Article on Regulating Marketing–A Coasean Analysis of Marketing

By Eric Goldman

Eric Goldman, A Coasean Analysis of Marketing, 2006 Wis. L. Rev. __ (forthcoming).

In 2001, I had a career-altering epiphany while I was working at Epinions (this is the topic that prompted me to consider becoming a full-time academic). Epinions was morphing from a content generation engine (generating consumer reviews of products and services) into a shopbot where a core value proposition was to refer users to vendors to consummate transactions. As we made this transition, I realized that we were really entering the attention broker business. We aggregated consumer attention, principally from search engine referrals, using copyrighted content (the consumer reviews) as marketing to capture consumer attention. We then redirected that attention to vendors for our economic benefit. To the extent we bought the consumer’s attention (say, through paid search listings), we were just in the attention arbitrage business (i.e., we wanted to sell the attention for more than we paid to buy it).

As a result, I realized that we competed against every other attention broker, including adware vendors (who were nascent in 2001), spammers, and every other marketing intermediary. But I couldn’t resolve an underlying question–what gave us (or anyone) the right to broker a consumer’s attention? Who “owned” attention, and when was it permissible to profit from someone else’s attention?

It took me 5 years and 8 complete rewrites to complete my paper, A Coasean Analysis of Marketing, that answers these questions. This was one of the hardest things I’ve ever done professionally. It was truly a labor of love!

Part of my difficulty is that I ultimately realized that “attention” wasn’t the real issue (and, in fact, it was distracting me). Instead, “attention brokering” is really a matching problem–marketers and consumers want to match with each other, but the matching process is costly. In particular, the key challenge is that consumers incur costs to express their preferences, a problem exacerbated by rising data glut.

Thus, the only sustainable solution allows consumers to express and manage their preferences at a near-zero cost. This will require a technological, not legal, solution, and the technology will look a lot like what we currently call adware and spyware. In turn, we may be doing ourselves a disservice if our efforts to regulate adware and spyware inhibit the development of technology that provides improved marketer-consumer matching in an information overload environment.

Certainly, many of these themes will be familiar to blog readers. However, this article ties together numerous threads that I’ve addressed on an ad hoc basis and, for the first time, lays out my vision comprehensively. Thus, I hope you’ll take a look at it. I welcome your comments and thoughts.

Some discussion about the article from around the blogosphere:

* Peter Huang’s comments

* Frank Pasquale’s comments

* Conglomerate Junior Scholars Workshop comments (including responses to Peter’s and Frank’s comments)

* Daniel Solove’s comments

The abstract:

Consumers claim to hate marketing – mostly, because they get too much unwanted marketing. In response, regulators develop medium-by-medium marketing suppression regulations. Unfortunately, these ad hoc solutions do little to satisfy consumers, and dynamic technologies and business practices quickly render them moot. Instead of continuing this cycle, there would be some benefit to developing a cross-media marketing regulatory scheme.

However, any holistic solution must be predicated on a clear rationale for regulating marketing. The most common justification is that marketing imposes a negative externality on consumers, but this argument ignores the private and social welfare created by marketing and can lead to cost overinternalization and marketing undersupply.

The Coase Theorem also suggests that social welfare improves by reducing the costs of matching marketers with interested consumers. To achieve this, consumers need a low cost but accurate mechanism to manifest their preferences. This Article shows that typical regulatory and marketplace solutions do not provide effective mechanisms.

Instead, marketer-consumer matchmaking will improve from technology that will automatically infer consumer preferences and use these inferences to filter incoming marketing and seek out wanted content. This technology is rapidly emerging, but regulation of surreptitious monitoring devices (like adware and spyware) may inadvertently block the development of this socially-beneficial technology. As a result, current regulatory overreactions to developing technology may counterproductively foreclose social welfare improvements

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