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Peers not Pareto

by Clay Shirky

After writing on the issue of freeriding, and particularly on why it isn't the general problem for P2P that people think it is , a possibly neater explanation of the same issue occurred to me.

I now think that most people working on the freeriding problem are assuming that P2P systems are "Pareto Optimal," when they actually aren't.

Named after the work of Italian economist and sociologist Vilfredo Pareto (1848-1923), Pareto Optimal refers to a situation in which you can't make anybody better off without making someone else worse off. An analogy is an oversold plane, where there are 110 ticket holders for 100 seats. You could make any of the 10 standby passangers better off, but only by making one of the current passengers worse off. Note that this says nothing about the overall fairness of the system, or even overall efficiency. It simply describes systems where there is equilibrium.

If I leave Napster on over the weekend, I typically get more downloads than I have total songs stored, at a marginal cost of zero. Those users are better off. I am not worse off. The situation is not Pareto Optimal.

Since free markets are so good at producing competitive equilibrium, free markets abound with Pareto Optimal situations. Furthermore, we are used to needing market incentives to adjust things fairly in Pareto Optimal situations. If you were told you had to get off the plane to make room for a standby passanger, you would think that was unfair, but if you were offered and accepted a travel voucher as recompense, you would not.

I think that we are in fact so used to Pareto Optimal situations that we see them even where they don't exist. Much of the writing about freeriding assumes that P2P systems are all Pareto Optimal, so that, logically, if someone takes from you but does not give back, they have gained and you have lost.

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This is plainly not true. If I leave Napster on over the weekend, I typically get more downloads than I have total songs stored, at a marginal cost of zero. Those users are better off. I am not worse off. The situation is not Pareto Optimal.

Consider the parallel of email. Like mp3s, an email is a file -- it takes up disk space and bandwidth. If I send you email, who is the producer and who the consumer in that situation? Should you be charged for the time I spent writing? Should I be charged for the disk space my email takes up on your hard drive? Are lurkers on this list freeriders if they don't post? Or are the posters freeriders because we are taking up the lurkers' resources without paying them for the bandwidth and disk our posts are using, to say nothing of their collective time?

Markets are both cause and effect of Pareto Optimal situations. One of the bets made by the "market systems" people is that a market for resources can either move a system to an equilibrium use of resources, or else that the system will move to an equilibrium use of resources of its own accord, at which point a market will be necessary to allocate resources efficiently.

On the other hand, we are already well-accustomed to situations on the Net where the resources produced and consumed are not in fact subject to real-time market pricing (like the production and consumption of the files that make up email), and it is apparent to everyone who uses those systems that real-time pricing (aka micropayments) would not make the system more efficient overall (though it would cut down on spam, which is the non-Pareto Optimal system's version of freeriding).

My view is that P2P file-sharing is (or can be, depending on its architecture) in the same position, where some users can be better off without making other users worse off.

Clay Shirky writes about the Internet and teaches at NYU's Interactive Telecommunications Program. He publishes a mailing list on Networks, Economics, and Culture at shirky.com/nec.html.

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