Rahul Telang

Internet Exchanges for Used Books: An Empirical Analysis of Product Cannibalization and Welfare Impact

Information systems and the Internet have facilitated the creation of used-product markets that feature a dramatically wider selection, lower search costs, and lower prices than their brick-and-mortar counterparts do. The increased viability of these used-product markets has caused concern among content creators and distributors, notably the Association of American Publishers and Authors Guild, who believe that used-product markets will significantly cannibalize new product sales. This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this paper, we empirically analyze the degree to which used products cannibalize new-product sales for booksone of the most prominent used-product categories sold online. To do this, we use a unique data set collected from Amazon.coms new and used book marketplaces to measure the degree to which used products cannibalize new-product sales. We then use these estimates to measure the resulting first-order changes in publisher welfare and consumer surplus. Our analysis suggests that used books are poor substitutes for new books for most of Amazons customers. The cross-price elasticity of new-book demand with respect to used-book prices is only 0.088. As a result, only 16 of used-book sales at Amazon cannibalize new-book purchases. The remaining 84 of used-book sales apparently would not have occurred at Amazons new-book prices. Further, our estimates suggest that this increase in book readership from Amazons used-book marketplace increases consumer surplus by approximately 67.21 million annually. This increase in consumer surplus, together with an estimated 45.05 million loss in publisher welfare and a 65.76 million increase in Amazons profits, leads to an increase in total welfare to society of approximately 87.92 million annually from the introduction of used-book markets at Amazon.com.

The Effect of Digital Sharing Technologies on Music Markets: A Survival Analysis of Albums on Ranking Charts

Recent technological and market forces have profoundly impacted the music industry. Emphasizing threats from peer-to-peer (P2P) technologies, the industry continues to seek sanctions against individuals who offer a significant number of songs for others to copy. Combining data on the performance of music albums on the Billboard charts with file sharing data from a popular network, we assess the impact of recent developments related to the music industry on survival of music albums on the charts and evaluate the specific impact of P2P sharing on an albums survival on the charts. In the post-P2P era, we find significantly reduced chart survival except for those albums that debut high on the charts. In addition, superstars and female artists continue to exhibit enhanced survival. Finally, we observe a narrowing of the advantage held by major labels. The second phase of our study isolates the impact of file sharing on album survival. We find that, although sharing does not hurt the survival of top-ranked albums, it does have a negative impact on low-ranked albums. These results point to increased risk from rapid information sharing for all but the “cream of the crop.”

The Economics of Peer-to-Peer Networks

Peer-to-Peer (P2P) networks have emerged as a significant social phenomenon for the distribution of information goods and may become an important alternative to traditional client-server network architectures for knowledge sharing within enterprises. This paper reviews and synthesizes the relevant computer science and economics literatures as they relate to P2P networks, and raises important questions for researchers interested in studying the behavior of these networks from the perspective of the economics of information technology.

Market for Software Vulnerabilities? Think Again

Software vulnerability disclosure has become a critical area of concern for policymakers. Traditionally, a Computer Emergency Response Team (CERT) acts as an infomediary between benign identifiers (who voluntarily report vulnerability information) and software users. After verifying a reported vulnerability, CERT sends out a public advisory so that users can safeguard their systems against potential exploits. Lately, firms such as iDefense have been implementing a new market-based approach for vulnerability information. The market-based infomediary provides monetary rewards to identifiers for each vulnerability reported. The infomediary then shares this information with its client base. Using this information, clients protect themselves against potential attacks that exploit those specific vulnerabilities.The key question addressed in our paper is whether movement toward such a market-based mechanism for vulnerability disclosure leads to a better social outcome. Our analysis demonstrates that an active unregulated market-based mechanism for vulnerabilities almost always underperforms a passive CERT-type mechanism. This counterintuitive result is attributed to the market-based infomediarys incentive to leak the vulnerability information inappropriately. If a profit-maximizing firm is not allowed to (or chooses not to) leak vulnerability information, we find that social welfare improves. Even a regulated market-based mechanism performs better than a CERT-type one, but only under certain conditions. Finally, we extend our analysis and show that a proposed mechanism--federally funded social planner--always performs better than a market-based mechanism.

The impact of free-riding on peer-to-peer networks

Peer-to-peer networking is gaining popularity as a architecture for sharing information goods and other computing resources. However, these networks suffer from a high level of free-riding, whereby some users consume network resources without providing any network resources. The high levels of free-riding observed by several recent studies have led some to suggest the imminent collapse of these communities as a viable information sharing mechanism. Our research develops analytic models to analyze the behavior of P2P networks in the presence of free-riding. In contrast to previous predictions, we find that P2P networks can operate effectively in the presence of significant free-riding. However, we also show that without external incentives, the level of free-riding in P2P networks is higher than socially optimal. Our research also explores the implications of these findings for entrepreneurs, network designers, and copyright holders.

Measuring Information Diffusion in an Online Community

Measuring peer influence in social networks is an important business and policy question that has become increasingly salient with the development of globally interconnected information and communication technology networks. However, in spite of the new data sources available today, researchers still face many of the same measurement challenges that have been present in the literature for over four decades: homophily, reflection and selection problems, identifying the source of influence, and determining preexisting knowledge. The goal of this paper is to develop an empirical approach for measuring information diffusion and discovery in online social networks that have these measurement challenges. We develop such an approach and apply it to data collected from 4,000 users of an online music community. We show that peers on such networks significantly increase music discovery. Moreover, we demonstrate how future research can use this method to measure information discovery and diffusion using data from other online social networks.

Inferring app demand from publicly available data

With an abundance of products available online, many online retailers provide sales rankings to make it easier for consumers to find the best-selling products. Successfully implementing product rankings online was done a decade ago by Amazon, and more recently by Apple’s App Store. However, neither market provides actual download data, a very useful statistic for both practitioners and researchers. In the past, researchers developed various strategies that allowed them to infer demand from rank data. Almost all of that work is based on an experiment that shifts sales or collaboration with a vendor to get actual sales data. In this research, we present an innovative method to use public data to infer the rank–demand relationship for the paid apps on Apple’s iTunes App Store. We find that the top-ranked paid app for iPhone generates 150 times more downloads compared to the paid app ranked at 200. Similarly, the top paid app on iPad generates 120 times more downloads compared to the paid app ranked at 200. We conclude with a discussion on an extension of this framework to the Android platform, in-app purchases, and free apps.

Measuring the risk-based value of IT security solutions

Information security problems cost millions of dollars for US companies and billions for the overall US economy. Nowadays, the question is not whether organizations need more security, but how much to spend for added security. And yet investing in IT security has always been a hard sell for IT managers. Scores of security technologies are on the market and, if anything is certain, it is that none of them can guarantee security. Each choice involves risk. The problem is that security managers lack structured cost-benefit methods to evaluate IT security solutions in light of prevailing uncertainties. A framework can help evaluate the costs and benefits of IT security solutions using a companys risk profile. Using an unconventional concept, this framework bases benefit on avoided risk rather than increased productivity. Lawrence Berkeley National Laboratory (LBNL) uses this framework to help demonstrate to management and auditors that it is significantly less expensive to accept some damage from cyberattacks than to attempt to prevent all possible damages. This pragmatic approach continues to enable LBNLs cybersecurity staff to optimize security countermeasure investments and reduce spending without sacrificing protection. The framework described here uses a risk management approach that integrates risk profile with actual damages and implementation costs to determine the costs and benefits of information security solutions. This approach requires reasonably voluminous data and is thus well suited for organizations with extensive incident data or when the consequences of incidents are high enough to warrant extensive data gathering.

An Empirical Analysis of Software Vendors' Patch Release Behavior: Impact of Vulnerability Disclosure

A key aspect of better and more secure software is timely patch release by software vendors for the vulnerabilities in their products. Software vulnerability disclosure, which refers to the publication of vulnerability information, has generated intense debate. An important consideration in this debate is the behavior of software vendors. How quickly do vendors patch vulnerabilities and how does disclosure affect patch release time? This paper compiles a unique data set from the Computer Emergency Response Team/Coordination Center (CERT) and SecurityFocus to answer this question. Our results suggest that disclosure accelerates patch release. The instantaneous probability of releasing the patch rises by nearly two and a half times because of disclosure. Open source vendors release patches more quickly than closed source vendors. Vendors are more responsive to more severe vulnerabilities. We also find that vendors respond more slowly to vulnerabilities not disclosed by CERT. We verify our results by using another publicly available data set and find that results are consistent. We also show how our estimates can aid policy makers in their decision making.

Piracy or Promotion? The Impact of Broadband Internet Penetration on Dvd Sales

The movie industry represents one area where digital networks have had a particularly strong impact on economic activity. These digital networks provide copyright holders with new sales and promotional channels for their content, while also providing consumers with new opportunities to obtain high quality free copies of this content. Broadband access is a necessary condition for movie piracy and the movie industry has argued that the dominant impact of increased broadband Internet penetration will be increased piracy, and reduced media sales. We analyze this hypothesis by applying fixed effects and first difference models to a new dataset quantifying changes in broadband Internet penetration and DVD sales at a local level from 2000 to 2003. Contrary to industry concerns, we find that increased broadband Internet penetration leads to a significant increase in DVD sales. Our results are robust across a variety of specifications. Using the most conservative results, we find that 9.3% of the