The “Gridlock Economy” and Anti-commons Problems Through the Lens of the Prisoner’s Dilemma and Collective Action Problem Theories

Michael Heller has a really interesting new book out called “The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives.” He describes how when too many people own things and parts of things, it results in way too many agreements needing to be assembled in order to get anything done, with way too many property holders being able to hold out and block the process in order to try to negotiate the most money for themselves. As a result, a societally advantageous outcome often does not occur. Heller has called this phenomenon the Tragedy of the Anticommons.

He gives the examples of some wonderful Alzheimer’s drug which a company apparently thought they could make, but would need to get patent licenses from so many other companies, with so many holdouts and demands for high license/royalty rates, that the company gave up on researching the drug in favor of researching simpler projects. The company kept secret about it’s great Alzheimer drug idea–if it publicized what a great drug it would be, that might imply that it was very valuable to them, and thus each company with relevant patents would be more inclined to hold out for much higher and higher license rates, which would make assembling the necessary rights bundle all the more expensive. However, all of the companies and humanity as a whole could be better off if the drug could in fact be made.

Here’s where it’s somewhat like the Prisoner’s Dilemma problem which you may have heard of, in that lack of communication to get and enforce agreement leads to a sub-optimal outcome. If the company could somehow get agreement beforehand that all the companies with relevant patents would agree to reasonable terms, then the deal could get done, and an optimal outcome could be reached; new value could be created from the drug and shared among all the companies. This is like in the Prisoner’s Dilemma; if only the two prisoners could agree beforehand that they would not rat each other out no matter what, and if they could communicated to enforce that, then they could reach the best outcome–neither would rat each other out (“defect” as its called in game theory language), and they would get light sentences.

Prisoner B Stays Silent Prisoner B Betrays
Prisoner A Stays Silent Each serves 6 months Prisoner A: 10 yearsPrisoner B: goes free
Prisoner A Betrays Prisoner A: goes freePrisoner B: 10 years Each serves 5 years

Table from Wikipedia

In the Prisoner’s Dilemma scenario, the player who defects when the other player doesn’t defect will get the most benefit for themselves–no jail time at all. In the drug company story, so too will a company who defects when the others don’t will theoretically stand to get the best outcome in the context of bargaining power towards the deal–if every other company agreed to license their patents, they might think about how close they are to getting the deal done and start to value the deal highly, and will have spent money on transactions costs already, plus they may have revealed information about how much/how little money they are willing to accept for a license–the last holdout might stand to gain the most and be able to negotiate the best deal for themselves as the others might be anxious to get the deal done at last, and the holdout will have revealed information about the other parties’ deal preferences. Of course, according to game theory, all companies will think this way, will want to be the last/lone holdouts, so no companies will be likely to agree to license their patents to the company!

In fact, that is one reason the company might not be able to communicate with the companies beforehand about how important it is that they get agreement from all the companies–if the company tried to get such an agreement from companies, each other company would think that the project must be a really valuable and important project, and this would be likely to make each company want even more to be the lone holdout. And like I mentioned, the lone holdout could theoretically command a better stake for themselves if every other company were salivating to get the deal done–maybe they’d pay more to get this one last roadblock out of the way! And of course each company would want to be the lone holdout, so none of them would agree to license their patents.

Tragic! I’ll have to read more of the book to findout what suggestions Mr. Heller has in mind. He also describes the subprime mortgage meltdown in gridlock economy terms; all the mortgages were chopped up and securititzed, in olden days it was easier to deal with one bank to stave off foreclosure, now so many people own parts of mortgages that it’s too hard to communicate with all of the owners of any one single mortgage, the transaction costs (see Coase’s ideas on transaction costs) would be too high, so foreclosure is the easiest route, even though foreclosures are wasteful to all involved. He also talks about gridlocks in terms of copyright, think of all the hoops to jump through to get copyrights for sampled songs, or think about even the troubles trying to clear all the copyrights to the Eyes on the Prize documentary, etc. Lots of transaction costs!!! As I mentioned, I’ll have to read more to see what solutions Mr. Heller proposes. I wonder if there could be some sort of mediators hired on to broker these deals…in some areas ideas like patent sharing pools are in the works, etc.

Also see the collective action problem, as described below, which also fits, if the individualistically rational choice is to become the last/lone holdout. From a University of Washington website:

2. COLLECTIVE ACTION PROBLEM = A situation in which everyone (in a given group) has a choice between two alternatives and where, if everyone involved chooses the alternative act that is Individualistically Rational (IR), the outcome will be worse for everyone involved, in their own estimation, than it would be if they were all to choose the other alternative (i.e., than it would be if they were all to choose the alternative that is not IR).

In essence, all of these issues seem to tie ultimately into cooperation problems and profit expectations. Every one would be better off if everyone cooperated, where if one party defects, no deal is done at all. Imagine nuclear disarmament. We might all be better if we all agreed to disarm. But countries could benefit from being the lone holdout, the only country with nuclear weapons, so all parties are loathe to disarm.

To try to go into more detail about the comparison, in the Prisoner’s Dilemma problem, there are basically four levels of benefit : high, medium, low, and none, well, it’s given in terms of their sentences, but I’ve kind of rephrased it here. If one party defects and the other chooses not to defect, the defector gets the high benefit, i.e. gets no jailtime, and the nondefector gets no benefit, say the full sentence, 10 years in jail. If both cooperate and don’t rat each other out, they get a medium benefit, say a lightened sentence to 6 months each in jail. And if both parties defect, they get a low benefit, i.e. a reduced sentence of 5 years each in jail. The setup is most likely to lead to the low benefit to each party; each strives for the high benefit by ratting each other out, but this leads to the low benefit for each. If only they could have communicated sufficiently to both cooperate, they would both get a medium benefit, instead of both getting the low benefit.

How I’m saying this can be similar to the gridlock problem is this: a company can get the high benefit if they are the last holdout; if the other companies choose to cooperate, they may have spent transaction costs analyzing and negotiating terms of cooperation already, and they may have revealed a willingness to accept a certain range or certain terms, funds expensed and information revealed which can put them at a disadvantage when negotiating with the holdout; thus the holdout/defector can get the high benefit (if the deal ultimately goes through) and the cooperators are at theoretically more of a bargaining disadvantage than if they had all defected and not cooperated, because they have spent money negotiating and have revealed some of their preferences, and so they get no benefit in terms of their negotiating position–although if they are all cumulatively closer to a deal being done, then perhaps that is in fact in the long run better off than if they had all defected, which is more subtle than in the Prisonners Dilemma.

If they all cooperate, no one gets the high benefit theoretically in the current deal of extracting the highest benefits by leveraging being a holdout, but they all get a nice medium benefit of realizing potential profits from the deal. The biggest difference might be in the “low” benefit area: whereas the prisoners get a low benefit from both defecting, i.e. they still get some of their sentence reduced by both ratting each other out, the companies do not really get any benefit from all defecting, except if it is considered a benefit that they have each not revealed valuable preference information by attempting to cooperate and didn’t expend  transaction costs so far in cooperating, it’s not really a “benefit” at all but more like they didn’t put themselves at more of a disadvantage, kind of like a lesser punishment in the way the Prisoners Dilemma is framed–however, if all companies defecting means that the deal is farther away from fruition than if all but one had cooperated, then all companies defecting may leave them in a worse position than if they had attempted to cooperate but one lone holdout persisted, which is different from the analogous cases in the Prisoner’s Dilemma.

What do you think?

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