Economics of Spam

A nice paper by Justin M. Rao and David H. Reiley in the recent edition of Journal of Econ Perspectives.

They look at this whole business of spamming. Interestingly, they say it is nothing but negative externality like pollution, traffic congestion:

We estimate that American firms and consumers experience costs of almost $20 billion annually due to spam. Our figure is more conservative than the $50 billion figure often cited by other authors, and we also note that the figure would be much higher if it were not for private investment in anti-spam technology by firms, which we detail further on. Based on the work of crafty computer scientists who have infiltrated and monitored spammers’ activity, we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year.Thus, the “externality ratio” of external costs to internal benefits for spam is around 100:1.

In this paper, we start by describing the history of the market for spam, highlighting the strategic cat-and-mouse game between spammers and email providers. We discuss how the market structure for spamming has evolved from a diffuse network of independent spammers running their own online stores to a highly specialized industry featuring a well-organized network of merchants, spam distributors (botnets), and spammers (or “advertisers”). We then put the spam market’s externality ratio of 100 into context by comparing it to other activities with negative externalities. Lastly, we evaluate various policy proposals designed to solve the spam problem, cautioning that these proposals may err in assuming away the spammers’ ability to adapt.

On comparison with other negative externalities, spamming ranks pretty high. The ranking is done based on externality ratio (cost/ revenue):

To put this magnitude into context, Table 3 provides estimates for the externality ratios associated with 1) the air pollution from driving a vehicle, and 2) the (nonviolent) stealing of automobiles. For driving, we use a low value for the benefifi t accrued to a driver, a fifi gure just above the operation cost per mile. In reality, people make many inframarginal trips, valued by the consumer well over the marginal cost. The cost estimate comes from Delucchi (1998), who does a nice job of accounting for the  social cost of the various air pollutants emitted by an automobile; time congestion externalities are not measured so this estimate should be viewed as the cost of driving on an uncongested roadway. (Interested readers are directed to Parry, Walls,  and Harrington 2007, who survey the literature more broadly, including the matter of congestion costs.) Delucchi’s preferred estimate for the social cost per mile was $0.06; using this figure gives an externality ratio of about 0.1, three orders of magnitude less than the value we obtain for spam.

By contrast, stealing automobiles has a much higher externality ratio, as demonstrated by Field (1993). The societal costs include uninsured losses to victims, insurance premiums, law enforcement patrol costs, and the cost of prosecuting and incarcerating offenders who are caught. Adding it all up, the costs imposed on society by auto thieves  are a whopping 7 to 30 times the revenue extracted from the vehicle theft.

In certain ways, nonviolent auto theft turns out to be a fairly close analogue to spam. The costs of both auto theft and spam are high, and are distributed diffusely across the majority of the population (because insurance rates and law enforcement costs account for the bulk of the costs of auto theft, as in Field 1993). Relative to other types of crime with poor insurance coverage, both have particularly diffuse costs. Unlike most crime, spam has no specififi cally identififi able victim, no especially wronged persons inspiring law enforcement to vigorously bring spammers to justice.

The authors discuss several proposals to prevent spamming. They find simpler interventions better:

In contrast to the high-level market-design interventions that have been proposed, we feel the most promising economic interventions are those that raise the cost of doing business for the spammers by cutting into their margins and thus making many campaigns unprofitable. As mentioned, one fruitful avenue is to put legal pressure on domestic banks that process payments from foreign banks known to act on behalf of spam merchants. This could put downward pressure on conversion rates and with them, profifi ts. Another proposal comes from our colleague Randall Lewis, who imagines “spamming the spammers” by identifying spam emails and placing fake orders on spam-advertised stores. This step would increase the merchants’ costs dramatically, as they would fifi nd it much more difficult to fi ll orders, and their banks may raise their fees if they submit many invalid payment  authorization requests. Of course, an unintended consequence is that from time to time a legitimate merchant will be inundated with bogus product orders.

Superb read. Slightly technical on the computers side (but I think it is bare minimum one should know).

Economics is everywhere…

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