust litigation is to seek the truth, whereas the role for the attorneys is to seek the best possible outcome possible for the client. Yet the attorneys hire the economic experts, and the experts often work closely in many aspects of researching and developing the client's case. Can an expert economist provide an independent, professionally respectable opinion in this setting fraught with advocacy? We discuss the inducements to advocacy faced by economists who testify in antitrust proceedings, and ways in which a practicing economic expert might counter these inducements. We discuss two cases in which we have been involved to illustrate some of the important issues.
The PEAK Experiment: Usage and Economic Behavior (Download full paper)
MacKie-Mason, Jeffrey K. Riveros, Juan F. Bonn, Maria S. Lougee, Wendy P.
Published on: January, 1999
Biased Replacement Policies for Web Caches: Differential Quality-of-Service and Aggregate User Value (Download full paper)
MacKie-Mason, Jeffrey K. Kelly, Terence P. Chan, Yee Man Jamin, Sugih
Published on: January, 1999
Abstract: Disk space in shared Web caches can be diverted to serve some system users at the expense of others. Cache hits reduce server loads, and if servers desire load reduction to different degrees, a replacement policy which prioritizes cache space across servers can provide differential quality-of-service (QoS). We present a simple generalization of least-frequently-used (LFU) replacement that is sensitive to varying levels of server valuation for cache hits. Through trace-driven simulation we show that under a particular assumption about server valuations our algorithm delivers a reasonable QoS relationship: higher byte hit rates for servers that value hits more. We furthermore adopt the economic perspective that value received by system users is a more appropriate performance metric than hit rate or byte hit rate, and demonstrate that our algorithm delivers higher "social welfare" (aggregate value to servers) than LRU or LFU.
'Bundling' y el Acceso Electronico a la Informacion Academica: El Projecto PEAK (Download full paper)
MacKie-Mason, Jeffrey K. Riveros, Juan F.
Published on: December, 1998
Some Economics of Market-Based Distributed Scheduling (Download full paper)
MacKie-Mason, Jeffrey K. Walsh, William E. Wellman, Michael P. Wurman, Peter
Published on: May, 1998
Abstract: Market mechanisms solve distributed scheduling problems by allocating the scheduled resources according to market prices. We model distributed scheduling as a discrete resource allocation problem, and demonstrate the applicability of economic analysis to this framework. Drawing on results from the literature, we discuss the existence of equilibrium prices for some general classes of scheduling problems, and the quality of equilibrium solutions. We then present two protocols for implementing market solutions, and analyze their computational and economic properties.
Telephony, the Internet, and the Media (Download full paper)
MacKie-Mason, Jeffrey K. and David Waterman, eds.
Published on: January, 1998
Abstract: This review essay introduces the 15 selected papers from the 25th Annual TPRC. We mention major telecoms policy highlights of 1997, then offer a light interpretative essay with summaries of the papers. We organize the discussion into five general sections: "Historical," "Telephony," "The Internet," "The Media," and "Comparative Studies in Telephone and Satellite Policy." Readers will notice repeated themes and cross-connections between the chapters in these sections.
PEAK: Pricing Electronic Access to Knowledge (Download full paper)
MacKie-Mason, Jeffrey K. Jankovich, Alexandra
Published on: January, 1997
Network Architecture and Content Provision: An Economic Analysis (Download full paper)
MacKie-Mason, Jeffrey K., Scott Shenker and Hal Varian
Published on: January, 1996
Abstract: An earlier version of Service Architecture and Content Provision, as presented at the Telecom Policy Research Conference 1995. There are some additional mathematical examples, and a short section on the effects of architecture on content creation that we did not include in the published version.
Pricing Congestible Resources (Download full paper)
MacKie-Mason, Jeffrey K. and Hal Varian
Published on: September, 1995
Abstract: We describe the basic economic theory of pricing a congestible resource such as an ftp server, a router, a Web site, etc. In particular, we examine the implications of "congestion pricing" as a way to encourage efficient use of network resources. We explore the implications of flat pricing and congestion pricing for capacity expansion in centrally planned, competitive, and monopolistic environments
Generalized Vickrey Auctions (Download full paper)
Varian, Hal R. and Jeffrey K. MacKie-Mason
Published on: July, 1994
Abstract: We describe a generalization of the Vickrey auction. Our mechanism extends the auction to implement efficient allocations for problems with more than one good, multiple units for the goods, and externalities. The primary restriction on preferences is that they must be quasilinear.
An AOL/Time Warner Merger Will Harm Competition in Internet Online Services (Download full paper)
MacKie-Mason, Jeffrey K.
Abstract: America Online (AOL) is the largest, and in some aspects dominant, firm in the aggregation and distribution of content and services over the Internet. AOL is also the largest provider of Internet access in the U.S. Overall, it is the most successful firm in the business of online services, or the joint provision of Internet access and content and service distribution. This is a business that AOL essentially invented, and no other firm has been able to compete effectively with AOL. Time-Warner (including its Road Runner subsidiary) is one of the most important present and future competitors in this business because it is the number two aggregator and distributor via high-speed (broadband) Internet connections, the next generation of Internet access. This merger thus combines AOL and one of its most significant competitors in online services, creating significant horizontal anti-competitive effects. The merger between AOL and Time Warner will horizontally and vertically increase AOL's power in the market for Internet online services. The anti-competitive effects of this merger will harm consumers.
System Design, User Cost and Electronic Usage of Journals (Download full paper)
Gazzale, Robert S. and Jeffrey K. MacKie-Mason
Abstract: Dramatic increases in the capabilities and decreases in the costs of computers and communi-cation networks have fomented revolutionary thoughts in the scholarly publishing community. In one dimension, traditional pricing schemes and product packages are being modified or re-placed. We designed and undertook a large-scale field experiment in pricing and bundling for electronic access to scholarly journals: PEAK. We provided Internet-based delivery of content from 1200 Elsevier Science journals to users at multiple campuses and commercial facilities. Our primary research objective was to generate rich empirical evidence on user behavior when faced with various bundling schemes and price structures. In this article we explain the different types and levels of cost that users faced when accessing individual articles, and report on the ef-fect of these costs on usage. We found that both monetary and non-monetary user costs have a significant impact on the demand for electronic access. We also estimate how taking user costs into account would change the "optimal" (least cost) bundle of access options that an institution should purchase.
Competition Between Firms that Bundle (Download full paper)
Fay, Scott and Jeffrey K. MacKie-Mason
Abstract: Information goods are characterized by high fixed (first-copy) costs, but very low costs for the production of additional copies. Marginal costs of electronically-delivered information goods have been further reduced by the remarkable recent decline in computing and digital communication costs. Most previous research focuses on how a monopolist would perform (and the proper regulation to impose) in such an environment. Achieving dynamic efficiency is difficult because pricing at marginal cost (which is statically efficient) eliminates the incentive to invest in the creation of new content. Recently, the strategy of bundling numerous goods together has been explored in greater detail. Bundling may achieve static efficiency since individuals will face a zero cost on the margin for each item consumed. Yet, dynamic efficiency can be maintained because the producer is able to recover investment costs through bundle sales. This paper analyzes the profitability and welfare properties of bundling in a multi-firm setting. This allows us to explore how incumbents and entrants interact when each firm is selling numerous competing products. Our fundamental conclusion is that even adding only a single firm to this industry with substantial fixed costs and negligible marginal costs will result in much lower prices for consumers, much higher social welfare, and only a moderate reduction in firms' profits regardless of the pricing schemes employed. This outcome is somewhat surprising given that in a standard static two-good Bertrand model, a duopoly would lead to a price war which eliminates the incentive to invest in new content (or to enter the industry in the first place). Although the firms are producing a priori identical items, consumers know that their valuations for the particular items will vary ex post. Thus, no price reduction by one firm can completely eliminate the demand faced by other firms. Although there remains an incentive to invest in new product creation, this incentive is lower than a monopolist would have. As a result, in a dynamic version of this model, the welfare superiority of the duopoly becomes dampened (but not eliminated). Finally, when firms are allowed to sell items both as a bundle and individually, we find that most revenue will be obtained from bundle sales. These results indicate that bundling will persist in a multi-firm setting and suggest that only firms of substantial size will be able to survive in such a market.
One Size Doesn't Fit All: Improving Network QoS Through Preference-driven Web Caching (Download full paper)
Chan, Yee Man, Jonathan Womer, Jeffrey K. MacKie-Mason and Sugih Jamin
Abstract: In order to combat Internet congestion Web caches use replacement policies that attempt to keep the objects in a cache that are most likely to get requested in the future. We adopt the economic perspective that the objects with the greatest value to the users should be in a cache. Using trace driven simulations we implement an incentive compatible market-based Web cache for servers to push content into a cache. This system decentralizes the caching process as servers provide information in the form of bids for space in the cache. Truthful information from the server on valuations of objects and predictions of hit rates is obtained. This information is used in filling the cache, which can provide increased aggregate value and differential quality of service to servers when compared to LFU and LRU.
A Smart Market for Resource Reservation in a Multiple Quality of Service Information Network (Download full paper)
MacKie-Mason, Jeffrey K.
Abstract: The technology is nearly available to offer remarkably powerful new communications services: multiple streams, from multiple users, composed of different applications that require different qualities of service (QoS), all travelling over a single interconnected physical infrastructure. Society will benefit from integrated applications (video conferencing with interactive demos and shared whiteboards; computer-integrated telephony, etc.). However, we are a long way from from free, broadband, "anytime, anywhere" integrated services networks. Allocation of scarce resources in a multiple quality of service network may be the single greatest barrier to communications anytime, anywhere. In this paper I present a fairly general model of the problem, and, after showing that a decentralized open market will fail, I propose a "smart market" mechanism for solving the problem. The smart market implements simultaneously efficient routing and bandwidth allocation for reservations made in advance. As computing speed improves, the length of the advance reservation interval can be shortened.
Improving Learning Performance by Applying Economic Knowledge (Download full paper)
Christopher H. Brooks, Robert S. Gazzale, Jeffrey K. MacKie-Mason, and Edmund H. Durfee
Abstract: Digital information economies require information goods producers to learn how to position themselves within a potentially vast product space. Further, the topography of this space is often nonstationary, due to the interactive dynamics of multiple producers changing their positions as they try to learn the distribution of consumer preferences and other features of the problem's economic structure. This presents a producer or its agent with a difficult learning problem: how to locate profitable niches in a very large space. In this paper, we present a model of an information goods duopoly and show that, under complete information, producers would prefer not to compete, instead acting as local monopolists and targeting separate niches in the consumer population. However, when producers have no information about the problem they are solving, it can be quite difficult for them to converge on this solution. We show how a modest amount of economic knowledge about the problem can make it much easier, either by reducing the search space, starting in a useful area of the space, or by introducing a gradient. These experiments support the hypothesis that a producer using some knowledge of a problem's (economic) structure can outperform a producer that is performing a naive, knowledge-free form of learning.
Explaining underutilization of tax depreciation deductions: Empirical evidence from Norway (Download full paper)
Aarbu, Karl Ove and Jeffrey K. MacKie-Mason
Abstract: Many corporations do not claim all of their allowable tax depreciation deductions, despite apparently incurring a higher tax cost. There are several possible explanations. First, we find strong evidence that firms facing current tax losses or carrying forward past losses underutilize depreciation in order to recover tax losses before they expire. Second, corporations with bad economic performance tend to underutilize their deductions, suggesting that corporations use costly ��windowdressing�� on their accounting measures. Third, we find support for the hypothesis that tax compliance costs discourage the utilization of accelerated depreciation, especially by small firms. We do not find much support for other hypotheses. For example, we find no evidence of substitution between tax depreciation and private debt due to competition between the benefits of private bank monitoring and the tax savings from using tax allowances to postpone tax payments, as suggested in earlier literature. We also study the effects of the uniform reporting accounting system (typical of many European countries) which can, under certain circumstances, constrain dividends. The dividend constraint can be loosened by forgoing some tax depreciation, but the evidence does not support this motivation. Unusual access to extremely detailed individual firm tax returns forms in Norway made our empirical analysis possible. In addition, the 1992 Norwegian tax reform provided a natural experiment for testing some of the hypotheses. We use the time-series and cross-sectional variation across Norwegian corporations in 1988, 1991, 1992 and 1993.
Antitrust Immunity for Refusals to Deal in (Intellectual) Property Is a Slippery Slope (Download full paper)
MacKie-Mason, Jeffrey K.
Abstract: The Federal Circuit's decision in CSU v. Xerox1 has generated enormous controversy. However, there seems to be emerging agreement among both critics and supporters of the decision on a correct, narrow reading of the decision. Whatever else the decision stands for, it appears to declare antitrust immunity for unilateral refusals to sell or license patented or copyrighted intellectual property (IP). What was at stake in Xerox is whether a firm with a legitimate property right in the design of certain parts has the right to condition sale of those parts with terms that enable Xerox to obtain a monopoly in a different market, for service labor. More broadly, what is at stake is a safe harbor for conduct that previously has been found illegal. For, although much emphasis is placed on whether this was a unilateral refusal to deal (as opposed to a concerted agreement, which would not be exempt from Section 1 scrutiny), it is at least as important that this was a conditional refusal. As I show below, the meaningful distinction between this conditional refusal to deal and a conventional illegal tie is nil. Further, if an antitrust exemption is given to all conditional unilateral refusals to deal, this formalistic shield will be easily available in the future to firms that would otherwise be subject to antitrust liability for tying or other concerted agreements.
Model Selection in an Information Economy: Choosing what to Learn (Download full paper)
Christopher H. Brooks, Robert S. Gazzale, Rajarshi Das, Jeffrey O. Kephart, Jeffrey K. MacKie-Mason, and Edmund H. Durfee
Abstract: In an economy in which a producer must learn the preferences of a consumer population, it is faced with a classic decision problem: when to explore and when to exploit. If the producer has a limited number of chances to experiment, it must explicitly consider the cost of learning (in terms of foregone profit) against the value of the information acquired. Information goods add an additional dimension to this problem; due to their flexibility, they can be bundled and priced according to a number of different price schedules. An optimizing producer should consider the profit each price schedule can extract, as well as the difficulty of learning of this schedule. In this paper, we demonstrate the tradeoff between complexity and profitability for a number of common price schedules. We begin with a one-shot decision as to which schedule to learn. Schedules with moderate complexity are preferred in the short and medium term, as they are learned quickly, yet extract a significant fraction of the available profit. We then turn to the repeated version of this one-shot decision and show that moderate complexity schedules, in particular two-part tariff, perform well when the producer must adapt to nonstationarity in the consumer population. When a producer can dynamically change schedules as it learns, it can use an explicit decision-theoretic formulation to greedily select the schedule which appears to yield the greatest profit in the next period.
A Market-Based Approach to Optimal Resource Allocation in Integrated-Services connection-Oriented Networks (Download full paper)
Panagiotis Thomas, Demosthenis Teneketzis and Jeffrey K. MacKie-Mason
Abstract: We present an approach to the admission control and resource allocation problem in connection-oriented networks that offer multiple services to users. Users' preferences are summarized by means of their utility functions, and each user is allowed to request more than one type of service. Multiple types of resources are allocated at each link along the path of a connection. We assume that the relation between Quality of Service (QoS) and resource allocation is given, and we incorporate it as a constraint into a static optimization problem. The objective of the optimization problem is to determine the amount and, required resources for each type of service to maximize the sum of the users' utilities. We prove the existence of a solution of the optimization problem, and describe a competitive market economy that implements the solution and satisfies the informational constraints imposed by the nature of the decentralized resource allocation problem. The economy consists of four different types of agents: resource providers, service providers, users, and an auctioneer that regulates the prices based on the observed aggregate excess demand. The goods that are sold are: (i) the resources at each link of the network; and (ii) services constructed from these resources and then delivered to users. We specify an iterative procedure that is used by the auctioneer to update the prices, and we show that it leads to an allocation that is arbitrarily close to a solution of the optimization problem in a finite number of iterations.
Pricing Information Bundles in a Dynamic Environment (Download full paper)
Jeffrey O. Kephart, Rajarshi Das, Christopher H. Brooks, Edmund H. Durfee, Robert S. Gazzale and Jeffrey K. MacKie-Mason
Abstract: We explore a scenario in which a monopolist producer of information goods seeks to maximize its profits in a market where consumer demand shifts frequently and unpredictably. The producer is free to set an arbitrarily complex price schedule-a function that maps the set of purchased items to a price-but without direct knowledge of consumer demand it cannot compute the optimal schedule. Instead, it must employ a form of optimization based on trial and error. By means of a simple model of consumer demand and a modified version of a simple nonlinear optimization routine, we study a variety of parameterizations of the price schedule and quantity some of the relationships among learnability, complexity, and profitability. In particular, we show that fixed pricing or simple two-parameter dynamic pricing schedules are preferred when consumer demand shifts frequently, but that dynamic pricing based on more complex schedules tends to be most profitable when consumer demand shifts very infrequently.
Endogenous Differentiation of Information Goods Under Uncertainty (Download full paper)
Robert S. Gazzale and Jeffrey K. MacKie-Mason
Abstract: Information goods can be reconfigured at low cost. Therefore, firms can choose how to differentiate their products at a frequency comparable to price changes. However, doing so effectively is complicated by uncertainty about customer preferences, compounded by the fact that the search for a good product niche is carried out in competition with other searching firms. We study two firms that differentiate their information goods. The firms simultaneously compete in product configuration and price. We assume a non-uniform distribution of consumers: the largest number prefer a product located at a ``sweet spot,'' but the rate at which the customer density falls off away from this product configuration is unknown. Our characterization reflects the standard tradeoff between exploitation (current profit) and exploration (learning to enhance future profit). In our model firms balance current profits from competing for a mass and a niche market, while learning about the profitability of these alternative strategies. We show that the amount of learning that firms will undertake depends on the convexity or concavity of the profit function in the rate of demand fall-off. In our model firms have an incentive to learn, and can use both price and product configuration in order to explore. We show that the ability to explore in product characteristic space leads to a previously unidentified consequence of learning: attenuation of competition. The incentive to learn induces firms to differentiate their products more than they would if the value of learning were ignored. This leads to decreased direct competition with rivals, and thus higher prices and profits than if the firms were acting myopically. Thus, we might expect that when firms are not well informed about consumer preferences for information goods --- as might be especially true in new markets for innovative products --- product diversity will be higher and direct competition will be smaller than might otherwise be expected.
Information Bundling in a Dynamic Environment (Download full paper)
Christopher H. Brooks, Rajarshi Das, Jeffrey O. Kephart, Jeffrey K. MacKie-Mason, Robert S. Gazzale, and Edmund H. Durfee
Abstract: Markets for digital information goods provide the possibility of exploring new and more complex pricing schemes, due to information goods' flexibility and negligible marginal cost. In this paper we compare the dynamic performance of price schedules of varying complexity under two different specifications of consumer demand shifts.
Pricing and Bundling Electronic Information Goods: Experimental Evidence (Download full paper)
MacKie-Mason, Jeffrey K., Juan F. Riveros and Robert S. Gazzale
Abstract: Dramatic increases in the capabilities and decreases in the costs of computers and communication networks have fomented revolutionary thoughts in the scholarly publishing community. In one dimension, traditional pricing schemes and product packages are being modified or replaced. We designed and undertook a large-scale field experiment in pricing and bundling for electronic access to scholarly journals: PEAK. We provided Internet-based delivery of content from 1200 Elsevier Science journals to users at multiple campuses and commercial facilities. Our primary research objective was to generate rich empirical evidence on user behavior when faced with various bundling schemes and price structures. In this article we report initial results. We found that although there is a steep initial learning curve, decision-makers rapidly comprehended our innovative pricing schemes. We also found that our novel and flexible "generalized subscription" was successful at balancing paid usage with easy access to a larger body of content than was previously available to participating institutions. Finally, we found that both monetary and non-monetary user costs have a significant impact on the demand for electronic access.
Two-sided Learning in an Agent Economy for Information Bundles (Download full paper)
Kephart, Jeffrey O., Rajarshi Das and Jeffrey K. MacKie-Mason
Abstract: Commerce in information goods is one of the earliest emerging applications for intelligent agents in commerce. However, the fundamental characteristics of information goods mean that they can and likely will be offered in widely varying configurations. Participating agents will need to deal with uncertainty about both prices and location in multi-dimensional product space. Thus, studying the behavior of learning agents is central to understanding and designing for agent-based information economies. Since uncertainty will exist on both sides of transactions, and interactions between learning agents that are negotiating and transacting with other learning agents may lead to unexpected dynamics, it is important to study two-sided learning. We present a simple but powerful model of an information bundling economy with a single producer and multiple consumer agents. We explore the pricing and purchasing behavior of these agents when articles can be bundled. In this initial exploration, we study the dynamics of this economy when consumer agents are uninformed about the distribution of article values. We discover that a reasonable albeit naive consumer learning strategy can lead to disastrous market behavior. We find a simple explanation for this market failure, and develop a simple improvement to the producer agent's strategy that largely ameliorates the problem. But in the process we learn an important lesson: dynamic market interactions when there is substantial uncertainty can lead to pathological outcomes if agents are designed with "reasonable" but not sufficiently adaptive strategies. Thus, in programmed agent environments it may be essential to dramatically increase our understanding of adaptivity and learning if we want to obtain good aggregate outcomes.
Automated Strategy Searches in an Electronic Goods Market: Learning and Complex Price Schedules (Download full paper)
Brooks, Christopher H., Scott Fay, Rajarshi Das, Jeffrey K. MacKie-Mason, Jeffrey O. Kephart and Edmund Durfee
Abstract: In an automated market for electronic goods new problems arise that have not been well studied previously. For example, information goods are very flexible. Marginal costs are negligible and nearly limitless bundling and unbundling of these items are possible, in contrast to physical goods. Consequently, producers can offer complex pricing schemes. However, the profit-maximizing design of a complex pricing schedule depends on a producer's knowledge of the distribution of consumer preferences for the available information goods. Preferences are private and can only be gradually uncovered through market experience. In this paper we compare dynamic performance across price schedules of varying complexity. We provide the producer with two machine learning method producer that is performing a naive, knowledge-free form of leanings (function approximation and hill-climbing) which implement a strategy that balances exploitation to maximize current profits against exploration of the profit landscape to improve future profits. We find that the tradeoff between exploitation and exploration is different depending on the learning algorithms employed, and in particular depending on the complexity of the price schedule that if offered. In general, simpler price schedules are more robust and give up less profit during the learning periods even though in our stationary environment learning eventually is complete and the more complex schedules have high long-run profits. These results hold for both learning methods, even though the relative performance of the methods is quite sensitive to choice of initial conditions and differences in the smoothness of the profit landscape for different price schedules. Our results have implications for automated learning and strategic pricing in non-stationary environments, which arise when the consumer population changes, individuals change their preferences, or competing firms change their strategies.
Links Between Vertically Related Markets: ITS v. Kodak (Download full paper)
MacKie-Mason, Jeffrey K. and John Metzler
Abstract: In 1987 seventeen small companies filed an antitrust lawsuit against the Eastman Kodak Corporation, alleging that Kodak used its monopoly power over repair parts for its high-volume copiers and micrographics equipment in order to monopolize the service markets for those machines. Eleven years later, there have been two District Court opinions, two from the Ninth Circuit Court of Appeals, and one from the Supreme Court, and further post-trial, post-appeal disputes continue. Since the initial Supreme Court opinion in Kodak, there have been at least seven closely related Appeals Court opinions, and they stand in sharply divided conflict. Kodak is one of the most significant antitrust cases of the last decade or two. It is also one of the most controversial, and the controversy is far from resolved. We review the facts and the procedural history. We then present the main economic issues in dispute, and summarize the evidence presented at trial. We close with brief observations on some unresolved question that affect future antitrust economic analysis, and describe the post-Kodak conflict among other Circuit Courts of Appeal.
How Much Do Taxes Discourage Incorporation? (Download full paper)
MacKie-Mason, Jeffrey K. and Roger H. Gordon
Abstract: The double taxation of corporate income should discourage firms from incorporating. We investigate the extent to which the aggregate allocation of assets and taxable income in the U.S. between corporate and non-corporate firms responds to the size of this tax distortion during the period 1959-86. In theory, profitable firms should shift out of the corporate sector when the tax distortion is large, and conversely for firms with tax losses. Our empirical results provide strong support for all of these forecasts and imply that the resulting excess burden equals 16% of business tax revenue.
Evaluating and Selecting Digital Payment Mechanisms (Download full paper)
MacKie-Mason, Jeffrey K. and Kimberly White
Abstract: The Internet is growing rapidly as a marketplace for the exchange of both tangible and information goods and services. Numerous payment mechanisms suitable for use in this marketplace are in various stages of development. Because their development is so recent, it is difficult for potential participants in electronic commerce to evaluate and select payment mechanisms. We propose a systematic method for evaluating and selecting payment mechanisms. Our selection process typically leads to a solution in a few iterations or less; it is generalizable; and it requires relatively little information about each alternative, reducing the cost of evaluating and selecting payment mechanisms. Researchers and payment mechanism designers are guided on further development by the needs of users who desire particular bundles of characteristics. As a by-product of our analysis, we present a detailed matrix characterizing 10 leading payment systems according to 30 criteria.
Feedback And Efficiency In ATM Networks (Download full paper)
Murphy, Liam, John Murphy, and Jeffrey K. MacKie-Mason
Abstract: Admission control and congestion control can provide performance guarantees in ATM networks. However some users may not be able to describe their traffic accurately enough for the network to provide these guarantees. By sending a dynamic feedback signal about the current utilization of network resources, the network could provide some guarantees to adaptive users who respond appropriately: this is the basis of ABR service. We outline a user-oriented framework for network operation and control, explicitly defining how such feedback is generated by the network and what form it takes. We show through simulations that it is possible to simultaneously gain both network and economic efficiency by using a form of feedback we call responsive pricing, which is compatible with current ATM Forum UNI specifications.
The Role of Responsive Pricing in the Internet (Download full paper)
MacKie-Mason, Jeffrey K., Liam Murphy and John Murphy
Abstract: The recent introduction of user-friendly navigation and retrieval tools for the World Wide Web has triggered an unprecedented level of interest in the Internet among the media and the general public, as well as in the technical community. It seems inevitable that some changes or additions are needed in the control mechanisms used to allocate usage of Internet resources. We argue that a feedback signal in the form of a variable price for network service is a workable tool to aid network operators in controlling Internet traffic. We suggest that these prices should vary dynamically based on the current utilization of network resources. We show how this responsive pricing puts control of network service back where it belongs: with the users.
Some Economics of the Internet (Download full paper)
MacKie-Mason, Jeffrey K. and Hal Varian
Abstract: This paper overlaps substantially with the paper Pricing the Internet. We describe the history, technology and costs of the Internet (at greater length than in "Pricing"). We describe a "smart market" for pricing Internet congestion. There is more attention to the smart market, and less to other pricing considerations, than in "Pricing."
Economic FAQs About the Internet (Download full paper)
MacKie-Mason, Jeffrey K. and Hal Varian
Abstract: We present some economic FAQs about the Internet in question-and-answer format. Updated, Summer 1995.
Pricing the Internet (Download full paper)
MacKie-Mason, Jeffrey K. and Hal Varian
Abstract: We describe the technology and costs of the Internet, then discuss how to design efficient pricing in order to allocate scarce Internet resources. We offer a "smart market" as a device to efficiently price congestion.
Some FAQs about Usage-Based Pricing (Download full paper)
MacKie-Mason, Jeffrey K. and Hal Varian
Abstract: Written for WWW '94 (Chicago). We answer some frequently asked questions about usage-sensitive pricing for Internet resources.
Using a Minimum Threshold to Motivate Contributions to Social Computing (Download full paper)
MacKie-Mason, Jeffrey K.
Abstract: Social computing systems collect, aggregate, and share usercontributed content, and therefore depend on contributions from users to function properly. However, humans are intelligent beings and cannot be programmed to behave; system designers must provide incentives to encourage users to contribute. We explore the behavioral consequences of one simple incentive mechanism: require users to contribute a minimum amount of information before they are granted access to the system. Users with a high marginal cost of contribution will stop using the system, but users with a moderate marginal cost will increase their contribution, frequently leading to greater benefits for everyone still using the system. Additionally, if contributions are collaborative and build upon each other, then existing contributors are likely to slightly decrease their contributions, leading to a more ’equal’ distribution of contributions. We show that this mechanism often leads to increased contributions, and provide concrete design advice for using this mechanism in social computing systems.
Related research files
Name: Video: Incentive-centered design for user-contributed content (Download artifact)
Released on: March, 2008
Description: Video of presentation to Yahoo! Research, Santa Clara, California
Name: Magazine article: Defending the Net (Download artifact)
Released on: March, 2008
Description: Magazine article about social firewall research, published by Metromode, 6 March 2008
Name: STIET podcast Oct 2007 (Download artifact)
Released on: October, 2007
Description: A podcast interview with Jeff MacKie-Mason and Tom Finholt about the STIET ICD project
Name: STIET movie Oct 2007 (Download artifact)
Released on: October, 2007
Description: A short marketing movie about the STIET ICD research program, prepared by the UM News Service
Name: WJR Detroit webcast STIET interview 20oct2007 (Download artifact)
Released on: October, 2007
Description: WJR's "Internet Advisor" program interviewed me and Wayne State STIET leader Prof. Dan Grosu about the STIET program's research and communication technology.