Talk:Lecture 1

Lecture 1 Discussion=====

Welcome to the Discussion Page for Lecture 1. Please use the + sign in the top of the screen to add comments to the page.

Article on 'hijacking' of cumulative innovation

Interesting article from First Monday:

The economics of open source hijacking and the declining quality of digital information resources: A case for copyleft

-- Tapan

Additional Readings

The following readings contain additional information on last night's material:

1) On Whether Patents are Good for Software Development:

James Bessen & Eric Maskin, Sequential Innovation, Patents, and Innovation, (Jan. 2000), available at http://www.researchoninnovation.org/patent.pdf

2) On the Liberality vel non of IBM’s Licensing Policy:

Ronald Mann, The Myth of the Software Patent Thicket (2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=510103

3) Prof. Scotchmer's forthcoming book: Suzanne Scotchmer, Innovation & Incentives (MIT Jan. 2005). (The book is available at http://mitpress.mit.edu/catalog/item/default.asp?sid=872E36D5-2D83-4889-B3C4-DDB4DEF36AE3&ttype=2&tid=10277)

4) Finally, just for fun, two Golden Oldies. As far as I know, nobody has noticed them before. The first (I claim) shows that the key Internet technology of packet switching already existed in the Soviet Union ca. 1948. The second presents an anecdote describing IBM's experiences with "the anticommons" during the 1950s.

A Great Novelist Foresees the Internet

"Clipping, damping, amplitude compression, electronic differentiation and integration of normal human speech were engineering desecrations comparable to the dismemberment of a southern resort area like Novy Afon or Guzuf into little fragments of matter, stuffing them into a billion matchboxes, mixing them all up, flying them to Nerchinsk, sorting them out and reassembling them in their new location so that the result could not be distinguished from the original -- a recreation of the subtropics, the sound of waves on the shore, the southern air and moonlight." A I Solzhenitsyn, The First Circle (Harper & Row: NY: 1968). T. P. Whitney, Trans.

The Anticommons at IBM:

“At an August 1955 meeting with key engineers in Poughkeepsie, Watson Jr., chided them from hesitating to use ferrite cores in commercial products because of Wang’s patents. He quoted his father as saying, ‘That’s the most ridiculous reason for not moving into a new area that I’ve ever heard of because, one way or another, we can negotiate with Wang.’

“Indeed, the company was able to obtain rights to Wang’s patent for the reasonable fee of several hundred thousand dollars. . .

“Watson’s confidence that rights to any patent could be obtained at a reasonable fee, or the patent circumvented, appeared to be justified. But by the end of the decade, his confidence was deeply shaken. [Jay W.] Forrester had filed a a patent application under which MIT (through its patent management firm, Research Corporation) was demanding royalties of 2 cents for every magnetic core used in a coincident-current memory. This demand, made in November 1959, was quickly rejected for IBM by James Birkenstock who noted that ‘in our core storage units we employ seven of our own patents, as well as having acquired licenses under five patents from outsiders which were necessary to make the Forrester patent usable.’ If a royalty of 2 cents per bit were demanded under each of these patents, the cost per bit for royalties alone would be 26 cents, making core storage economically infeasible. Based on this analysis, Birkenstock concluded that a royalty of 2 cents per bit was ten to twenty times too much. But Research Corporation indicated it had already rejected an offer of 1 cent per bit, so an impasse resulted.”

[In an October 1960 interference proceeding, Forrester lost its ten broadest claims to a rival patent held by RCA. IBM had a cross-license to RCA’s patents.] “The jubilation was short-lived, however, as Research Corporation continued to demand royalties of 2 cents per core and initiated a civil action to regain the lost patent claims. Thus while IBM engineers were developing cost-effective memory designs and improving manufacturing techniques, litigation between RCA and MIT plodded slowly in the courts toward a settlement that would have profound ramifications on IBM and the entire data processing industry . . .

[IBM experimented with several other technologies, including “the Flute.”] “The experience with the Flute helped to emphaisize that there was no attractive alternative to coincident-current 3D selection ferrite-core memories. IBM had obtained rights to use all relevant patents except Forrester’s – and the validity of that patent was still being argued in the courts.

“Meanwhile, IBM engineers cointued to develop improved ferrite-core memory design and manufacturing methods as customers ordered more and larger memories. By the end of 1963, the company’s annual production of ferrite cores exceeded 1 billion; a royalty of 2 cetns per core would alone have cost more than $20 million per year. With the IBM System/360 slated for announcement in early 1964, the situation was intolerable. In February, 1964, an agreement was finally reached in which the company agreed to pay a on-time fee of $13 million for the use of Forrester’s patent if at least one of the claims was upheld in the litigation between MIT and RCA. The following month RCA and MIT reached an agreement in which the validity of Forrester’s patent was affirmed, and IBM made its payment to MIT. Larger than any previous payment it was nevertheless dramatically cheaper than the requested royalty of 2 cents per bit.”

C.J. Bashe, L. Johnson, J. Palmer & Emerson Pugh, IBM’s Early Computers (MIT: 1986), pp. 267-70.

Books Mentioned During Lecture

Two books were mentioned during the lecture by Ed Lazowska and Steve Maurer. One was http://www.amazon.com/exec/obidos/ASIN/087584863X/qid=1096603863/sr=ka-1/ref=pd_ka_1/102-7272045-1856915 Information Rules]. The other is http://mitpress.mit.edu/catalog/item/default.asp?sid=872E36D5-2D83-4889-B3C4-DDB4DEF36AE3&ttype=2&tid=10277

The two books complement one another quite nicely. Varian & Shapiro is already a classic. It tells a lot of stories and helps build intuition about what's going on in the new economy. The approach is in the general tradition of "how-to" business books. Prof. Scotchmer's book is just coming out from MIT next January and can be ordered through their catalog. It follows the economics tradition by starting with a handful of assumptions and working out the consequences through simple models. (Full disclosure, I'm a co-author on 3 of the chapters -- smm) It helps you learn to think about IT problems more abstractly. This is obviously a good approach for policymakers, but I also find that the approach provides nice insights for lawyers or businesspeople trying to design practical transactions. I'd say the technical level is a bit easier than the Procuring Knowledge reading, but the main point is that non-social scientists shouldn't be intimidated. Partly, that's because the book is modular -- i.e., it was deliberately written so that you can skip the formal proofs and not lose the thread. Second, I think it's a good general principle to get in the habit of reading books that are slightly too hard for you. That's equally true for IT people reading social science and for social scientists reading about technology! BTW, social scientists use the same math as the sciences, so many tech folk will find the subject surprisingly transparent even at a formal level.

Discussion of P=MC and entertainment media

From: csep590tu-admin@cs.washington.edu; on behalf of; Walker Duhon [wduhon@windows.microsoft.com] To: James Welle; Stephen Mark Maurer; isking@u.washington.edu csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media

That does put an additional wrinkle in -- the sentence should be rephrased in the case of Netflix. The overall point that Netflix's decision to supply a title is dependent not just on the addtional cost but also the revenue it generates still holds, but under Netflix's subscription model it is much harder to quantify the revenue benefit of having the title on hand. Netflix has a big selling point with subscribers in having such broad selection, both of hot titles and obscure ones. Shipping the movie to customers doesn't contribute to revenue, but having the movie available contributes to revenue by attracting and keeping subscribers. It would be interesting to know what the actual decision-making process is in the case of Netflix -- is it based upon some calculation of demand? Do they just supply any movie they can think of to get the overall reputation of selection?

Interesting article.

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From: James Welle Sent: Sat 10/2/2004 5:03 PM To: Walker Duhon; Stephen Mark Maurer; isking@u.washington.edu Cc: csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media

One thing that presumably happens is that Netflix can afford to hold a DVD in inventory based on total demand across the entire country. That's a nice illustration of how IT can overcome frictions that prevent physical businesses from serving demand that theoretically exists. - smm

There have been several stories on the web speculating on how many movies a customer has to rent before Netflix loses money on that particular customer.

http://www.kuro5hin.org/story/2004/4/18/14547/1054

"Both Blockbuster and Netflix will tend to supply those titles in which the revenue generated from rentals exceeds the ~constant cost of supplying the title."

Is this still true with a subscription model? The fact that you actually shipped the DVD to someone doesn't actually generate revenue and titles that are rented frequently would generate the most shipping and handling costs.

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Original Message-----

From: csep590tu-admin@cs.washington.edu [1] On Behalf Of Walker Duhon Sent: Saturday, October 02, 2004 3:25 PM To: Stephen Mark Maurer; isking@u.washington.edu Cc: csep590tu@cs.washington.edu Subject: RE: [CSE P 590TU] P=MC and entertainment media

I don't think that the notion of marginal costs captures what is going on in this case. Marginal cost is the cost of supplying an additional unit of a good. That Blockbuster faces higher marginal costs than Netflix which in turn faces higher marginal costs than streaming is reasonable. It is less reasonable to assume that Blockbuster faces rising marginal costs as it supplies each additional video. It is more likely that Blockbuster faces constant or perhaps even slightly decreasing marginal costs as its stores get bigger -- the price of real estate per unit area is roughly constant, the price of the additional video/DVD is constant, and the price of the employees to run the place is constant or perhaps decreasing per video offered. Given this, it is likely that at all levels of output, price exceeds marginal cost.

The limiting factor in Blockbuster's case is not cost but demand. Note that movies are not a uniform product (an assumption of the Micro 101 model) and the demand for each title is different. Both Blockbuster and Netflix will tend to supply those titles in which the revenue generated from rentals exceeds the ~constant cost of supplying the title. Because a Blockbuster store serves a limited geographic area (limiting the customer base) the subset of titles that the individual store supplies on this basis is going to be relatively small. Netflix serves a larger geographic area, and can thus expect to generate sufficient revenue from more obscure titles supplied in small amounts. It is true that since marginal costs are smaller for Netflix (to the extent that this is indeed true) it can supply still more titles, but it is nonetheless (revenue - cost) and not marginal cost alone that governs the decision.

Of course this is too simple as well. There are a lot of other factors that go into the titles supplied at Blockbuster including the organizational and management convenience of having stores roughly uniform in scale and selection.

Walker

From: csep590tu-admin@cs.washington.edu [2] On Behalf Of Ed Lazowska Sent: Saturday, October 02, 2004 2:43 PM To: Stephen Mark Maurer; isking@u.washington.edu Cc: csep590tu - Mailing List Subject: RE: [CSE P 590TU] P=MC and entertainment media

Just by the way, there is a service that has been rolled out in a few cities that nicely complements NetFlix.

You get something that's pretty much like a Tivo box. It comes pre-loaded with the 100 most recent DVD releases. Using a sub-carrier of the local PBS television station, the company trickles down new DVD releases to the box, displacing older ones -- it's a pure FIFO strategy, so the box always has the 100 most recent releases. When you watch a video, the box logs it, and once a week it calls Master Control and reports your usage; you get a monthly bill. There are only about 30 new releases a month, so the bandwidth requirements are minimal.

The technology comes from a Seattle company; I believe it's Disney that's rolling it out; it's in a few cities at present (but not Seattle).

The cost to "do a city" is only about $100K -- the cost of adapting the TV station to transmit the new releases on the sub-carrier.

VERY clever. Cheap as dirt, and it replaces the "front half" of your neighborhood video store -- the new releases. With no "Crap! All 16 copies have been checked out" problem. NetFlix, as Ian notes, has already wiped out the back half of the store.

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Original Message-----

From: csep590tu-admin@cs.washington.edu [3] On Behalf Of Stephen Mark Maurer Sent: Saturday, October 02, 2004 9:41 AM To: isking@u.washington.edu Cc: csep590tu - Mailing List Subject: Re: [CSE P 590TU] P=MC and entertainment media

Dear All,

Ian, thanks for this. BTW, lecture-specific comments should probably go on the Wiki rather than e-mail, particularly when they're nice enough to keep the way this one is.

It sounds like what's happening here is that the bricks and mortar world has MC = Price of Downtown Real Estate = High, and the streaming world will eventually have MC = 0. But in the meanwhile, we have Netflix which still has to pay for real estate in the form of a warehouse in a disreputable part of town, MC = Low, but also gets a significant amount of free space from the fact that its inventory is sitting in the mail and/or people's houses. One interesing question is whether Digital Rights Management (DRM) would be useful here. Lots of businesses give away CDs like a disposable item. Suppose I got the CD but had to telephone Netflix with my credit card number each time I wanted to use it...

So yes, you make a nice point. Here, DWL has a cultural face: Instead of everybody watching the same stuff, people with niche interests can look at their first, best choices. Kind of like what happened between the days when everybody read TIME and NEWSWEEK and the birth of the Web.

Have a good weekend!

smm

> All, > > There's a good article in this month's (October 2004) Wired magazine > called "The Long Tail", that is a corollary of the discussion we were > having about economics when the marginal cost is zero. Basically, a > bricks-and-mortar outfit such as Blockbuster (to focus on video > rental) can only carry so many (roughly 3,000) titles because of > economic limitations that drive physical limitations (i.e. a > Blockbuster store acres in size would dramatically increase MC through

> overhead); therefore, they carry those titles they believe have the > broadest popularity, to maximize return on their MC (which is cost per

> unit space of real estate to display a DVD). However, a service such > as Netflix can afford to carry titles that may only see 100 rentals in

> a month, or a year - but they can carry a LOT of them, and over half > their business is outside this "major market" catalog (thus, the "long

> tail" of low popularity content). They can afford this because their > MC is lower than that of Blockbuster; if they rent "Forbidden Planet" > once a year, it's revenue above and beyond their overall MC per title > (or they're being stupid and won't be around much longer). Other > forms of media (e.g. streamed/downloaded music) see the same benefit -

> and the article mentions in passing the availability of retro game > software within this same model. > > The moral: if it doesn't cost you anything (extra) to deliver a > product only a minority want, you're still making money on that > minority. If you don't serve that minority, they're your dead weight > loss. -- Ian >

I'd have to say that I'm a non-commitmental type of person that still goes to the mom and pop stores to get the 99 cent DVD or VHS rentals. I think they make good business too. I'm from the suburbs of San Jose right here in the bay area, and at some point or another in high school, my classmates worked at the local Longs Drugs Store. The model they have set up for DVD and VHS rentals works wonders, and although they're unable to always guarantee a movie in stock, I never find it incentive enough to go across the street and pay 4 bucks for a movie. And with netflix (so I've heard), you don't always get the movie you want. They put you on this thing analogous to a course waitlist. So I guess my point is, there are so many groups of people with different preferences--those that go for price, those that go for variety, or those that go for immediate gratification. Is there a competitive strategy that can possibly capture all groups?

-Mandy Chang UCB

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Brad Struss: I found some interesting information related to this discussion in Netflix's most recent 10k filing with the SEC (http://www.sec.gov/Archives/edgar/data/1065280/000119312504128377/d10q.htm). One interesting point is that they do not directly purchase all of their DVDs. Many of them are purchased via a revenue sharing agreement that is based upon how much they are actually rented. So, in some cases, the marginal cost of each additional DVD sent to a customer is the revenue share of the DVD plus the shipping and handling.

Here's the relevant passage from their filing: "The Company acquires DVDs from studios and distributors through either direct purchases or revenue sharing agreements. The revenue sharing agreements enable the Company to obtain DVDs at a lower upfront cost than under traditional direct purchase arrangements. Under the revenue sharing agreements, the Company shares a percentage of the actual net revenues generated by the use of each particular title with the studios over a fixed period of time, or the Title Term, which is typically twelve months for each DVD title. At the end of the Title Term, the Company has the option of either returning the DVD title to the studio or purchasing the title."

The 10k also has information regarding the discussion above about when a customer becomes a money losing customer based upon the number of DVDs they rent in a month. They measure their business on three key business metrics: subscriber churn, subscriber aquisition cost, and gross margin. While a heavy renter impacts gross margin by increasing operating margin, it reduces subscriber churn and most likely increases customer satisfaction. This can result in lower marketing/customer acquisition costs offsetting the higher operating margin.

Here's the relevant 10k information:

"-Subscriber Churn: Subscriber churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. We grow our subscriber base either by adding new subscribers or by retaining existing subscribers. Subscriber churn is the key metric which allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plans. An increase in subscriber churn may signal a deterioration in the quality of our service, or it may signal an unfavorable behavioral change in the mix of new subscribers. Lower subscriber churn means higher customer retention, faster revenue growth and lower marketing expenses as a percent of revenues for any given level of subscriber acquisition.

- Subscriber Acquisition Cost: Subscriber acquisition cost is defined as total marketing expense divided by total gross subscriber additions. Management reviews this metric closely to evaluate how effective our marketing programs are in acquiring new subscribers on an economical basis.

- Gross Margin: Management reviews gross margin in conjunction with subscriber churn and subscriber acquisition cost to target a desired operating margin. For example, movie rentals per average paying subscriber may increase, which depresses our gross margin. However, increased movie rentals per average paying subscriber may result in higher subscriber satisfaction, which reduces subscriber churn and increases word-of-mouth advertising about our service. As a result, marketing expense may fall as a percentage of revenues and operating margins rise, offsetting the impact of a reduction in gross margin. We can also make trade-offs between our DVD library investments which have an inverse relationship with subscriber churn and subscriber acquisition cost. For example, an increase in our DVD library investments may improve customer satisfaction and lower subscriber churn, and hence increase the number of new subscribers acquired via word-of-mouth. This in turn may allow us to accelerate our subscriber growth for a given level of marketing spending."

Brad Struss, UW

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There's an interesting article on CNET today that talks about how Blockbuster is going to begin to provide a Netflix type of offering, but using their local retail outlets to ship customer selections out. It seems to me that this would be much more inefficient than a central distribution center, but perhaps there's a enough slack time in a Blockbuster's employees time to handle this along with other daily tasks.

http://news.com.com/Blockbusters+brick-and-mortar+Netflix+defense/2100-1026_3-5428617.html?tag=nefd.top

- Brad Struss, UW

SpaceshipOne wins the X-Prize

Avichal 21:15, 4 Oct 2004 (PDT) Well most of you must know by now that the X-Prize was won by SpaceshipOne [4]. Following our discussion of incentive mechanisms, do people on this group think that this was a successful endeavor?

I would mention a couple of points which caught my attention:

1. Their website mentions that how their prize is modeled after the 'Orteig' prize won by Charles Lindenbergh, which is attributed by some to have set the $250 Billion aviation industry in motion, and how they feel that the X-prize would do something similar for space travel. Well I really doubt if that's truly the case, infact I fear that these events will more be inline to the 60s era space race between US & USSR. Once they landed on the moon, it was almost like it was no longer fashionable. But still the X-prize has certainly garnered a lot of attention, atleast in the short term.
   
2. The website mentions that the 'Ortieg' prize of $25000, incited an investment of over $400,000 from the participating teams. Well the X-prize was $10 million, and there were 20 plus teams, with many of them putting in significant investment in this project. So while I do not know the amounts invested by the teams (Does someone?), I wouldn't be surprised if it is in the same ratio as the 'Orteig' prize (i.e. attracted $160mn in investment)
   So as far as eliciting participation is concerned, I think they were successful. Also, I must say, in my opinion the value of the prize was set correctly, so as to draw significant participation (which provides a healthy competition), but was not so high to have excessive duplication of effort. Also, looking at the various ideas proposed by the teams (launching from a baloon etc. etc.) , it did spur innovation. Infact it's even possible that more than one idea (besides the winner) goes on to be used in commercial space travel.
   

SMM: The X Prize folks make a math error here. If you are a contestant racing for a prize, the simplest version is that you will enter the race if the expected value of winning (i.e. probability of winning x payoff if you do) exceeds your R&D costs. So if you look around and see lots of people racing, it will take a very large prize to induce investment. The X-Prize rhetoric is therefore a species of perpetual motion. However, one nice thing to think about is that the earliest (1905) aviation prize was *not* winner-take-all. Instead, it awarded an even share to everyone who met the challenge (flying around the Eiffel tower) within a set number of months. The nice thing about that arrangement is that when the first airplane succeeded, the others didn't just quit and go home. So society got several airplane designs instead of just one.

1. The prize was very well backed (as per their website it was even backed by an insurance policy to ensure the full payout till 2005), so clearly they did not have any problem establishing their credibility. This surely contributed in drawing participation from various teams across the world. In prize system this is always an important factor.
   
2. This was a 'targeted' prize, and the field is certainly one I would classify as 'Big Science', where there was not much scope of a commercial gain for participants (except in very long term). Thus I think the 'prize' model was well chosen here. The onnovation that we have with the development of SpaceshipOne would not have happened probably for many years to come, but for this prize.

Update - X-Prize becomes an annual Competition

--Jackr 21:09, 5 Oct 2004 (PDT) According to this CNN article, the X-Prize will become the X-Prize Cup, an annual competition. This seems like a smart move if the goal really is to promote the industry and is another step in trying to mimic the prize environment of the early 20th century and aerospace.

SMM: NASA is trying to get Congress to fund a $20 million annual prize targeted on various grand challenges to spaceflight. It's called The Centennial Challenge

Avichal 13:23, 8 Oct 2004 (PDT) Good article. thanks! I quote this from the article:
"...Teams will compete in five different categories to win the overall cup: Fastest turnaround time between the first launch and second landing, maximum number of passengers per launch, total number of passengers during the competition, maximum altitude and fastest flight time..."

Well, for one I would be really concerned about safety issues. I mean, NASA pours in money on it's projects, and still has had a few disasters (Columbia, 2003; Challenger 1986). While I admire the fortitude of people flying these aircrafts, I would certainly be concerned about their safety. On a tigther budget, and a shorter deadline, each team may be cutting corners to win that prize.

Still, what will be most interesting to see, is that

1. Whether it works! If it really boosts space-travel, and makes it possible for common people to go in space if they want to.
2. If it catches on! Whether the idea of fueling innovation by prizes spreads to other fields too.

--Jackr 09:12, 9 Oct 2004 (PDT) I had a friend at work make the comment that American's "value human life too highly". I.e., we're too risk averse. I think there maybe something to that. Airflight progressed at a much more rapid pace than space flights seems to have progressed. Conversely, space flight, at least under NASA, seems to be much safer. Seems were sacrificing progress for safety. And my friends point was other developing countries might not make the same trade off as us and progress much more rapidly than the U.S.

Software Patents

Software patents have been a subject of controversy since quite some time now, and have recently reached a new height in wake of the campaign against software patents in Europe. Much has been written on this topic showing why software patents are bad. However, not too many alternatives have been put forth.

In a recent story on Groklaw, a software architect Craig James defends software patents but acknowledges the short comings of the present system and suggests some alternative mechanisms. An interesting read.

-- Diwaker 17:05, 11 Oct 2004 (PDT)

Patrick Haluptzok

I actually think today the patent system with respect to software is not promoting progress due to low novelty/difficulty bar for issuing patents. I personally have patents issued to me that I do feel would be obvious to folks trying to solve the same problem - and some of the biggest litigation in software patents like web page plugs, and 1 click shopping sort of things are very obvious to whoever first would run into the problem. At MSFT we get 1500 bonus for every patent filed and it is greatly encouraged, so we are very aggressive in filing patents.

Patents today waste incredible amounts of resources of intelligent lawyers and programmers filing patents and then fighting over infringement on fairly obvious solutions to problems. These resources could have been used figuring out other tough problems for the benefit to society. Product development is often held up and costs are increased due to the patent activity around the product (acquiring and defending).

The economic rewards in software currently are adequate in the first to market advantage to drive innovation. The only advantage I would give to software patents is some important secrets are made public in the patent filing that otherwise might stay buried in company trade secrets. I think the benefit of patents would be realized if the "novelty" aspect could be beefed up as a requirement so only truly innovative steps forward gained a patent.

Relevant Colloquium: Airfares. Minimizing DWL with variable pricing

Damon I just stumbled across a colloquium that has bits that are relevant to this lecture. The colloquium is a discussion of the problem of searching through the seemingly countless fares offered by airlines to provide a traveller with options that don't break their bank. The problem turns out to be extraordinarily complex (NP-hard, in fact) due to the complexity of fare rules, and the colloquium is pretty worthwhile.

Here's the bit that relates to this class. At about 24 minutes in, de Marcken explains why airfare pricing is so complex -- he gives the explanation, he says, that is most often given by the airlines. It's an attempt to maximize profit and minimize DWL with variable pricing.

Briefly, say that a flight costs $50,000 to operate. If you charge everyone $1, you'll fill the flight, but you'll only make $300. If you charge everyone $10,000, you may sell 2 tickets, and you'll still only make $20,000. What the airlines are trying to accomplish with variable pricing is getting everyone to pay what they're willing to pay. How do they do this? With seemingly arbitrary, annoying fare rules (e.g., 14-day advance, saturday-night stay, age restrictions, restrictions on use in conjunction with other fares, etc.).

The most convenient fares on a given flight will cost the most money, and people with high demand and ability to pay will pay. The cheapest fares are so loaded down with restrictions that people who can afford not to take them won't.

Even more interesting, these fare restrictions are manipulated incredibly often, in response to actual customer purchases. If the airline notices that a fare is being snapped up more often than they expected, they'll make it more inconvenient or more expensive.

It's a fascinating insight into an everyday instance of the minimizing-DWL problem we've discussed in class.

Copyright Trivia

In the hallway of the historic Paramount Theater, I witnessed an usher stopping a woman from taking a group photograph of her fiends. It seems the inside of the Paramount Theater has been copyrighted by the restoration team … taking inside photographs is prohibited. It seemed odd to me that a restoration team would be able to copyright an historic landmark.

Software Patents

(User: John) I agree that patenting software is largely a waste of time and talented people. The U.S. has been loathe to grant software patents until relatively recently. The U.S. copyright regime is crazy. Terms of copyright protection are outrageous (75 - 150 years). After studying patent law, I see no reason for patents lasting more than 10 years. Software patents can only occur where the source code is proprietary in nature. Open source code cannot tolerate patenting. At this moment, the open source code systems are winning the software development race vs. proprietary systems. There are many carrots in support of innovation and inventors. Market based monopolies are but one method of enticement. A world wide patent system is undoubtedly unworkable at this time in human history. Here is an area that needs scholarly investigation with regard to the suitability of present patent/copyright systems. Are these systems in their present guise more effective at promoting innovation than other envisionable systems? Professor Calandrillo of the U.W. Law School has written a paper on replacing these systems with a federal monetary reward system. His paper touches several sub-issues relating to patent desirability. I don't agree with him, but his ideas are relevant to this kind of discussion.