Digital Markets

Instructor Suzanne Scotchmer, Professor of Law, Economics and Public Policy

Meets Spring 2010, Thursdays, 3:20 to 6:00 in 111 Law school


Topics include (1) collective rights organizations, (2) technical protections of content, (3) two-sided markets, (4) the optimal design of online auctions for search engines, (5) the economics of computer security, (6) the economics of recommender systems, and (7) open source development, (8) pricing and regulating the internet, (9) electronic voting.


This is a combined course for law students (Law 276.45), economics graduate students (Econ 296)and MPPs (PP290), meeting together for two hours, and separately, each group for an hour.


Date, topic

Readings: If not linked, you can find these in Course Resources in bspace.

Jan 14

Overview of course;

Some economics review

 Overview, and discussion of student interests.

(Only law students will be at this session the others start next week.)


Background on the economics of intellectual property

Chapter 2 of Innovation and Incentives, Scotchmer (PowerPoint)

Background on the economics on network effects

Chapter 7 of Information Rules Shapiro and Varian

Chapter 10 of Innovation and Incentives, Scotchmer (PowerPoint)

Background on the economics on network effects


Assignment 1.

Write two pages on one or two examples from SV on how the economics of the digital age is different from the mortar-and-bricks economy.

Jan 21

Online Distribution,

Pricing, and Price Discrimination

Economics Background: Tirole, Ch3 on Price Discrimination, Theory of Industrial Organization.

Download the powerpoint of Ity Shurtz. Econ grad students should digest the details of Ch3.

Download the Scotchmer powerpoint on durable goods monopoly.

Economics papers: Renting versus selling songs.

Poddar, S. 2004. Strategic choice in durable goods market when firms move simultaneously

Rayna, T. 2006. The Economics of Digital Goods: Selling vs. Renting Music Online


Versioning for Price Discrimination

Chapter 3 of Information Rules Shapiro and Varian


Assignment 2

(1) Explain why the Barnes and Noble pricing scheme is second-degree price discrimination. Draw demand curves to explain why it is profitable. From a social welfare point of view, should it be allowed?
(2) Draw diagrams to explain the price discrimination on Windows NT (quality) described by SV Ch3. From a social welfare point of view, should quality differences and price discrimination be allowed?

More discussion questions (price discrimination in general):
(3) Explain why price discrimination might or might not be equitable.
(As compared, for example, to a one-price monopoly. What does
equitable mean?)

(4) Use your discussion above to explain that price discrimination can either improve or degrade efficiency.

Jan 28

Google Book Settlement

Pamela Samuelson

Pam Samuelson, Google Book Search and the future of Books in Cyberspace

Courant, Paul N. The Stakes in the Google book Search Settlement

Lessig, For the Love of Culture, The New Republic February 4, 2010


Assignment 3. (Write answers for the drop box. We will discuss these on Feb. 4.)
(1) How are books classified in the GBS, and how are the 4 classes treated differently?
(2) Why might library subscriptions eventually be subject to monopoly pricing?
(3) If there is an antitrust issue, where is the harm to competition, and who are the antagonists? Where do publishers fit in this dispute? Does Google have a credible defense?

(4) What are orphan works? Does the GBS give Google a privileged position in selling them?
(5) Explain how Lessigs
concern is different than the ones summarized by Samuelson.

Feb 4

(a) Bundling Digital


(b) Price discrimination and competition policy

Bundling for Price Discrimination

(Do not read the details in these papers, just try to understand the intuition.)

Bakos and Brynjolfsson, Bundling Information Goods: Pricing, Profits, and Efficiency, Management Science, December 1999; 45: 1613 - 1630.

Bakos, Brynjolfsson, Lichtman. 1999. Shared Information Goods. J. of Law and Econ 42:117-155.

Chapter 7.4 of Innovation and Incentives, Scotchmer


Scotchmer bundling powerpoint


More on price discrimination

Levine, M. E., Price Discrimination Without Market Power. Yale Journal on Regulation 19:1-36 (2002).


Assignment 4

Feb 11

Guest Lecturer:

Roope Kylmakosi, Nokia


Feb 11-18

Price Discrimination and social welfare

P Berg and C. Calcagno


Search and search advertising


Search Advertising
How it works: Hal Varian (Google Chief Economist), Google Adwords Quality and Performance 
Economics Auctions Papers (read for the idea only if you are not an economics graduate student)
Hal Varian, Position Auctions, Varian's notes on this paper 
Economics Auctions Papers (read for the idea only if you are not an economics graduate student)

Athey and Ellison (2008), Position Auctions and Consumer Search

M. Schwarz et al, 2007, Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords.

Ity Shurtz powerpoint on position auctions

Regulatory Issues
Bracha_and_Pasquale, Federal Search Commission?

The_Plot_to_Kill_Google (Wired)


Assignment 5

Feb 25

Search and search advertising

Ron Berman

Suzanne Scotchmer


Pay for Content

Ben Jones

Purchase history price discrimination

Acquisti and Varian, 2005, Conditioning Prices on Purchase History, Marketing Science 24: 367381

Acquisiti, 2005, Ubiquitous Computing, Customer Tracking, and Price Discrimination, In G. Roussos (ed), Ubiquitous Commerce, Springer Verlag, 2005
Scotchmer purchase history powerpoint
Berman, Ron. 2010. The role of search engine optimization in search results
Download Berman_SEO_presentation from resources.


New York Times pay-for-content model

Business models that are in use for digital content


Assignment 6

Mar 4

Electronic Voting

Joseph Hall

Thomson, in NYT. Can you Count on voting Machines? (also in Course Resources)
Joseph Hall: Voting Machine Transparency (focus on chapters 2 and 3)

S. Wallach. Voting system risk assessment via computational complexity analysis
Brady, et al. Law and Data: The Butterfly Ballot Episode (in resources)
Assignment 7

March 4

First Sale and

Price Discrimination

ProCD (case, in course resources)

March 11


Digital Rights Management 1

More on Search Advertising


More on antitrust and search advertising

WSJ EC antitrust inquiry re Google

BW Google Suppressing Search?

Filed Complaint: Source Tool v. Google


Assignment 8


Mar 18


The Politicization of Content and Search on the Internet


The European Microsoft case

Pierre Larouche

Internet Filtering    In Iran   In China   Around the World
WSJ on internet censorship in China
NYT China and PC censorship software
BW China's WiFi Wrangle
NYT WebPassport Please


NYT March 2: Iran Closes Opposition Publications

WSJ articles on Chinese censorship (resources)

WSJ China Real Time Feb 26: Report Looks at China's Online Censorship

WSJ video clip: Google's stock price falls on news it will pull out of China

WSJ March 2: Web Firms under Fire to Protect Human Rights


Digital Antitrust

Pierre Larouche The European Microsoft Case at the Crossroads of Innovation and Competition Policy. Antitrust Law Journal 75: 601-631.

Ahlborn, C. and D. Evans, The Microsoft Judgement and its Implications.. Antitrust Law Journal 75: 601-631.

April 1 Collective Rights Management and Compulsory Licensing of Music


Slate: Fear the Kindle

Privacy Engineering for DRM, Feigenbaum et al, 

Business models that are in use for digital content

De Filippi, (1) Comparison chart, (2) DRM Systems


Aldrich, in course resources. An Exploration of Rights Management Technologies Used in the Music Industry

Digital Rights Management and the Pricing of Digital Products, Park and Scotchmer

Pogue, A New Zune,
NYT 2008 (course resources)

Wall Street Journal articles about iPad (WSJ_iPad in resources)

De Filippi, (1) Comparison chart, (2) DRM Systems


Scotchmer CROs powerpoint

Besen, Economic Analysis of Collectives.
Besen, Compensating Creators
Besen, Private Copying
Craft: 2001  Webcasting Music RevolutionConley, 2008 Extraterritoriality
Feldman, Chuang. Overcoming  Free-Rider Behavior in Peer to Peer Systems

US v. ASCAP 2008


April 8

Recommender systems

Resnick, Zeckhauser. 2001. Trust Among Strangers in Internet Transactions: Empirical Analysis of eBay's Reputation System.

Resnick, Zeckhauser, Swanson, Lockwood. The Value of Reputation on eBay: A Controlled Experiment

Miller, Nolan, Resnick,  Zeckhauser. 2005. Eliciting Honest Feedback: The Peer Prediction Method


Sarwar et al, in WWW'01 Proceedings (Sections 1,2)


Avery, Resnick and Zeckhauser, Market for Evaluations, AER 89:564-584

Dellaroca, Online Opinion Forums. 2006. Management Science 52:1577–1593.

Dellarocas, Digitization of Word of Mouth, Management Science 49:1407-1424

April 15

Ben Jones

Digital Information Systems and Relational contracting in the supply chain April 15

April 22
Identity Theft, Privacy

Chris Hoofnagle

How Identity Theft Works: (in course resources)
Solove, The New Vulnerability...
Pousen, One Hacker's Audacious Plan...
TheAge.Com.Au, Value of Stolen Identities
Hoofnagle, Internalizing Identify Theft

Hoofnagle Big Brother's Little Helpers: How ChoicePoint and Other Commercial Data Brokers Collect, Process, and Package Your Data for Law Enforcement



Geoff Voelker, UCSD CS: print powerpoint, listen to MP3 lecture (Podcast)

Feldman, Chuang. Overcoming  Free-Rider Behavior in Peer to Peer Systems
Symantec Report on the Underground Economy
S. Wallach. Voting_System_risk_Assessment_via_computational_complexity_analysis

Privacy, recommended

Solove, Brief History of Information Privacy Law
Hoofnagle & Solove, A Model Regime of Privacy Protection
Hoofnagle Big Brother's Little Helpers: How ChoicePoint and Other Commercial Data Brokers Collect, Process, and Package Your Data for Law Enforcement

Assignment 9

April 29

Net Neutrality

E. Felten, Three Flavors of Net Neutrality

E. Felten Nuts and Bolts of Net Neutrality

NYT articles in resources


Economides, N. 2009. Net Neutrality, Non-Discrimination and Digital Distribution of Content Through the Internet.


H. Shelanski, "Network Neutrality: Regulating with More Questions than Answers
Chirico, van der Haar, Larouche, Net Neutrality in the EU

Chirico, van der Haar, Larouche presentation


Tim Wu and Chris Yoo, Keeping the Internet Neutral
Tim Wu, Network Neutrality, Broadband Discrimination

April 29


Open Source Development

Schwarz and Takhteyev, Half a Century of Public Software Institutions: Open Source as a Solution to the Hold-up Problem.

Scotchmer. Openness, Open Source, and the Veil of Ignorance.

Maurer and Scotchmer, Open Source Software: the New IP Paradigm 


Two-Sided Markets

David Evans, Two Sided Platforms and Single-Firm Conduct

Farrell and Weiser, Vertical Integration and Open Access Policies: Toward a Convergence of Antitrust and REgulation in the Internet Age.
Armstrong (2006): Competition in Two Sided Markets
Tirole (2005): Two -Sided Markets: A Progress Report
Hagiu (2007): Merchant or Two-Sided Platform?
Does this literature have anything to say about EC_versus_Microsoft_2009?

Miscellaneous Topics