An Economic Response to Unsolicited Communication Thede LoderMarshall Van AlstyneRick Wash...

An Economic Response to Unsolicited Communication

Thede Loder Marshall Van Alstyne Rick WashUniversity of

MichiganBoston University & MIT University of

Michigan

tloder@umich.edu mva@bu.edu

marshall@mit.edu

rwash@umich.edu

Agenda

• Description of the problem– From regulatory and technical perspectives– From an economic perspective

• Application of the Coase Theorem plus Signaling & Screening from information economics

• Comparison against idealized perfect filter and perfect tax.

• Cover surrounding issues of adoption, spoofing, free speech, viruses & spam zombies.

Data on the Spam Problem• Estimated yearly loss to business $20 billion (Ferris Rsch)• Federal ‘Can Spam’ Act enacted in 2004 with near unanimous support;

superceding 8 State laws (NYT) …but no impact (Pew Internet Report) 55% (Brightmail 2003) , 77% (CDT 2004) of all email is now spam • 29% of Americans report curtailing e-mail use (Pew Internet report)• Zombies send 50-80% of all spam (FTC), 25% of US pc’s infected (Symantec)• No consensus definition: 92% adult, 74% political/religious, 65% charities, 32%

unsolicited + prior biz relation, 11% unsolicited + granted permission to market. • 1/3 users clicked on link, 5% admit to purchase, 3% provided pers. info. (Pew)

Spammer Alan Ralsky vowed to carry on (NYT)

Existing or Proposed Solutions

• Legislative/Regulatory:– Banning, labeling– Taxation, stamps

• Technological:– Filtering: Rule based (static or dynamic), Bayesian

Filters, collective/community classification– Challenge Response: quasi-Turing tests, return address

testing, computational challenge• Economic

– computational challenge– Bonds

Problems with Existing Solutions

• Whose spam definition?• Banning and labeling

– Enforceability, jurisdiction?– Costly to police and adjudicate– Labeling lacks incentive

compatibility– Exemptions for prior biz

relations, political groups• Taxing & e-stamps

– Blocks wanted along with unwanted email

– Blunts cost-effectiveness of email as medium

• Filtering (Rules, Collaborative, Bayesian): – False positives, false negatives– Increases spam email traffic

(attempts to penetrate)– Costly arms-race– Consensus definition– Blocks automated

correspondence• Challenge-Response (Reverse

Turing Tests)– Cheaply hire real people– Unrecoverable costs

Legislation Technologyy

Technology: Smart Infrastructure

TCP/IP pattern detection – TarPit tie up server:

451 – Your spam is important to us. Please stay online…

Source: Martin Lamb – MIT Spam Conference 1/16/04

Technology: Smart Infrastructure

SMTP pattern detection – TarPit reject incoming mail:

Error 452 – I don’t need any Viagra. Go Away.

Source: Martin Lamb – MIT Spam Conference 1/16/04

CAPTCHAs

• Completely Automated Public Turing test to tell Computers and Humans Apart

• But, clever pornographers have inverted the weapon, simply routing the test to people for free porn.

Filter vs. Filter

berkshiremarriottwireless

Warning: risqué!

Where is “v1@grya” or <naughty-body-part> ever used?

“… get a rod like a firehose.”

What is spam?

Improving Welfare

I. In economic terms, spam is “message pollution” a negative externality arising from sender attempts to reach a tiny group of people who want their products.

The approaches to pollution are filters, regulation, and …

The Coase Theorem – Property Rights

Resolve why the market failed…

Old: Pigou’s theory that gov’t should force private parties to “internalize” externalities by means of taxes.

New: Coase argues that affected parties can do so via trade and negotiation, if (1) property rights are well defined and (2) transaction costs are negligible.

Regardless of initial assignment, the social outcome is at least as efficient.

Nobel 1991 – “for his discovery and clarification of the significance of

transaction costs and property rights for the institutional structure and functioning of

the economy.”

No unilateral solution can do better.

Improving Welfare

I. In economic terms, spam is “message pollution” a negative externality arising from sender attempts to reach a tiny group of people who want their products.

II. The Coase Theorem: one solution is to define attention rights, i.e. create a mechanism to charge those who create waste.

III. But assign property rights to recipients!a. A sender right to waste recipient time encourages extortion.

Spammers just threaten to send more. b. Seems obvious, but no. Also interpreted as right to be heard.c. If transaction costs are high, assign rights to the party with

higher costs of avoiding waste.

• [r, r] and [s, s] are bounds on reader and sender values.• Sender knows own value s and cost cs before sending,

won’t send when s < cs.• There may be good SG and bad SB sender distributions,

sender knows from which distribution he draws.• Recipient only knows her r value after reading and

incurring cost cr .• Filtering results in a fraction of messages not getting

through.

Terminology & Assumptions

Modeling Email ValueExamples:- project update from colleague- long lost high school buddy- friend’s wedding announcement- shipping update from vendor- recruiting lead from a friend- favorable press story

Examples:- market research & focus groups- polling- persuasion, “vote for X”- pornography- message with attached virus- phishing, Nigerian scam- key logger, password stealer

Examples:- personalized loan app- custom news- subscription content- sales leads- Google Answers- credit score

= cost to receive

= cost to send

Wanted

Unwanted

Wanted butNot Sent

Unwanted andNot SentExamples:

- embarrassing news sent to wrong person

- old news- accidentally telling your boss

what you really think

Specific modeling assumptions are robust

cost to receivecost to send

region of positive probability

cr =cs =

Social Welfare Contribution

Received email northeast of the diagonal line makes a positive contribution to social welfare

positive contribution to W

negative contribution to W

Welfare (W) = RS + SS

RS = Recipient SurplusSS = Sender Surplus

Interpreting Existing Solutions

cs+ tax

Flat Tax, Stamps, Challenges, & Criminalization Penalties

lossUnwantedUnwanted

Unsent

FilteredWaste

Unsent

Filtering (all types)

Good mail blocked

Bad mailpassed

Not all filtered email is waste!

Perfect Filter

DefinitionA technological filter that: Operates without cost Makes no mistakes (no false

positives, no false negatives) Intuits and internalizes all

reader preferences Eliminates, prior to receipt,

any email where r < cr

Filtered

Unsent

loss WantedWanted

cs/ W+cs

With a Perfect FilterA Lot of Value is Wasted

A perfect filter: Operates without cost Makes no mistakes (no false

positives, no false negatives) Discards any email where r < cr

Unsent

WantedWanted

crSent & Sent & FilteredFiltered

Sent &Sent &Pure WastePure Waste

UnSent &UnSent &WantedWanted

But a filter: Allows no negotiation Never helps generate new

content you do want And can’t transfer value from

legitimate senders

= unrealized positive value

Reverse Signaling – Buying Leads

• Judson Brady, the owner of Broad Street Flowers, pays Ingenio around $4.15 for each call from a prospect. NYT Feb 27, 2006

• Google Answers lets you pledge your credit card as bond for getting answers to critical questions.

Problem: How do you reveal information without negotiation?

Signaling & ScreeningSignal: information conveyed by a knowledgeable party that is credible because it is costly to fake.

Screen: a device used by uninformed parties to sort others in the market by offering them different options. A choice reveals the hidden private information.

Nobel 2001 –“for their analyses of markets with asymmetric

information”

The right spam mechanism sorts based on intent not content.

Akerlof Spence

Stiglitz

Consider an “Attention Bond”

• Simple screening mechanism applied to unrecognized senders.• Challenge demands an escrowed bond fee of amount .• Recipient has sole discretion to claim or return , with expected bond

forfeiture b=p, all proceeds go to recipient• Effects:

1. A recipient-controlled variable ‘tax’ on senders, based on sender behavior2. Shift task from ex ante classification (hard) to ex post verification (easy).3. Compensates recipient directly for any wasted time

Initially, the sender knows more about message content than the receiver, so force them to reveal that private knowledge:

Consider an “Attention Bond”

1. Recipient sets screen, chooses bond size bi.2. Unknown senders must post bond bi to get through.3. On reading message, recipient chooses to claim or return bi, with expected bond

forfeiture i =pibi .

• Effects: – Seized bonds are side-payments -- increase recipient willingness to accept low value messages.– Bond choice functions as a (weak) price signal indicating recipient type.– Willingness to post bond signals sender private knowledge of message value.– Shift task from ex ante classification (hard) to ex post verification (easy).

If the sender knows more about message content than the receiver, force him to reveal that private knowledge:

…and Sender issues bond authorization

The bond is posted

Sender mail server issues bond authorization

Recipient’s Escrow issues notification of bond receipt

Recipient’s Mail Server delivers original messageThe bond is returned

The Recipient claims bond or lets it expire.

The ABM in Action

Sender initiates a messageSender mail server attempts delivery

Sender on Whitelist, mail delivered

Sender not on whitelist, bond-challenge issued

or the challenge is delivered to the Sender…

Warning: economics!

The Reader’s choice of bonddrdsbcrkRS

bc rBs

)(Reader Surplus defined:

rs crr

1Optimal expected bond:

Reader Surplus:

0RSRSB Always:

The Perfect Filter

drdscrk

c rPFr s

Reader Surplus defined:

Reader Surplus:

PFB RSRS Bonding wins if:

Perfect Filter: Send if: scs

cscrRS sr

Social Planner’s choice of bond

drdscscrRSSSWr

bc srs

)(*** Welfare defined:

Optimal bond:

10,* kkWWAlways:

The socially optimal bond depends only on reader attributes, providing a subsidy if reader surplus is positive and compensation if surplus is negative.

It is the ideal Pigouvian tax for homogeneous senders and receivers.

Choosing the expected bond size b = p.

Unsent

Recipient Payoff

For any particular distribution, the recipient can remove the sender incentive to send emails for which s < cs+p, while at the same time gaining p.

Positive payoff to recipient

Negative payoff to recipient

UnwantedUnwanted

WantedWanted

Unsent

Recipient Payoff

UnwantedUnwanted

WantedWanted

Now transfer p where p >0, > 0

Unsent

Recipient Payoff

UnwantedUnwanted

WantedWanted

p increasing…

Unsent

Recipient Payoff

UnwantedUnwanted

WantedWanted

p increasing…

Unsent

Recipient Payoff

Negative payoff to recipientUnwantedUnwanted

WantedWanted

p increasing…

Unsent

Recipient Payoff

Negative payoff to recipientUnwantedUnwanted

WantedWanted

Unsent

Recipient Payoff

Negative payoff to recipient UnwantedUnwanted

WantedWanted

Unsent

Recipient Payoff

WantedWanted

Unsent

Recipient Payoff

WantedWanted

Consider classes of good G and bad B senders .

Distribution G

“Good”

Distribution B

“Bad”

G Sent with Attention Bond

cs cs + pg

For each distribution, the recipient can choose a policy with a seize probability px

UnsentUnsentGG

B Sent with Attention Bond

cs cs + pb

Unsent BUnsent B

For a mostly unwanted email distribution, the recipient is best off if they seize with a high probability (greater p product)

Welfare Basis - Attention Bond

cs + pb

cs + pg W+

Welfare Basis - Perfect Filter

Sent & FilteredSent & Filtered

cs /g W+

Welfare Basis – Good & Bad E-Mail

cs + pb

cs + pg W+

Attention Bond

cs /g W+

Perfect Filter

How about the perfect Pigouvian tax for heterogenous

senders & receivers?

Interpreting Existing Solutions

cs+ tax

Flat Tax, Stamps, Challenges, & Criminalization Penalties

lossUnwantedUnwanted

Unsent

FilteredWaste

Unsent

Filtering (all types)

Good mail blocked

Bad mailpassed

Introduce Recipient Hetereogeneity

Two kinds of Senders, – G and B’s (GM & BMW cars, Girls & Boys, Green & Blue)– For T sender types, have (2T-1) who like any given subset.– The message prevalence is for G and (1-) for B

Three kinds of Recipients:– Type G Likes G’s messages– Type B Likes B’s messages– Type U Likes all messages– User prevalence is for G, for B, and (1- -) for U

WLOG, let welfare of G ≥ welfare of B transactions.Recipients can act strategically.

Type B RecipientsType G Recipients

Type U Recipients

Received value depends on match

- Value of match

- Value of mismatch

- Value of sum

Total Baseline Welfare

))(1( rGsG crcs

))(1)(1( rBsB crcs

)()1()( rsrs cccc

All G transactions:

All B transactions:

Misdirected G & B mail:

If G and B senders mail the population, surplus from all G, B and U transactions is:

A tax is only effective when1. Waste from misdirected mail exceeds the value of B transactions2. Tax hits B senders first: (1-)sB – cs < (1-) sB – cs

Type U Recipients

Tax eliminates B senders and recipientstax

- Value of match

- Value of mismatch

- Value of sum

Type U Recipients

The ABM facilitates targeting

- Value of match

- Value of mismatch

- Value of sum

ABM vs. Pigouvian Flat Tax

Pool Separate Results

{} {G}, {B}, {U} ABM Always

{U, G} {B} ABM Always

{U, B} {G} ABM Always

{B, G} {U} ABM Usually

{B, U, G} {} Tax Usually

Proofs of separating and pooling equilibria available in the paper.

Bond vs. TaxPool Separate Results

{} {G}, {B}, {U} Bond

{U, G} {B} Bond

{U, B} {G} Bond

{B, G} {U} Bond†

{B, U, G} {} Tax†

†There exist specific exceptions. Proofs of separating and pooling equilibria available in the paper.

• Proposition: If recipient types choose distinct bond values, then the ABM results in first-best welfare.

• Intuition: No unnecessary costs from mistargetting, all transactions complete, separating equilibrium.

• Conditions: When bond values are low relative to message values– (test condition inequalities available)

• Proposition: If either bB or bG are distinct, then welfare under the ABM dominates that under a flat tax.

• Intuition: Choosing to pool internalizes the costs of mistargetting caused by pooling, else you could choose “limit bonds”

Welfare Analysis

• Proposition: Social welfare under attention bonds exceeds that under a tax, unless type B recipients forgo B messages solely to poach G bonds.

• Intuition: If either {B} or {G} separate then targeting improves sufficient to improve welfare.

• If {B, G} pool, both must consent. G recipients can always separate by choosing a “limit bond.” – If B senders mail to a {G,B} pool, B transactions value must

exceed the waste. A tax destroys welfare.– If B senders do NOT mail to a {G,B} pool, mail from G to B

creates uncompensated waste. A tax improves welfare.

Why Not Seize the Bond?

• First Contact Moral Hazard

• Releasing the bond is also a signal– Credibly distinguish your type in any pooling

equilibrium. In computer science vernacular, to separate yourself from a “honeypot.”

– Investment in reputation, Competition, Bi-directional communications, etc.

Information Entering the Market

• Recipient: bond choice bi serves as a (weak) price signal of recipient type.

• Sender: posting bond bi serves as a credible signal of sender belief in a match.

• Recipient: For pooling equilibria, refund i =pibi is a credible signal of a match.

Adoption, Infrastructure & Policy Issues

Consider Advantages for Commerce:Direct Marketing

• Cheaper than traditional mail channels

• Receiver gets the benefit, not printer or mailer, no environmental waste.

• More information & preference feedback than TV, Radio, Snail Mail, or Magazines

• Lists are self-cleaning

Consider Advantages for Users

When someone outside the ABM network 1st reaches someone inside, they get a challenge saying “adopt this and get”:

1. Your message delivered2. Your spam eliminated3. No need to do this again ever for anyone in the

network4. And a free bank account where marketers can drop

nickels.

Rebuttals

Obj: Great! I’ll set up a honeypot and retire.

Q: As a marketer, what’s your incentive to indiscriminately mail bonds to buyers in the presence of honeypots?

A: None. Rather you’ll target bonded messages to prospective buyers with the highest interest.

This is exactly what should happen. Forcing marketers to internalize the costs of wasteful messages causes them to produce less waste.

Obj: If you can spoof it won’t work;if you can’t spoof you don’t need it.

• False on both counts.• If you can spoof, all messages

look like 1st contact.• If you can not spoof, do not

confuse (i) verifying an address with (ii) authenticating a useri. Cannot work (see “Social Cost of

Cheap Pseudonyms”).ii. Undesirable! You lose Pentagon

Papers, Watergate, Enron whistle- blowing, Halloween document… any free speech where the sender doesn’t want to be identified!

Obj: Doesn’t risk limit free speech?

• Free speech is the only criterion on which no intervention beats bonds, filters and taxes.

• Perfect Filter: given 74% think political & non-profit speech is spam, much never gets through.

• Perfect Tax: always collected ex ante vs. 74% who collect under ABM – and always get through.

Would you want Yahoo!, AOL-Time-Warner, or Microsoft determining the content you receive?

The ABM is completely decentralized and content neutral; no one person, institution, or policy determines the content you hear. Legitimate senders face lower barriers than under filters or taxes.

Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare!

The FTC weighs in

Address the problem before it starts!

• In economic terms, this is a moral hazard problem.

• Not bearing the costs of the waste their infected machines create, owners are insufficiently motivated (or able) to clean them.

• We need fraud protection…

Just like credit cards, ISPs can afford to offer say $5 insurance provided ISPs can keep users’ antiviral software up to date.

Attacks are detected faster. Virus propagation slows.

Obj: If 65% of spam is sent by infected zombies, fraud creates a user nightmare!

• In economic terms, this is a moral hazard problem.

• Not bearing the costs of the waste their infected machines create, owners are insufficiently motivated (or able) to clean them.

• We need fraud protection…

Just like credit cards, ISPs can afford to offer say $5 insurance provided ISPs can keep users’ antiviral software up to date.

Policy & Enforcement Issues

• Applicable to Do-Not-Call / Do-Not-Spam lists.• Need consumer fraud protection analogous to that for

Credit Cards• Severe penalties for spoofing and misuse of 3rd party IDs• Need escrow account clearing analogous to Automated

Clearing House (ACH) for checks• Need pro-competitive open standards• Need for privacy regulation on transactions• Boon to commerce: replace threat of communications veto

with option for fruitful exchange

Additional Social Benefits

• Direct marketing– Cheaper than traditional mail channels– Receiver gets the benefit, not printer and mailer– Provides information feedback & self-cleaning lists– Avoids harmful reputation effects

• Recipients have reason to publish contact information, not hide it• Shifts arms race to crypto.• Permits communication otherwise filtered (e.g. political speech)• Allows anonymous and whistleblower communication not possible with

strong identity systems.• Tailors to an individual’s unique preferences.• Reclaims the value of your address for you rather than the marketers. • Helps you get off any list you don’t want to be on.

Conclusions• Screening action of bond forces senders to reveal their

intentions.• Bond size & seizure functions as signal to senders.• Creates possibility of greater trade volume, with both

parties wanting to participate -> win-win communication.• Facilitating wealth transfers benefits readers more than

unilateral veto. Can beat a Perfect Filter & Perfect Tax.• Shifts the arms-race to crypto• Content neutral and decentralized with respect to free

speech. • Returns control of the mailbox to its owner• Can reduce spread of viruses and spam zombies

Concluding Remarks• Define “spam” as information pollution.• Property rights then provide price signals and let one side

purchase a fraction of the other side’s call externality.• Revealed information can potentially include (i) recipient

type (ii) sender type (iii) successful 3rd party match (not modeled).

• Taxes and filters, in contrast, block communication and provide no information to the market. Filters offer no side-payments.

• Side-payments can cause recipients to act strategically.• Combined with a 2-sided insurance market, can reduce

spread of viruses and spam zombies

Questions?

For further info see:1. “An Economic

Response to Unsolicited Communication,” Loder, Van Alstyne, Wash. http://bepress.com

2. Popular article – on request.

An Economic Response to Unsolicited Communication Thede LoderMarshall Van AlstyneRick Wash...

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