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1、Economics and LawCST part 1b,Ross Anderson,Richard Clayton,Why teach you this course?,Modern systems involve many competing principals!Systems:Internet now so big its often more like a market than a deterministic system!Economics used for protocol design,congestion control,and much elseTheory:the co
2、mbinatorial auction is now seen as the archetypal complexity-theory problemProfessional:about half of you will eventually go into consultancy,management,Law:what can make you liable online?Ethics:how to navigate the many grey areasPolicy:arguments about copyright,surveillance,privacy,Aims and Object
3、ives,Aims:introduce you to some basic concepts in economics and lawObjectives:at the end,you should have a basic appreciation of economic and legal terminology and arguments;understand some of the applications of economic models to systems engineering and their interest to theoretical computer scien
4、ce;and understand the main constraints that markets and legislation place on firms dealing in information goods and services,Outline,Game theory:prisoners dilemma,iterated gamesClassical economics with competitive marketsMarket failures monopoly,asymmetric information,network effects,lock-inHow info
5、rmation markets are differentAuction theory and mechanism designPrinciples of law contract,tort and other ways you can become liable for things you do onlineLaw and the InternetPolicy and ethics,Resources,Shapiro and Varian“Information Rules”Varian“Intermediate Microeconomics”Course website,plus as
6、further reading:Adam Smith,“The Wealth of Nations”JK Galbraith,“A History of Economics”Len Fisher,“Rock,Paper,Scissors”William Poundstone,“Prisoners Dilemma”Paul Seabright,“The Company of Strangers:A Natural History of Economic Life”Paul Krugman,“The Return of Depression Economics”Glanville Williams
7、,ATH Smith,“Learning the Law”,Studying a humanities subject,Its not like learning to prove theorems or program in Java,which gives a testable skillWide reading is important ideas become clearer when approached from several perspectivesCollege libraries are a good place to startDig into some subprobl
8、em that interests youWork out opposing viewpoints:how would a socialist/libertarian/Keynsian/monetarist approach this problem?What decides if people cooperate or compete,what resolves conflict?Write proper essays!,Roadmap,Economics as a subject is traditionally made up of macroeconomics,microeconomi
9、cs and specialised topicsMacro is about the performance and structure of the global economy or a nation or region.Its about models of employment,inflation,growth,investment,savings,credit,tax,GNPWe will touch on this only briefly,Roadmap(2),Microeconomics or micro is about how individuals and firms
10、react to incentives,how market mechanisms establish prices,and the circumstances in which markets can failMany topics of interest to computer scientists&engineers include game theory,the economics of information,the economics of dependability,and behavioural economics(economics+psychology)Our tools
11、range from mathematical models to empirical social science,Cooperation or conflict,One way of getting what you want is to make it,or make something else of value and trade for it EconomicsAnother way is to just take it,whether by force or via the ballot box PoliticsChoices between cooperation and co
12、nflict are made at all sorts of levels all the timeThey can evolve in complex combinationsThe tool we use to tease them out and analyse them is game theory,Game theory,The study of problems of cooperation and conflict among independent decision-makersWe focus on games of strategy,rather than chanceW
13、e abstract to players,choices,payoffs,strategiesThere are games of perfect information(such as chess)games of imperfect information(which are often more interesting to analyse),Strategic form,Example:matching pennies.Alice and Bob throw H or T.If theyre different,Alice gets Bobs penny;else he gets h
14、ers.The strategic form is Bob AliceThis is an example of a zero-sum game:Alices gain=Bobs loss,Dominant strategy equlibrium,In the following game,Bobs better off playing left;similarly Alice is always better off playing bottom Bob AliceA strategy is an algorithm:input state,output play Here,each pla
15、yers optimal play is a constantThe is called a dominant strategy equilibrium,Nash equlibrium,Consider this game:Bob AliceEach players optimal strategy depends on what they think the other will doTwo strategies are in Nash equilibrium when As choice is optimal given Bs,and vice versa Here there are t
16、wo:top left and bottom rightThis game is sometimes called Battle of the sexes,Pure v mixed strategies,If we allow only deterministic algorithms,some games have no Nash equilibrium.E.g.BobAlice Alice plays scissors Bob wants to play stone Alice wants to play paper Fix:randomised algorithm.This is cal
17、led a mixed strategy;deterministic algorithms are called pure,Prisoners dilemma,Two prisoners are arrested on suspicion of planning a robbery.The police tell them separately:if neither confesses,one year each for gun possession;if one confesses he goes free and the other gets 6 years;if both confess
18、 then each will get 3 years Benjy Alfie(confess,confess)is the dominant strategy equilibriumIts obviously not optimal for the villains!Is this a problem?If so,whats the solution?,Prisoners dilemma(2),You might answer serves them right!But this cant apply to all instances of the dilemmaDefence spendi
19、ngFishing quotasFree riders in file-sharing systemsReducing carbon emissionsTough but inescapable conclusion:if the game is truly as described,there is no escape.Both will cheat rather than cooperate,with bad outcomeTo fix it,you need to change the game somehow!,The evolution of cooperation,If PD pl
20、ayed repeatedly,theres a fix!Tit-for tat:cooperate at round 1,then at round n do what the other guy did at n-1Large simulation competitions run by Bob Axelrod played off many iterated-game strategies;tit-for-tat did consistently wellIn the presence of noise,tit-for-tat gets locked into(defect,defect
21、).So:forgive the other guy occasionallyPeople have realised in the last 20 years or so that strategy evolution explains a lot of behaviour,Price-fixing,If it costs$250 to fly someone LHR-JFK and back,do airlines compete and charge$255 or collude and charge$500?Competition laws forbid price-fixing ca
22、rtels,but the same behaviour can arise implicitlyTry charging$500 and see what other airlines do.If they defect by competing,play tit-for-tatIf youre the regulator,how do you cope?,Stag hunt,People can hunt rabbits on their own,but have to work together to hunt a stag.If your buddy runs off after a
23、rabbit,the stag will escape Frank BernardDifference from PD:(stag,stag)is now a Nash equilibriumYoull only chase a rabbit if you believe your buddy will defectThus while PD is payoff-dominant,stag hunt is risk-dominant,Chicken,In Rebel without a cause,Jim(James Dean)and Buzz(Corey Allan)drive stolen
24、 cars at a canyon and try to jump out last to prove their manhood Jim BuzzHere,(1,3)and(3,1)are Nash equilibriaBertrand Russell suggested this as a model of nuclear confrontation in the Cold WarBiologists call the iterated version hawk-dove(more later),Volunteers dilemma,Multi-player chicken:if one
25、person volunteers,everyone else benefits,but if no-one volunteers then everyone suffers a big loss Everyone else MeThe Arab Spring is harder still:“If everyone goes on the street and says the government is finished,its finished.If you go on the street and say the government is finished,youre finishe
26、d”Evolution of leadership:first move=fitness signal,Deadlock,Differs from PD in that(defect,defect)is preferable to mutual cooperation.Alice BobThat is,Im going to defect anyway but it would be nice if you were a sucker and cooperatedIs mutual defection a dominant strategy equilibrium,or a Nash equi
27、librium?,Asymmetric games,In the game of Bully,the first player plays chicken while the second plays deadlock Deadlock player Chicken playerExample:the Wisdom of SolomonThe babys real mother plays chicken(rather see the baby live)while the thief plays deadlock(rather not lose)(Depressing)model of mi
28、litary aggression,Game theory and evolution,John Maynard Smith proposed the Hawk-dove game as a simple model of animal behaviour.Consider a mixed population of aggressive and docile individuals:Food v at each round;doves share;hawks take food from doves;hawks fight(with risk of death c)If v c,whole
29、population becomes hawk(dominant strategy)What happens if c v?,Game theory and evolution(2),If c v,a small number of hawks will prosper as most interactions will be with doves.Equilibrium reached at hawk probability p setting hawk payoff=dove payoff I.e.p(v-c)/2+(1-p)v=(1-p)v/2 pv-pc+2v-2pv=v-pv-pc=
30、-v p=v/c,Broader implications,Anthropology 10,000 years ago we were the shy murderous ape.If you saw a man you didnt recognise,youd better kill him first Now we collaborate globally and live in largely peaceful societies(Seabright,“Company of Strangers”)Cooperation supported by many institutions fro
31、m religions(“do unto others as youd have them do unto you”)to markets and legal codesSocial constructs such as honour and trustMuch research into the psychology&economics,Broader implications(2),The formalisation by Nash,Axelrod,Maynard Smith and others opened up many applicationsPolitics:models of
32、conflict,of civil war,of when religions are dominated by fundamentalistsCriminologists:model everything from duelling to the Mafia as alternative contract enforcement,and tattoos,self-harm etc as in-game signallingComputer science:how do you get people in peer-to-peer systems to do their share rathe
33、r than free riding?How do you get AS operators on the Internet to tell the truth about routing?,Prices and markets,As an introduction to theories of prices,consumers and markets,consider an idealised market for flats in CambridgeAssume only two types one-bed flats in town,or house-shares in Chestert
34、on.People who can afford flats will rent them,and those who cant will get house-shares insteadAssume that there are 1000 flats to rent,and that people vary in their ability/willingness to pay,Accommodation market,So there might be 1 person prepared to pay 2000,300 prepared to pay 1000,1000 prepared
35、to pay 500With 1000 flats to let,the market equilibrium price p*is where the supply and demand curves cross,i.e.500,Monopoly,If the market is rigged,the cartel might restrict supply 800 flats at 700 pm can earn more than 1000 at 500 pm This is inefficient!(there are empty flats which people would pa
36、y to rent)How can we formalise this?,Efficiency,A monopolist might leave some flats empty despite people being prepared to pay for themDefinitionsA Pareto improvement is a way to make some people better off without making anyone worse offA Pareto efficient allocation is such that no Pareto improveme
37、nt is possibleThis is weak:pure monarchy and pure communism are both Pareto efficient!Anyway,is there any way for the monopolist to find a Pareto efficient allocation?,Discriminating monopolist,If you know what everyone can pay,charge them just that!This arrangement is Pareto efficient!The monopolis
38、t captures all the consumer surplus,Consumer surplus,Consumer surplus is the total amount people saved on their reservation priceOrdinary monopoly:green area left to consumersThe monopolist diminished surplus by A and BThe discriminating monopolist gets the lot!,Monopoly and technology,Monopolies ar
39、e common in the information goods and services industriesWell study why in some detail laterFor now,monopolists have an incentive to price discriminate,to mop up all the available surplusHence the many prices of Windows!But its not just tech.Think airline tickets,cars,and even food.So what factors d
40、etermine the structure of markets?,Basic consumer theory,Examines mechanisms of choiceConsumers choose best bundle of goods they can affordMost of the time,two goods are enough say books versus everything elseAssuming a budget constraint m,p1x1+p2x2 mThis gives a line on which choices must lie,Prefe
41、rences,We draw indifference curves or isoquants joining mutually indifferent points that is,where the consumer prefers bundle(x1,x2)equally to(y1,y2)We assume theyre well behaved the curves dont cross.I.e.if(x1,x2)is preferred when(y1,y2)is affordable,then when(y1,y2)is preferred,(x1,x2)is not affor
42、dable(the weak axiom of revealed preference),Substitutes,Sometimes I just dont care at all whether I have good 1 or good 2E.g.:Tescos sugar or Sainsburys sugarSuch goods are called substitutes,Complements,Sometimes I want exactly the same quantity of good 1 and good 2E.g.left shoes and right shoesSu
43、ch goods are called complements,Bads,There are some goods Id rather avoid!But sometimes I have to consume some of a bad in order to enjoy some of a good,Marginal rate of substitution,The tangent to an isoquant gives the marginal rate of substitution(MRS)This is the exchange rate at which the consume
44、r will trade the two:MRS=x1/x2Comvex curves:youre more likely to trade the good if you have more of it,Diminishing MRS,The more you have of x1 relative to x2,the more likely you are to trade x1 for x2,in the strictly convex caseI.e.you become less willing to pay for one more,Utility,Often indifferen
45、ce curves can be parametrisedMarginal utility MU1=dU/dx1 Then MRS=-MU1/MU2Utility functions can be useful for describing consumer choices They can often be inferred from shopping behaviour,and answer questions about the value of better/faster/,Cobb-Douglas utility,Commonly used:U(x1,x2)=x1cx2dIf the
46、 utility is believed to depend on a number of observed factors,take logarithms and look for a fit,The marginalist revolution,Until 1871,no-one had a good theory of supply and demand.Why are essentials like water cheap,while diamonds are expensive?Solution:the value of the last and least wanted addit
47、ion to your consumption of a good sets its value to you(Karl Menger,Stanley Jevons,1871)Shifted thinking from costs of production to demand,and led to classical synthesis of Marshall and others interlocking models of consumption,production,labour,finance etc in a world of free competition,Concrete e
48、xample,Suppose a local coal market in 1840 had three typical suppliers/customersThe market price determines who produces and who consumesIts determined by the marginal transactionIt fluctuates with demand(weather)and can evolve in the long term with tech,investment,Demand,Assuming functions are well
49、-behaved,we can get a consumers demand from their utility or vice versaMarket demand is the sum of demand over consumersIn general a price change will have a substitution effect(if beer goes up,drink more wine)and an income effect(if rent goes up,youre poorer)Economists talk of Marshallian demand an
50、d Hicksian demand;the latter has constant utility(consumers compensated for changes in income),Elasticity,Given a market demand curve,elasticity measures the effect on demand of a small change in price Formally,(p)=(q/q)/(p/p)=pq/qpElasticity=1 means there are substitutesRevenue R=pq,so R/p=q+p p/q=
