Economics 755
Economics of Information

Winter 1998, Tues/Thurs 2:30-4:00 pm, 201 Lorch Hall

Prof. Jeffrey K. MacKie-Mason
210 Lorch Hall, 764-7438, office hours 4:00-5:30pm Thursdays
301C West Hall, 647-4856



This is a course on various microeconomic theories of information. This does not mean a course in how asymmetric information, principal-agent problems or adverse selection affect economic outcomes. Rather, we will be studying the economics of information itself. In particular, we will study information transportation in networks, information content, and markets for information. In the final unit we will study the use of information and computation systems to implement markets, and some issues in information and complexity.

Questions about the economics of information are not new, but most of the research we will read is quite recent. The course design is motivated by the vast number of new problems, or new combinations of old problems, that have followed from two major trends. These trends are the exponentially falling costs of digital computation and communications. As a consequence, organizing, searching, retrieving, and delivering information has become astonishingly inexpensive. As a crude shorthand, we sometimes say that digital information can be duplicated at zero marginal cost, with perfect fidelity (no quality loss), and distributed at zero cost. When something even approximating these conditions occurs, unusual economic phenomena arise.

Here a some useful collections of information if you want to learn more about the economics of the Internet, communications technology in general, networks, &c.


The course will be presented in a mixed lecture-seminar format. Each registered member of the class will be responsible for an in-class presentation of material; how we work this out depends on how many students register. Lecturing will make liberal use of the socratic method; this means you are required to read the assignments before class and to be prepared to thoughtfully discuss them in class.

All of the required readings (marked with a *), and many of the recommended readings are available as a "self-copy" coursepack at Michigan Document Service on South University. Recommended readings which are published in journals are for the most part not included in the coursepack. All readings are on reserve in Foster Library.

I have not assigned specific dates to the topics in the syllabus; I will warn you of how far I expect to get each week as we go along. For planning, I’ve indicated roughly how many weeks I expect we’ll spend on each major topic area.

In addition to class preparation and participation, you will be required to submit three written assignments. The first two should be in the form of referee reports. The third will be in the form of an NSF proposal for a theoretical research paper.

The grade will depend 30% on preparation and participation, and 70% on the written assignments (15%, 15% and 40% respectively).



  1. Introduction: What’s special about information?
  2. *Lucky, R. W. (1989). Silicon Dreams: Information, Man and Machine. New York, St. Martin's Press. Pp. 1-35.

    *DeLong, J. B. and Froomkin, A. M. (1997). The Next Economy? Internet Publishing and Beyond: The Economics of Digital Information and Intellectual Property. Edited by D. Hurley, B. Kahin and H. Varian. Cambridge, MIT Press. Available from

  3. Information Transport (about 3 weeks)
    1. Congestion theory
    2. *MacKie-Mason, J. K. and Varian, H. R. (1995). Pricing congestible network resources. IEEE Journal on Selected Areas of Communications. 13(7): 1141-1149. Available from

      *de Palma, A. and Arnott, R. (1989). The Temporal Use of a Telephone Line. Information Economics and Policy. 4(2): 155-174.

      MacKie-Mason, J. K. and Varian, H. R. (1995). Pricing the Internet. Public Access to the Internet. Edited by B. Kahin and J. Keller. Cambridge, MA, MIT Press: 269-314. Available from

      Chakravorti, B. (1993). Optimal Flow Control of an M/M/1 Queue with a Balanced Budget. IEEE Trans. on Automatic Control.

      Ferguson, D., Yemini, Y. and Nikolaou, C. (1988). Microeconomic Algorithms for Load Balancing in Distributed Computer Systems. The 8th International Conference on Distributed Computing: 491-499. Available from

    3. Multiple Qualities of Service
    4. *Cocchi, R., Estrin, D., Shenker, S. J. and Zhang, L. (1993). Pricing in computer networks: motivation, formulation and example. IEEE Transactions on Networking. 1(6): 614-627. Available from

      *MacKie-Mason, J. K. (1997). A Smart Market for Resource Reservation in a Multiple Quality of Service Information Network. Ann Arbor, Dept. of Economics, University of Michigan. Available from

      *Shenker, S. J. (1996). Service models and pricing policies for integrated services. Public Access to the Internet. Edited by B. Kahin and J. Keller. Cambridge, MA, MIT Press. Available from

      Thomas, P. and Teneketzis, D. (1996). An Approach to Service Provisioning with Quality of Service Requirements in ATM Networks. Ann Arbor, MI, Dept. of Electrical Engineering and Computer Science, University of Michigan.

      Sairamesh, J., Ferguson, D. F. and Yemini, Y. (1995). Pricing Network Services (Single Link). Hawthorne, NY and New York, NY, IBM T. J. Watson Research Center and Columbia University.

    5. Edge Pricing
    6. *Nichols, K., Jacobson, V. and Zhang, L. (1997). A Two-bit Differentiated Services Architecture for the Internet. Available from

      *Shenker, S., Clark, D., Estrin, D. and Herzog, S. (1996). Pricing in Computer Networks: Reshaping the Research Agenda. The Internet and Telecommunications Policy. Edited by G. Brock and G. Rosston. Mahwah, NJ, Lawrence Erlbaum Associates.

      Clark, D. (1995). Adding Service Discrimination to the Internet. Available from

      Clark, D. (1997). Combining Sender and Receiver Payments in the Internet. Interconnection and the Internet. Edited by G. Rosston and D. Waterman. Mahwah, NJ, Lawrence Erlbaum Associates.

    7. Cost Sharing
    8. *Herzog, S., Shenker, S. and Estrin, D. (1996). Sharing the 'Cost' of Multicast Trees: an axiomatic analysis. IEEE Transactions on Networking.

      *Moulin, H. and Shenker, S. (1996). Strategyproof sharing of submodular access costs: Budget balance versus efficiency. Durham, NC and Palo Alto, CA, Dept. of Economics, Duke University, and Xerox PARC. Available from

      Ben-Cheikh, A. and Girard, A. (1996). Cost Allocation and Network Design in B-ISDN Networks.

    9. Junk Email

    10. *Gabber, E., Jakobsson, M., Matias, Y. and Mayer, A. (1997). Curbing Junk E-Mail via Secure Classification. Murray Hill, NJ, Bell Laboratories. Available from

      Mas-Colell, A., Whinston, M. D. and Green, J. (1995). Microeconomic Theory. New York, Oxford University Press. Chapter 13 ("Signaling").

      See other approaches to junk e-mail at Unsolicited Email Resource Center

  4. Information Content (about 4 weeks)
    1. Bundling
    2. *Bakos, Y. and Brynjolfsson, E. (1996). Bundling Information Goods: Pricing, Profits and Efficiency.

      *Chuang, J. C.-I. and Sirbu, M. A. (1997). Network Delivery of Information Goods: Optimal Pricing of Articles and Subscriptions. The Economics of Digital Information (tentative). Edited by B. Kahin and D. Hurley. Cambridge, MA, MIT Press. Available from

      *MacKie-Mason, J. K. and Riveros, J. (1997). Economics and Electronic Access to Scholarly Information. The Economics of Digital Information (tentative). Edited by B. Kahin and D. Hurley. Cambridge, MA, MIT Press. Available from

      Bakos, Y. and Brynjolfsson, E. (1997). Aggregation and Disaggregation of Information Goods: Implications for Bundling, Site Licensing and Micropayment.

      (RESERVE ONLY) Salinger, M. A. (1995). A Graphical Analysis of Bundling. Journal of Business. 68(1): 85-98.

    3. Versioning
    4. *Varian, H. (1997). Versioning Information Goods. The Economics of Digital Information (tentative). Edited by B. Kahin and D. Hurley. Cambridge, MA, MIT Press. Available from

    5. Copy Protection
    6. *Bessen, J. and Maskin, E. (1998). Intellectual Property on the Internet: What's Wrong with Conventional Wisdom? Internet Publishing and Beyond: Economics of Digital Information and Intellectual Property. Edited by D. Hurley, B. Kahin and H. Varian. Cambridge, MA, MIT Press. Available from

      Besen, S. M. and S. N. Kirby (1989).  Private Copying, Appropriability, and Optimal Copying Royalties.  Journal of Law and Economics32(October): 255-280.

      *Shy, O. (1996). Copyright Protection, Piracy, and Pricing Digitally- and Nondigitally-Stored Information. Available from

    7. Intellectual Property
    8. *Cohen, J. E. (1997). Lochner in Cyberspace: The New Economic Orthodoxy of "Rights Management". Pittsburgh, School of Law, University of Pittsburgh.

      Schlachter, E. (1997). The Intellectual Property Renaissance in Cyberspace: Why Copyright Law Could Be Unimportant on the Internet. Berkeley Technology Law Journal. 12(1). Available from

      (RESERVE ONLY) Dam, K. (1995). Some Economic Considerations in the Intellectual Property Protection of Software. Journal of Legal Studies.

    9. Service Architecture Effects
    10. *MacKie-Mason, J. K., Shenker, S. J. and Varian, H. R. (1996). Service architecture and content provision: The network provider as editor. Telecommunications Policy, Pergamon. 20(3): 203-218. Available from

    11. User Pays vs. Advertiser Pays
    12. *Waterman, D. and Yan, M. Z. (1997). Cable Advertising and the Future of Basic Cable Networking. Bloomington, IN, Dept. of Telecommunications, Indiana University.

    13. Social Filtering
    14. *Avery, C., Resnick, P. and Zeckhauser, R. (1997). The Market for Evaluations. Available from

      Resnick was one of the original developers of the GroupLens collaborative filtering system.  See also Firefly.

    15. Trust

    16. *Cranor, L. F. and Resnick, P. (1997). Protocols for Automated Negotiations with Buyer Anonymity and Seller Reputations. Ann Arbor, MI, School of Information, University of Michigan. Available from
  5. Information Markets (about 4 weeks)
    1. Network Externalities
    2. *Economides, N. (1996). The Economics of Networks. International Journal of Industrial Organization. October. Available from

      *Katz, M. L. and Shapiro, C. (1985). Network Externalities, Competition, and Compatibility. American Economic Review. 75(3): 424-440. Available from

      *Liebowitz, S. J. and Margolis, S. E. (1994). Network Externality: An Uncommon Tragegy. Journal of Economic Perspectives. 8(2): 133-150.

      Economides, N. and Himmelberg, C. (1995). Critical Mass and Network Size with Application to the US Fax Market. New York, Stern School of Business, NYU. Available from

      (RESERVE ONLY) Katz, M. L. and Shapiro, C. (1994). Systems Competition and Network Effects. Journal of Economic Perspectives. 8(2): 93-115.

      (RESERVE ONLY) Margolis, Stephen E. and S. J. Liebowitz. "Path Dependence", in The New Palgrave Dictionary of Economics and Law.

      Katz, Michael L. and Carl Shapiro (1986). Technology Adoption in the Presence of Network Externalities, Journal of Political Economy. 94(4):822-841. Available from

      Katz, Michael L. and Carl Shapiro (1985). Network Externalities, Competition and Compatibility, American Economic Review. 75(3):424-440. Available from

      Flyer, Fredrick and Nicholas Economides (1987). Compatibility and Market Structure for Network Goods, NYU Stern School of Business Discussion Paper 98-02. Available from

    3. Vertical Leveraging, Microsoft and Antitrust
    4. This topic will include a joint session with Economics 632 on a Wednesday afternoon, 4-7pm.

      *Reback, G., Creighton, S., Killam, D., Nathanson, N., Saloner, G. et al. (1995). White Paper: Technological, Economic and Legal Perspectives Regarding Microsoft's Business Strategy in Light of the Proposed Acquisition of Intuit, Inc. Upside. February 1, 1995. Available from

      *Economides, N. and White, L. (1996). One-Way Networks, Two-Way Networks, Compatibility, and Antitrust. Opening Networks to Competition: The Regulation and Pricing of Access. Edited by D. Gabel and D. Weiman. Amsterdam, Kluwer Academic Press. Available from

      See news and legal documents at Economides’ Microsoft antitrust site

      MacKie-Mason, "Leveraging and Layering: Making Sense of Telecom, Computing and Data Market Structures", presentation to U. S. Federal Communications Commission, July 1996

    5. Publishing
    6. *Varian, H. R. (1997). Buying, Sharing and Renting Information Goods. Berkeley, CA, SIMS, University of California, Berkeley. Available from

      *Ordover, J. A. and Willig, R. D. (1978). On the Optimal Provision of Journals qua Sometimes Shared Goods. American Economic Review. 68(3): 324-338. Available from

      *Fishburn, P. C. and Odlyzko, A. M. (1997). Competitive pricing of information goods: Subscription pricing versus pay-per-use. Florham Park, NJ, AT&T Labs - Research. Available from

      *Noll, R. G. (1996). The Economics of Scholarly Publications and the Information Superhighway. The Internet and Telecommunications Policy. Edited by G. W. Brock and G. L. Rosston. Mahwah, NJ, Lawrence Erlbaum Associates: 231-246.

      (RESERVE ONLY) Noll, R. G. and Steinmueller, W. E. (1992). An economic analysis of scientific journal prices: Preliminary results. Serials Review. 18: 32-37.

      (RESERVE ONLY) Tenopir, C. and King, D. (1997). Trends in Scientific Scholarly Journal Publishing in the United States. Journal of Scholarly Publishing. 28(3).

      Fishburn, P., Odlyzko, A. and Siders, R. (1997). Fixed Fee Versus Unit Pricing for Information Goods: Competition, Equilibira, and Price Wars. Available from

    7. Broadcast Competition
    8. *Berry, S. and Waldfogel, J. (1997). Free Entry and Social Inefficiency in Radio Broadcasting. New Haven, CT, Dept. of Economics, Yale University. Available from

      Shelanski, H. A. (1997). Video Competition and its Consequences for Renewed Programming Regulation. Berkeley, School of Law, UC Berkeley.

    9. Information Equity and Sharing

    10. *Van Alstyne, M. and Brynjolfsson, E. (1995). Communication Networks and the Rise of an Information Elite: Do Computers Help the Rich Get Richer? Proceedings of the International Conference on Information Systems. Amsterdam. Available from
  6. Computational Markets and Complexity (about 3 weeks)
    1. Mechanism Design
    2. *MacKie-Mason, J. K. and Varian, H. R. (1994). Generalized Vickrey Auctions. Ann Arbor, MI, Dept. of Economics, University of Michigan. Available from

      *Myerson, R. and Satterthwaite, M. (1983). Efficient Mechanisms for Bilateral Trading. Journal of Economic Theory. 29: 265-81.

      Green, J. and Laffont, J.-J. (1977). Characterizations of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods. Econometrica. 45: 427-438. Available from

      (RESERVE ONLY) Fudenberg, Drew, Game Theory. Cambridge, MA: MIT Press, 1991, esp. pp. 274-291 on Bayesian implementations.

      (RESERVE ONLY) Clarke, E. H. (1971). Multipart pricing of public goods. Public Choice. 2: 19-33.

      (RESERVE ONLY) Groves, T. (1973). Incentives in Teams. Econometrica. 41(4): 617-631.

    3. Smart Markets
    4. *Banks, J., Ledyard, J. and Porter, D. (1989). Allocating Uncertain and Unresponsive Resources: an Experimental Approach. RAND Journal of Economics.

      *Brewer, P. J. (1997). Decentralized computation procurement and computational robustness in a smart market. Economic Theory. Forthcoming.

      *MacKie-Mason, J. K. (1994). A spatial smart market for wholesale electricity exchanges. Ann Arbor, MI, University of Michigan. Available from

      *Rassenti, S. J., Smith, V. L. and Bulfin, R. L. (1982). A Combinatorial Auction Mechanism for Airport Time Slot Allocation. Bell Journal of Economics. 13(2): 402-417.

    5. Computational Markets
    6. *Mullen, T. and Wellman, M. P. (1995). A simple computational market for network infomation services. First International Conference on Multiagent Systems. San Francisco, MIT Press. Available from

      *Cheng, J. Q. and Wellman, M. P. (forthcoming). The WALRAS Algorithm: A convergent distributed implementation of general-equilibrium outcomes. Computational Economics. Available from

      *Walsh, W., Wellman, M. P., Wurman, P. and MacKie-Mason, J. K. (1997). Some Economics of Market-Based Distributed Scheduling. Ann Arbor, MI, University of Michigan. Available from

      *Wurman, P. R., Walsh, W. E. and Wellman, M. P. (1997). Flexible Double Auctions for Electronic Commerce: Theory and Implementation. Ann Arbor, MI, Artificial Intelligence Laboratory, University of Michigan. Available from

      McAfee, R. P. and McMillan, J. (1987). Auctions and Bidding. Journal of Economic Literature. 25: 699-738.

      (RESERVE ONLY) Milgrom, P. (1989). Auctions and Bidding: A primer. Journal of Economic Perspectives. 3(3): 3-22.

    7. Information and Complexity

    8. *Rust, J. (1997). Dealing with the complexity of economic calculations. New Haven, Dept. of Economics, Yale University. Available from

      *Mount, K. R. and Reiter, S. (1974). The Informational Size of Message Spaces. Journal of Economic Theory. 8(3): 161-192.

      (RESERVE ONLY) Axtell, R. and Epstein, J. M. (1997). Growing Artificial Societies: Social Science from the Bottom Up. Cambridge, MA, MIT Press.

      (RESERVE ONLY) Hurwicz, L. (1972). On Informationally Decentralized Systems. Decision and Organization (Volume in Honor of Jacob Marschak). Edited by R. Radner and C. B. McGuire. Amsterdam, North-Holland: 297-336.