Category Archives: Internet

Dean Baker on Drug Research

Posted on by

He writes,

It is not difficult to envision alternative mechanisms to pay for the research currently being incentivized with patent monopolies. Several economists have proposed a patent buyout system, where the government would buy out patents and place them in the public domain. A simpler method, however, would be to have direct public funding. The government already spends more than $30 billion a year to finance biomedical research through the National Institutes of Health (NIH). It would probably be necessary to increase this amount by $50-$60 billion a year in order to replace the funding currently supported through patent monopolies.

This additional funding could probably best be channeled through a mechanism other than NIH, with private companies bidding for major contracts to support research in a variety of areas. By having a relatively limited number of prime contractors, who could then contract out as they please, we would avoid having a situation of the government micromanaging research. The contracts could then be renewed and/or expanded, depending on the company’s track record. The conditions of getting the funding would be both that all patents are placed in the public domain and also that all research findings are made publicly available on the Internet as soon as practical.

I agree that we should think outside of the patent box when it comes to medical research. In fact, in my essay for the growth forum, I also chose to propose an alternative to the patent system.

Matthew Yglesias on Amazon and Market Power

Posted on by

He writes,

What is indisputably true is that Amazon is on track to destroy the businesses of incumbent book publishers. But the many authors and intellectuals who’ve been convinced that their interests — or the interests of literary culture writ large — are identical with those of the publishers are simply mistaken.

Pointer from Jason Collins.

I agree that we should not be rushing to the barricades to defend the traditional publishing business model. Rooting for the book publishers to have strong negotiating leverage with Amazon is equivalent to rooting for the legacy music industry to have strong negotiating leverage with iTunes.

Jean Tirole and Josh Lerner on Open Source

Posted on by

They wrote,

Open source and academia have many parallels. The most obvious parallel relates to motivation. As in open source, the direct financial returns from writing academic articles are typically nonexistent, but career concerns and the desire for peer recognition provide powerful inducements

They wrote this almost ten years ago. I bring it up because of Tirole’s Nobel Prize, announced yesterday.

Tirole and Lerner noted, with a bit of puzzlement that, compared with open-source software writers, academics were less likely to make their data sources public and more likely to allow their work to be hidden behind publishers’ paywalls. I think that in those ten years there has been a shift, at least in economics, more in the direction of the open-source model.

Patent Pools

Posted on by

Josh Lerner and Jean Tirole (the latter was just awarded a Nobel Prize) write,

Innovations in hardware, software or biotechnology often build on a number of other innovations owned by a diverse set of owners.

Pointer from Joshua Gans. For more on Tirole, see Tyler Cowen and subsequent posts by Alex and Tyler.

Two (or more) firms may hold complementary patents. That is, the value of using firm A’s patented innovation is higher to a licensee who can also use firm B’s patented innovation. Lerner and Tirole ask when a social planner would want these firms to pool their patents, that is to license them together. If you do not care to follow their mathematical analysis, you can skip to the end where they summarize their conclusions.

The situation is a form of the dual-monopoly problem. As I once explained,

suppose that a single company has a monopoly in both peanut butter and jelly. When it sets the price of jelly, it knows that the more jelly it sells the more peanut butter it will sell. Therefore, at the margin, it will tend to want to set a lower price for jelly than if it were just looking at jelly as a stand-alone product.

If you then break up the PB and J monopoly into two separate companies, the incentives of the two separate monopolies will change. The peanut butter company is not going to worry about the fact that higher peanut butter prices will reduce jelly consumption, and the jelly company is not going to worry about the fact that higher jelly prices will reduce peanut butter consumption. The net result of the breakup is that prices to consumers will rise.

This theory goes all the way back to Cournot.

It seems to me that we observe patent pools more often internally than externally. Think of Apple Computer as one gigantic internal patent pool. Or a large pharmaceutical company. It might be easier for one firm to internalize complementary patents than for several firms to get together and pool them.

Joshua Gans on Apple Pay

Posted on by

He writes,

This is why I think the resolution for the identification challenge is more significant. Last year, with the iPhone 5s, Apple finally got fingerprint recognition right. Last week I actually had to use a iPhone 5c for a few days without Touch ID and I couldn’t believe how much I had learned to rely on it. It really does work and you really do use it and it really is less hassle than a pin or even swiping to unlock the phone. But the security issues were not paramount but a fortunate side product.

Now they are paramount and what is more Touch ID solves the identification problem. It is really hard for criminals to spoof it or steal your identity using it. They would literally have to hold a gun to your head or take a hostage and, frankly, at that point, they are better off just robbing merchants directly.

U.S. credit cards are quite insecure. Biometric ID would seem to me to be a big improvement. Financial intermediaries will still have to put in back-up security measures, so that somebody who figures out how to copy your fingerprint is not able to make unlimited purchases. But I see phone-based payment technology as leapfrogging the current European model of more-secure credit cards.

Incidentally, I want an i-Watch, as long as it can use Google Maps as input. It would make bicycle navigation easier, but not with the crummy default maps app. Since the product won’t be available for a few months, and it since it won’t be biking weather for a few months after that, there is time to see how it develops.

Spectrum Price Discrimination Using Zero-rated Apps

Posted on by

The Washington Post reports,

Apps and Web sites that don’t count against the users’ data plan are popping up both in the United States and abroad, often under names like Wikipedia Zero or Facebook Zero.

Pointer from Tyler Cowen.

If what wireless companies need is congestion-pricing or peak-load pricing, then my prediction would be that we will not see zero-rated apps that allow video anywhere, any time. To get that, you will have to pay something.

There is now a vocal “net neutrality” chorus that will fight any form of price discrimination in wireless services, including fighting zero-rated apps. I think that they are misguided and represent no actual consumers. However, the FCC will do everything to make them seem important, because that in turn justifies having the FCC do more regulatory meddling.

Self-publishing and e-books

Posted on by

Hugh Howey writes,

Publishers can foster that change by further lowering the prices of their e-books. The record margins they’re currently earning are certainly seductive, but taking advantage of authors is not a sustainable business model. Hollywood studios had to capitulate to their writers when a new digital stream emerged. Publishers will likewise need to pay authors a fair share of the proceeds for e-book sales. 50% of net for every author is a good start.

There is much more, pointer from Tyler Cowen.

My best experience publishing was self-publishing The Three Languages of Politics.

My worst experience publishing was with Unchecked and Unbalanced. The publisher insists on pricing it not to sell on Kindle. I do not understand this. With zero marginal cost of distributing it as an e-book, I would think that the goal would be to maximize revenue. I don’t want 50 percent of the e-book revenue. I just want there to be e-book revenue. Publishers that are so stupid do not deserve stay in business.

A Solution to Biomedical Research Incentives?

Posted on by

I write,

In pharmaceuticals, the challenges with using the patent system are increasing. As Huber has pointed out, the nature of molecular medicine is changing. The system of rigid, blind clinical trials needs to be replaced by a regime of focused trials in which researchers learn and adapt as they go. Medical research may be valuable without producing a brand new molecule that cures a disease and thereby justifies a patent. It may instead focus on determining which combination of drugs will best treat a certain class of patients. A prize-grant would reward this sort of targeted research in a way that a patent cannot.

Niall Ferguson on Networks and Hierarchies

Posted on by

He writes,

European history in the 17th, 18th, and 19th centuries was characterized by a succession of network-driven waves of innovation: the Scientific Revolution, the Enlightenment, and the Industrial Revolution. In each case, the sharing of novel ideas within networks of scholars and tinkerers produced powerful and mainly positive externalities, culminating in the decisive improvements in economic efficiency and then life expectancy experienced in the British Isles, Western Europe, and North America from the late 18th century. The network effects of trade and migration were especially powerful, as European merchants and settlers exploited falling transportation costs to export their ideas, as well as their techniques and goods, to the rest of the world. Thanks to those ideas, this was also an era of political revolutions. Ideas about liberty, equality, and fraternity crossed the Atlantic as rapidly as pirated technology from the cotton mills of Lancashire. Kings were toppled, aristocracies abolished, and churches dissolved or made to compete without the support of a state.

Yet the 19th century saw the triumph of hierarchies over the new networks. This was partly because hierarchical corporations—which began, let us remember, as state-sponsored monopolies like the East India Company—were as important in the spread of industrial capitalism as horizontally structured markets. Firms could reduce the transaction costs of the market as well as exploit economies of scale and scope. The railways, steamships, and telegraph cables that made possible the first age of globalization had owners.

He argues that networks once again have gained an advantage, but he backs away from forecasting the demise of hierarchical corporations and states.

Uber $17 Billion?

Posted on by

The Seattle Times reports,

The funding positions the company at the front of a pack of Internet startups, at a valuation of about $17 billion, up from $3.5 billion in a financing last year.

Back in 1999, I started The Internet Bubble Monitor, a blog about that bubble. I tracked the absurd valuations of firms that had already gone public. This time around, it looks like the VCs want to front-run the public and bid firms up to absurd levels before anyone else can.

I would be curious to know what the investors think that the margins will be in the business in five years. Will Uber be able to collect $5 a ride? Fifty cents a ride? Maybe Facebook or Twitter will offer ride connections for free and hope to make a go of it on advertising revenue.

But, hey, I’m just an old man who doesn’t understand technology.