Category Archives: Transaction Costs

Transaction Costs of Copyright Clearance

“The indirect costs in higher education (through delays and difficulties in clearing rights) are very hard to estimate. [SCONUL has] attempted an estimate of the static costs in higher education and have arrived at a minimum figure of the order of 30 M/year.” [emphasis added]

Source: SCONUL (Society of College, National and University Libraries) submission to Gowers review quoted at para 51 of the British Academy report on Copyright and research in the humanities and social sciences.

Note that this is not the costs of the copyrights themselves (i.e. payments to use the copyright work) but £30 million in transaction costs related to copyright clearance.

Transaction Costs in the Provision of US Health Care

“In 2003 Medicare spent less than 2 percent of its resources on administration, while private insurance companies spent more than 13 percent.”

Source: Paul Krugman and Robin Wells, The Health Care Crisis and What to Do About It, New York Review of Books, Volume 53, Number 5, March 23, 2006.

This implies that a massive 11% of private insurance companies expenditure goes on pure transaction costs (monitoring, enforcement, litigation etc etc).

More Details

Krugman and Wells aregue that the two main problems of the US system are:

  • Its lack of universal coverage
  • Its extremely high per capita cost of healthcare provision (compared to other countries developed countries)

With regard to the second item they argue that much of the massive differential in per capita costs of health care in the United States is due to the uniquely high level of private (rather than public) provision in the US system. This is for two reasons. First, centralized, public provision, results in much lower transaction costs compared to private provision. Second, centralized, public providers can bargain more effectively with suppliers to obtain lower prices. As evidence for the first point they state:

The cost advantage of public health insurance appears to arise from two main sources. The first is lower administrative costs. Private insurers spend large sums fighting adverse selection, trying to identify and screen out high-cost customers. Systems such as Medicare, which covers every American sixty-five or older, or the Canadian single-payer system, which covers everyone, avoid these costs. In 2003 Medicare spent less than 2 percent of its resources on administration, while private insurance companies spent more than 13 percent.

At the same time, the fragmentation of a system that relies largely on private insurance leads both to administrative complexity because of differences in coverage among individuals and to what is, in effect, a zero-sum struggle between different players in the system, each trying to stick others with the bill. Many estimates suggest that the paperwork imposed on health care providers by the fragmentation of the US system costs several times as much as the direct costs borne by the insurers.

Giving Away the Printer Charging for the Printer Cartridges

Printers and their ink cartridges are good examples of of complementary goods. The market is particularly interesting because until recently the printer seller was the only provider of cartridges for that printer. Over the last decade it has become possible for people to get ink cartridges from others in the form of ‘refills’, that is refilled cartridges (it is hard to make the cartridges independently but not hard to refill them. Interestingly manufactuers of printes have tried to stop this practice by ‘locking’ the cartridge to their printer with special microchips — invoking the DMCA where necessary to prevent people reverse engingeering the locks (e.g. Lexmark).

One question of particular interest to me was how rational people were in relation to the complementaries present here. After all when you buy the printer the main piece of information you have is its price. I’ve also been struck by the number of people (and firms) who don’t buy refills even though they cost a fraction of the price of the manufacturer ones (often they may not even know they can get refills). Finally for printers the cost of the cartridges often dwarf the cost of the printer. Thus, I was particularly interested when ‘Which’ magazine (run by the Consumers Association in the UK to provide independent evaluation of products) provided an evaluation of printers in their February issue along with details of the cost of buying and printing with a given printer.

Information Technology’s Inbuilt (Progressive) Politics

This was a comment posted in response to one of Chris Lightfoot’s (ever interesting) posts:

[Chris wrote] … Technologies may or may not have inbuilt politics. The printing press can be used for printing books, or printing identity cards; `trusted computing’ can be used to enforce digital rights management or to secure peer-to-peer networks. If these technologies do have political values, how can we tell ahead of time what they are? …

I think saying that a technology has ‘inbuilt’ politics may be misleading. However technology does have political effects and these can be predictable.

Technology alters the power balance between groups because it affects them differentially. Lowering the cost of information access will usually assist the poorer members of society more than the richer. Just think of Kahle’s wonderful bookmobile or take the case of the printing press. The PP lowered the cost of information diffusion. Since these effects are to reduce monopoly control of information one would imagine this would have a predictable ‘progressive’ result.

Simlarly the internet reduces the cost of information and organization. This benefit has a differential impact where the less organized, less well-off groups gain more than the organized, well-off groups. The internet can go some way to resolving the free-rider issues and principal agent problems that bedevil government.

This doesn’t mean that technology isn’t a two edged sword and that in most cases it is used for both the good and the bad. Nevertheless in these kinds of cases the overall effect is unambiguous. Take the printing press, for example. Many governments had large bureaucracies dedicated to censorship (see Darnton on France in the 18th C.) and nowadays the Chinese monitor internet access. But the cost of these restrictions grows with new technology and they are less effective than what had previously existed. The French still read lots of banned literature (such as crude satires that mocked the King and his ministers) and the Chinese probably have more access to information than previously.

Technology can be a one-edged sword.