Douwe Osinga's Blog: The Free Rider Problem

Tuesday, May 25, 2004

The Free Rider Problem

Quinn has an interesting post on the Free Rider Problem. In any situation where people work together to generate value, a problem as to how to divide the spoils of the work will pop-up. If you're with a small group, usually social control will do the trick, but get a larger group and there are always people that put in less than they take out, or at least there are people that think other people do that.

Actually putting in less than you take out isn't really the problem. You work together to produce some kind of synergy, so it is possible that everybody gets out more than he puts in, or as long as everybody gets out more of the system than he puts in, the system is ok. You could still have freeloaders, i.e. people that put nothing in, but still get something out of it (think a community of farmers, with mice eating some of the produce), but as soon as some people get out less than they put it, they quit the system and the amount of freeloaders vs the others only increases and everything breaks down.

The Internet makes the whole free rider discussion much more acute for a number of reasons. The sheer amount of users disables the normal social anti-freeloader mechanisms. The fact that most value on the Internet is produced digitally and is easily copied against a marginal cost of effectively zero, makes free loading relatively harmless at first (i.e. the fact that I copy an mp3 illegally doesn't take away something from the band/record company, while stealing the actual CD would). And finally the Internet creates lots of potential new markets, i.e. electronic distribution of music, blogging and spam for example with a potential for cheaply generated value without an obvious way to split the spoils.

In technology you see the Free Rider phenomenon too. Big computer companies have to invest lot's of money to keep ahead of the curve, right? Wrong. At least, Dell doesn't really believe that. The New York Times compares the approaches of HP and Dell when it comes to research. Dell is free riding on the tech that is developed anyway, while HP is striving for improvement. Patents are supposed to take care that, but that's a solution that I'm not always too happy with either; it gives HP a monopoly on certain printer solutions, but it keeps the whole market very un-fluid. An Open Source approach might be a solution here.

Anyway, back to the Internet. Quinn writes:

poor people getting something free off the internet isn't theft, it's free publicity. There's more of an argument, albeit sometimes tenuous, that people who can afford to pay for something getting it free is theft. But, and this is very important, if someone is too poor to pay you for something digital, you haven't lost anything if they have it anyway

It sounds plausible and I'd want to believe it. I should be able to download music I'm not interested for free and once I like it enough, I should be charged for it, or something like it. But if a company is too poor to pay for a full Windows/Office license, should it be allowed to install it for free? Microsoft doesn't loose anything, because the company would otherwise install Linux (which let's assume for the argument, would be worse for them) so they actually gain the free publicity.

But the other companies in the same market who did well enough to afford Office and actually spent money it, suddenly have a competitor that has the same stuff for free. And Microsoft does loose something. A product that can be had for free seems less appealing than a product that always costs money. Sure, you could argue that software/digital stuff in general, it should be free anyway, but that is beside the point.

Also, you build a digital poverty trap like this: poor people can use all kinds of digital stuff for free, but as soon as they get richer, they have to give their money to Microsoft, the Movie people and the Record Companies.