Somebody over at Crooked Timber drew my attention to “Moral reasoning and Higher-Education Policy” written by two high-end liberal arts college president types. They get things rolling by stating “even students who pay full tuition receive sizable subsidies” and it goes onto revealing some of what goes on behind the scenes as schools try to manage their pricing in a system that “rests on a set of ethical judgments” and is “heavily regulated by the federal government.”

Portions of the essay are just great, particularly if you enjoy scandalous paranoia.

The colleges in effect say, “Share with us these quite intimate details of your personal financial situation, and we in turn will use that information, to identify those who need our help”

Yet our current situation is rather troubling. The colleges still get families to provide that information, but the idea that they will not use that information for competitive advantage is largely obsolete. Many institutions use it, for example, to exclude students whom they can’t afford to aid. They … try to charge … highest “net” price they will be willing to pay.”

That phrase “willing to pay” is the touch stone of a discriminatory pricing; the means to garnering the maximum profit for the goods your selling is always a question of discovering what the maximum the buyer is willing to pay. This behavior is good self interested economics and it is a lot easier if you can get him to reveal more private information. Of course if buyers catch you then a “A good deal of trust has been drained from the system…”

They mention some particularly thorny examples of information, conveniently available, that an economically rational school is tempted to use and which they suspect some do. For example signing the admission’s guest book signals an increased desire and so should raise the price offered. Same story if your parents attended the school.

Having just read that I was amused by this similar example from the payment’s industry. It’s an Ad show’s the consumer getting a coupon on their purchase because the payment system knows their payment habits, that they are shopping with a competitor, and so a discount is in order.

Pricing games are deeply entwined with privacy and secrecy. So for some reason it seems only right that that paper on ethics in university management is behind garden wall where the consumers won’t see it. But that’s sad because it is a very good very nuanced essay.

Michael Froomkin’s musing that toll collector might be the worst job has lead to some to be less than amused but, yeah; I was amused for the self centered reason that I’ve thought a lot about toll collecting. You see my favorite business model is the two sided network, i.e. a hub that coordinates the transaction traffic between two groups and for the longest time my preferred visualization for this model is as a bridge between the two populations.  The toll taking funds the owner’s house on the beach.  These are very profitable businesses that are very hard to create. They are like the old and foolish idea of selling to China where in you fantasize making a vast sum of money by charging a vast population a tiny tiny amount of money. Businesses like this are easy to find, because they have to touch vast populations, but they are very hard to build because you have to coordinate the millions, or billions, of transactions. Not just get those transactions to take place, you have to charge a toll on each one.

I love the saying the economics takes as it’s area of interest solved political problems, e.g. that each simple economic transaction marks a solution to some political problem. Of course every transaction is a political act. My choice where to buy Harry Potter is a vote in a political negotiation about the nature of modern retailing; the currency system I use, the store I select, the discounts (bribes) I garner, etc. etc. all fold into that politics. I suspect, for example, that the average cost to merchants of credit card transactions is around 5-7% of the transaction. Contrasting that to the total tax burden it seems like a very high cost for an alternate currency system. The regulatory framework around that, for example the bankruptcy rules, are of course a part of negotiating those taxes; a political problem. We have, depending upon our mood, various names for the processes that frame the politics of these negotiations about how to coordinate the transactions and who gets to collect the tolls if any. We can call it creative destruction, entrepreneurship, institution building, politics, revolution, etc. etc.

Sometimes we even call it freedom not so much because each time you succeed in creating a new high volume widely used from of exchange you create a bloom of new options for fun things in it’s penumbra; but because often the new institutional framework routes around an existing system’s constraints. It maybe the relaxing of constraints that creates the sense of freedom more than the bloom of fresh options. (I think there is something in that which is related to Clay’s recent point about “taking for granted“; e.g. that those freed have a hard time taking full advantage of the fresh option space because their muscles are somehow stiff; but I’m not clear exactly what.)

In the folk tale I recall the ferryman tricks one of his passengers into taking over his job. I have a few fluffy theories as to why that is. The toll collector is not the owner of the hub; he’s just a cog in the machine. In fact the hub owner would prefer that he never gum up the works. Heaven forbid that he should enter add complexity to the transaction. The toll taking is added complexity already the owner would prefer that tax be as invisible as possible.

There are two other reasons though; that extend beyond just the toll taker and effect the hub owner. The owner of a successful hub has a captured something of a monopoly; what a military man might call a high value target. Keeping everything running smoothly is tough work. Meanwhile each of those travelers passing over the ferry are going someplace, doing something, they are on holiday, going to town, moving on. They are free. He is not; he’s got a job to do.

Delegating to the toll booth collector the tedium is all well and good; but after a bit the toll booth collector has the worst of all perspectives. He sits in the center of a monopoly touching each coin of the monopoly rents but keeping none of it while watching all the happy travelers exercising the options created enabled by the solution to the coordination problem in which he can not share. No wonder, after a while, the begins to fantasize trading places with one of the travelers.

Delightfully, in the folktale the ferryman finally manages to foist the gig off on the king.

Businesses that provide a platform for third party developers are directly analogous to real estate development with the platform vendor in the role of landlord. The ultimate landlords are, of course, nation states. How all that is governed is the primary turf under dispute in politics. For example in colonial Boston the state delegated to Harvard University the rights to build a bridge over the river. Running the bridge was quite profitable, and later when the state wanted to build a second bridge Harvard sued them for breach of contract. Later the state licenced a lot of toll roads and canals, which mostly turned out not to be profitable. When the private operators folded the state got left holding the bag. Historically you needed to get a license from the king to run pretty much any business. Some of these where “licenses to print money,” others less so.

Vendors Apple, Microsoft, Google, Facebook, etc. etc., like states, manage their platforms to create economic growth on the platform for all the various reasons. For example Tivo averages $8.78 per subscriber per year and one way for them to increase revenue is to raise taxes or get more customers to move onto their platform. But an example like that can be extremely misleading. The bloom of economic activity around a platform offers many options, and the king can manage those licenses in numerous ways. The traditional technique is to employ the relatives. But more profitable is to spin off private businesses to friends and family.

The European kings handing out license for regions of the new world was mixed bag for the license holders; but the US government handing out license for the cross continental railroads was a pretty good deal. The railroad barons managed to retain the rights to much of the land around the rail lines. That’s an interesting contrast to the Louisiana purchase where the Federal government believed it would recoup the cost of the purchase by selling the land, but since we already had a long tradition of taking rather than paying for land it never did.

The railroad barons (like modern platform vendors) would advertise to attract settlers (developers) to their real estate (platforms). Here’s a story:

IN THE BEGINNING, there were 10 families of Germans from Russia, who arrived in Fresno, CA on June 19, 1887.

On May 8, along with 219 other immigrants, they had left the villages of Straub and Stahl am Tarlyk, on the Wiesenseite of the Volga River, journeying westward traveling by wagon, train, and boat through Poland, East Prussia, and Brandenburg to Bremen, Germany, the port of embarkation. When they docked in New York, they intended to go to Lincoln, Nebraska.

52 days later, on June 19th, 31 of these pioneers arrived at the old Southern Pacific Railroad Depot in Fresno, California. They brought their families to this great San Joaquin Valley to seek a better life for themselves and scouting for other families in their home villages in Russia.

According to Alex C. Nilmeier, of Fresno, his grandfather Philip Nilmeier had become acquainted with a Jewish salesman on board ship. He was a man of the world who believed the San Joaquin Valley had great potential as an agricultural area. Philip Nilmeier was able to convince ten families to change their destination from Lincoln, NE to Fresno. In 1919, he said that certain articles in a little booklet, setting forth the attractions of Fresno County, for working people, also induced him to break away from the homeland.

That worked out! But golly, think about the risk these folks were taking. All on the basis of a little booklet.  The visitor center of a national park I once visited had a picture taken about that time showing a barren landscape spotted with occasional hovels, in the foreground a family stood in front of theirs. The caption informed us that these were sod houses, since there was no other building material and that everybody died that winter.  I doubt their little booklet used the modern name for that park The Badlands. A tremendous load of Survivor Bias is built into the stores that get told about all these platforms.

Engineer for serendipity. — Roy Fielding

Brilliant.  More delightful then what I call creating large option spaces.

Surprisingly hard to get funded though.

Information goods are, by definition, abundant.  That is one of the principle reasons why software companies can be so extremely profitable.  Oracle’s profit margin is over 30% while your typical firm’s profit margin is 8%.  It’s easier to do that when the cost of the next unit you produce approaches zero.

Meanwhile one of the scarcity is one of the top ways to motivate action.  The economists built entire branch of sociology on that insight.  So vendors of information goods often strive to create the impression of scarcity where, in fact, there isn’t much.  When I was a kid you couldn’t subscribe to National Geographic without an invitation from a current subscriber.

I was amused this morning to get an email from a vendor.  He wanted me to know that I should act now because my limited pool of invitations to his service will turn into pumpkins soon.  Why might they turn into pumpkins, because he’s about to introduce a new improved invitation system.  I love it. Of course I would never hand out these old and dusty invitations, it would be embarrassing later when they ask why they didn’t get the new improved shinny invites.

There is a place where you get scarcity in information goods; when they are new.  New information holds the potential for new opportunities.  It creates a option space and sometimes the first settlers in a new space win big prizes.  Sometimes the starve to death.  So maybe I should hand out these invitations before the new risky ones are released.

Societies cut small actors some slack. We don’t expect children, visitors, etc. to adhere to the regulations in the same way we expect those who are closer to the core of the community. There are plenty of reasons for this. For example the small actors are so numerous. We license plumbers, but we don’t attempt to regulate home owners who might engage in a bit of weekend remodeling. It’s not just cost, it’s also ethical. We have a lot of sympathy for those on the periphery. We are all on somebody else’s periphery. We have all been young, sick, stupid, etc. We know that the periphery is a source of innovation. We know that small actors are often the only ones who can afford to speak truth to power.

Where a society draws the line on it’s regulatory frameworks is open to negotiation. My town doesn’t allow home owners to do their own plumbing. I’ve a friend who bought a house from a dentist. The house features numerous repairs done with dental cement. I love that story. It always make me think of home dentistry, or home schooling.

The line between the well regulated systems in a society and the slack we cut small actors creates interesting market dynamics. Herbalife can outsource it’s criminal advertising to it’s small business partners. Ebay continually struggles with how to regulate it’s vast hordes sellers, some percentage of which are criminal and taint the reputation of the market it owns. UPS can abuse the parking ticket system.

The parking ticket system is particularly nice because the society negotiates a price for violations of the regulatory system. That price is set, in part, to cut the small actors some slack. When San Francisco sets the price of parking ticket I doubt they were thinking about a fortune 500 firm abusing the system and were more thinking about the typical citizen breaking the rule as they run into pickup some take out the bought from a small business.

Since these things are negotiable they shift over time and you can shop around for a venue who’s regulatory cut points serve your needs. Firms do that all time. Jane Jacob’s pointed out years ago that as firms mature they become less dependent on the pool of services that an urban venue provide and that in turn enables them to move to lower cost, less regulated, venues. That goes the other way, too. Walmart emerged in a near zero regulated environment. As it has moved into more regulated environments it sometimes adapts, and sometimes it uses it’s market power to renegotiate the rules.

The internet’s effect our our society is rife with these dynamics!

It changes fundamentally the cost of keeping an eye on the small actors and their behavior. It’s big-brother’s best friend.

It has also enabled the aggregation of contributions from huge populations of small actors. Google, ebay, wikipedia, open source, are only a few of the example of new institutions that it has enabled all of which work by plucking value out of the activities of small actors. You could argue that the bot-nets are another example of large actors coopting the hard to regulate small actors.
This posting was triggered by another example of a place where you can see a price placed on the license we grant to small actors to push the boundaries of the regulatory frameworks. I.e. this posting about how the music copyright holders are trying to tighten up their regulation of the small internet broadcasters. It’s a facinating case, in part, because some of the tiny broadcasters are just like the small businesses that herbalife leverages. Acting in the role of herbalife in this varient are the companies that offer to host the tiny (aka personal) internet radio services. I.e. consider this sentence “The minimum fee is $500 per channel per year. There is no clear definition of what a “channel” is for services that make up individualized play-lists for listeners.”