Economics of Information

1. Economics of Information “Out of the rubble of failing markets who will pick up a stone and start building an empire?”

2. Traditional Market Requirements • Repeated Interaction • Reputation • Trust • Accountability • Identity • Regulatory Framework • Legal recourse Economics of Information - Mike Shor

3. Trust • Trust can be built • Reputation building • Trust can be transferred • Recommendation, certification • Must trust the certifier • Trust can be leveraged • Trust can be bought • Liability policies, entry fees Economics of Information - Mike Shor

4. Markets Without TrustA Simple Example • A market for widgets • High quality: value $150 cost: $50 • Low quality: value $100 cost: $25 • Without repeated interaction • Even if seller claims that he is producing high quality, has incentive to cheat • Consumers only pay for low quality • Inefficient market! • Potential profit from high quality is greater Economics of Information - Mike Shor

5. Markets With Trust • Seller announces high quality product • sets price of $125 • Consumer observes quality after purchase • If consumer is cheated, does not buy again • Firm profit calculations: • Low: 125-25 = 100 0 in the future • High: 125-50 = 75 75 in the future • Incentive to be honest • Incentive to trust Trust is NOT a zero-sum game! Economics of Information - Mike Shor

6. Electronic Solutions • Money ripping • Waiting taxis • Bit commitment • Stockbroker recommendations • Fair coin flips • Bargaining • Others • Digital security deposits • Online contract commitments All of these require intermediaries! Economics of Information - Mike Shor

7. Economic Solution • Trust is essential • Efficient operation of markets • Electronic solutions do not create trust • Simply alleviate the effects of lack of trust • But this still raises value • I.e. creates profit • Real trust requires persistent identities Economics of Information - Mike Shor

8. Identity • Three layers of identity • Persistent identity • Social security numbers • Pseudonymity • The local pub • Anonymity • Cash purchases • Do markets require all three to exist? Economics of Information - Mike Shor

9. The Case for Intermediaries: Public Keys • Creation of Asymmetric Cryptography • Allowed for private and public “keys” • Can know if a message is authentic • Problems • Access to public keys • “Spoofing” • Solution • Digital signature authorities • “Vouch” for public key Economics of Information - Mike Shor

10. A Failing Model • X.500 standards • Global directory of named entities • Each person is tied into a hierarchy • Me: (a sample X.500 certificate) • cn=Mike Shor ou=Owen l=Nashville st=TN • “Mike’s key is 18722635” • Co-signed by me, the Dean, the Chancellor, the Mayor, the Governor, … • Authentication through faith in “least common ancestor” Economics of Information - Mike Shor

11. Real Reputation Systems • Repeated interaction • Requires at least persistent pseudonyms • Agency relations • Representatives from the gas company • Word of mouth • “Unverified” mouths are trusted in numbers • Advice from trusted sources Economics of Information - Mike Shor

12. Economic Needs • Have acts performed on one’s behalf by others • Perform actions without declaring identities • Communicate the existence of attributes without revealing identity • Persistence in relationships without identification Economics of Information - Mike Shor

13. Electronic Solutions • Anonymity • Janus: unique identity for each web site • Remailers, Serial encrypted routing • Pseudonymity • anon.penet.fi (remailer) • Hotmail.com • eBay reputation ratings • Would Universal systems be valuable? • Pseudonymity? (eBay) • Persistent true identity? (online brokerages) • Trait-Certified pseudonymity? (B2B auction sites) Economics of Information - Mike Shor

14. Other market failures? • Other opportunities? • What do people want to do online? • What is preventing efficient transactions? Economics of Information - Mike Shor

15. The Global Economy “We have a global network, a global economy and global companies, but we have not got a global legal system. Never before have we lived in a situation like this.” - Robert Cailliau Economics of Information - Mike Shor

16. Encryption and Computing Power Domain of Trademarks Authentication Privacy and Use of Information Information Property Rights and Protection Universal Service and Access Customs Taxation Public and Private Sector Roles Licensing Content Development Technical Standards Electronic Currency Labor Laws Challenges for Global Regulation Economics of Information - Mike Shor

17. Privacy • 40% of web registration data is falsified • 66% do not register if they do not know how registration data will be used • 63% do not feel that registration is worthwhile considering site content • 58% do not trust the sites that collect information from them Economics of Information - Mike Shor

18. Privacy • The right to be left alone • “Informational Privacy” • Example (medical advice): • Buy a book from Amazon on depression • Go to onhealth.com and register • Ask a doctor in a newsgroup • In “cybermall” all actions are trackable Economics of Information - Mike Shor

19. A Framework for Privacy • Notice • Why information is collected • Consent • Permission to collect and use • Access • Allow “ownership” over information • Security • Maintain integrity of data • Redress • Provide enforcement and remedies Economics of Information - Mike Shor

20. Notice • What information is being collected? • Who is collecting the information? • Why information is being collected? • To whom is it disclosed? • Must make sure that people are aware of policies (not simply policy availability) • Information collected is required for transaction or consumer interest Economics of Information - Mike Shor

21. Consent • Choice • Must have easy opt-out methods • Process • Information used only in agreed-upon ways • Must opt-in for collection of sensitive information • racial, ethnic, religious, political, philosophical, sexual, associative, medical, etc. Economics of Information - Mike Shor

22. Privacy • ACCESS : Consumers have right to • Access personal information • Challenge validity with neutral parties • Offer corrections • SECURITY • Companies responsible for maintaining integrity of data (civil/criminal penalties) • REDRESS • Companies must supply contact information • Misuse of information carries remedies Economics of Information - Mike Shor

23. European Union Directive • “The transfer of personal data to a third country which does not ensure an adequate level of protection must be prohibited” • Further: • Noncompliant web sites may be barred • Corporations may be fined • US response: self-regulation Economics of Information - Mike Shor

24. Electronic Solutions • Privacy Negotiation • Example: P3P (Platform for Privacy Preferences) • Both sides set privacy preferences • User on browser, store on server • Software negotiates “privacy” Economics of Information - Mike Shor

25. P3P Challenges • Theory • How should negotiations work? • Pragmatic • How should technology be structured? • Regulatory • What are acceptable privacy policies? • Marketing • Who would be willing to pay for this service? Economics of Information - Mike Shor

26. EU vs. US • “Fundamental” US rights and principles are not held as fundamental in many countries. • “Freedom of Speech” • “Freedom of Association” “Most citizens are implacably opposed to censorship in any form – except censorship of whatever they personally happen to find offensive” Economics of Information - Mike Shor

27. Free Speech • SINGAPORE: ISPs must filter out content affecting public morals or religious hegemony • CHINA: Blocks most Western media outlets • FRANCE: Prohibits sale of Nazi-related artifacts • GERMANY: Arrested a political operative for providing a link to an objectionable online site • EU directive (June 2000): Nations may restrict the free flow of information if: • It is contrary to public policy • It incites hatred Economics of Information - Mike Shor

28. And in the US • United States v. Thomas, 1996 6th Circuit Court 1996 • affirmed the convictions of a California couple for violating federal obscenity laws stemming from electronic bulletin board postings made by the couple in California but accessible from and offensive to the community standards of Tennessee Economics of Information - Mike Shor

29. Summary • The new high-speed global markets bring many advantages, but also challenges • Whoever can solve those problems (technology meets marketing) will prosper in the information age • Next time What is information? Economics of Information - Mike Shor