Club Goods, Digital Infrastructure, and Blockchains
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The goal of this article is to define, differentiate, and examine the following set of four goods: Private Goods, Public Goods, Club Goods, Common-Pool Resources.
In my past writing, I’ve (lazily) used “public goods” (or the singular form, “public good”) as a stand-in for concepts like: “things that the public benefits from” and “things with coordination problems”. In fact, there is a formal economic definition of public goods (and it’s part of a 2x2!). I hereby commit to using the more formal definition when I’m writing/speaking. Here is that 2x2:
Let’s define and explore this 2x2 by first exploring its axis.
A rival good is one where my “consumption” (of that good) precludes you from consuming it. For example, if I eat an apple, you cannot also eat that same apple. Or if I catch a fish, you cannot catch the same fish. AFAICT, rival goods are generally physical things (atoms not bits).
In contrast, a non-rival good is one where my “consumption” (of that good) does notpreclude you from consuming it. For example, if I watch a movie, you can also watch that same movie in the same theater. Or if I learned some knowledge (that 2+2 = 4), then I can share that knowledge while still “keeping” my knowledge of it. AFAICT, non-rival goods are generally conceptual (knowledge, language), “physical” things that are hyper cheap (i.e. light: light waves [radio, TV, lighthouses], bits), or things where the “good” exists at a macro emergent level (national defense).
To formalize this mathematically, we can think of rival goods w.r.t. their marginal cost. Non-rival goods have a marginal cost of 0. Rival goods have high marginal cost.
A related concept here is anti-rivalry. These are non-rival goods that go a bit further — where sharing the good actually makes it better for me. I’d also call this “network effects”, where each additional node positively affects my experience on the network.
An excludable good is one where it is possible to stop others from using it (and where people actual decide to do so). For example, I can stop you from eating my apple. And I can also stop you from watching a movie (by forcing you to pay to get in).
An non-excludable good is one where it is not possible to stop others from using it (or where people currently decide not to do so). For example, air is non-excludable good, and so is something like ocean fishing (both are very difficult for me to stop you from using it).
To formalize this mathematically, we can think of excludable goods w.r.t. their price. Non-excludable goods have price of 0. Excludable goods have a higher price.
We can see how excludability and rivalry are orthogonal to each other. I can exclude you from consuming a non-rival good. e.g. In a movie theater, I can set the price of the ticket to be $1 even though the marginal cost of showing the movie is 0. Or, I can notexclude you from consuming a rival good. e.g. It’s difficult for me to exclude you from fishing in the great blue ocean. The “price” we put on fishing is $0, but the marginal cost of each fish is greater than $0.
Private Goods, Public Goods, Club Goods, Common-Pool Resources
Instead of going into each of these, I’m just going to show this screenshot again :).
How can we map this onto the digital world?
- In general, we should put most digital things in the non-rivalrous bucket (because marginal cost is 0).
- Right now, most digital products act as club goods. SaaS subscriptions perfectly fit this definition. Even though there’s a marginal cost of 0 to provide the software (free trials!), they “gate” it by saying it’s only available to paying subscribers (in the “club”).
- Club goods are also sometimes called “natural monopolies”. This is because you have 0 marginal costs but can exclude folks. You can see this with G-MAFIA aggregators (which tap into anti-rivalry as well). I’d love to see Ben Thompson more explicitly explore this.
- What are the existing digital club goods that we can turn into public goods?
Better Educational Scaffolding
- I want “common-pool resources” to share the same form as the other quadrants. e.g. _____ Goods. (And, tbh, I think we should change the language to explicitly map the 2x2. e.g. Common-pool resources would be Price0CostnGoods. (Weird flex, but ok.)
- I’d love to see more educational material on this that more explicitly shows that the orthogonality of these two ideas is “price vs. cost”. They are categorically different. How much can you/do you charge for it? vs. How much does is cost to produce each unit?
- I’d also love the educational material to actively add explore the anti-rivalrous goods bucket (e.g. to create a 2x3 instead of 2x2). (Network effects are important!) This gets a bit tricky. First, are we looking at goods where the priceis negative (i.e. an anti-excludable good where you pay people to use it), or where the marginal cost is negative (i.e. an anti-rivalrous good where you “make money” from creating it). An initial idea here: the “network” should pay the individual for participation. (In many ways, this is a core idea behind blockchain where the technical architecture is trying to map onto the underlying social system. i.e. Conway’s Law.) Or, we can use self-taxing to create “negative priced” goods. I think there’s a lot more to explore here, but find this space directionally correct (and juicy!).
- Metanote: it doesn’t look like the idea maze around anti-excludable goods “exist” yet (as shown by a google search returning 0). (I like using “google search results = 0” as an indicator of “truly new” ideas that I think should exist, like meta x-risk.)
How can we map this onto blockchain?
- The two bullet points above moderately map this onto blockchain. But I think there’s more exploration to be done here.
- First, let’s explore congestion as a crucial concept here. The idea behind congestion is that is moves things on the gradient from non-rivalry to rivalry. For example, at the beginning, a highway is a non-rival good: my consumption of it (driving) doesn’t preclude yours at all. But over time, as the highway becomes congested, our driving starts to affect others’ driving. …When non-rivalrous goods become congested, we often will make them excludable (e.g. a toll) in order to “relieve” some of the congestion (and make cost ~= price).
- AFAICT, blockchains map pretty well onto this. In theory, inclusion in an upcoming block is non-rivalrous. (It’s just bits! Let’s include everything in a block!) But then “congestion” sets in as more folks want to be on each block. By charging folks to have their transaction included in the block (exclusion!), we’ve created a club good (from the “necessity” of congestion). In other words, holding your information in the cloud is (essentially) a public good (non-rivalrous, non-exclusive), but having your information on a public blockchain is (closer to) a club good (moderately rivalrous, moderately exclusive).
- Does gas map onto this as well?
- For other academic literature here, see “Blockchain and Ex-Ante Exclusion Mechanisms” (where the ICO is a commitment to a club good that the government uses as signaling to determine whether it should provide a public good). And this old paper from 1996: “the third condition is that new members are added to the club, until the marginal benefit from additional membership is equal to the marginal congestion costs.”