Unless you have a highly effective email filter, ‘spam’ or unsolicited commercial email is one of modern life’s greatest irritations. According to Symantec, the world’s largest maker of computer software and the company behind the Norton brand, about 88 per cent of daily global email traffic is spam.
In a recent article titled ‘The Economics of Spam’* Justin Rao and David Reiley examine spam as a form of negative economic externality not unlike pollution. Automated spam filters probably prevent hundreds (if not thousands) of daily emails from affecting your inbox and rendering email totally useless. Rao and Railey make the point that spam has particularly adverse effects as the “ratio of external costs to private benefits is quite high”. They estimate that spam costs US companies and consumers at least $20 billion a year. In terms of revenue, spam merchants possibly collect about $200 million a year globally. Therefore, there is a significant ‘deadweight loss’.
Email is susceptible to spam as it is sent via a ‘sender push’ technology called Simple Mail Transfer Protocol (SMTP). In effect, SMTP is similar to the transfer protocol of the traditional postal service. In the same way that ‘junk mail’ can be delivered through your letter-box, spam email can be anonymously delivered to your inbox. Spam originated in the 1990s by using phony domains to send out bulk emails. Since then, there has been a ‘cat and mouse’ battle between the spammers and internet administrators (eg authentication protocols, word filters etc.). Of course, it wasn’t too long before spam merchants began using terms such as ‘Viag!a’ or ‘Ro7ex’ to bypass these defences.
In terms of its market structure, spam differs from legitimate advertising in that it uses obfuscation to get its message through, whereas traditional advertisers – from the early days of ‘Mad Men’ to the present – try to promote awareness of a real brand or company. The ‘supply’ side of the spam industry is dominated by ‘botnets’ (networks of ‘zombie’ computers infected by a piece of malicious software called ‘malware’). Again, according to Symantec, in 2009 six botnets accounted for over 90 per cent of botnet spam. In other words, the market structure appears to be an oligopoly.
Again, Rao and Reiley indicate that a botnet “may either rent out its services to independent spammers, or send its own spam while acting as an affiliate for a merchant”. On the ‘demand’ side of the market, spammers might register the domain ‘pharmas.com’ and then host tens of thousands of identical pages with different URLs on the same domain: ‘pharmas.com/buyviagra.html’. A 2011 study by Levchenko et al. found that a sample of 45 spam merchants had registered 365,395,278 unique URLs!
The issue here is that, while spammers face nearly zero costs in registering new domains and renting services from botnets, legitimate companies encounter significant fixed costs in setting up real websites with legal payment processing capabilities. Compare a fake pharmaceutical website to, for example, boots.com and you can see why the legitimate retailers face higher entry costs.
Rao and Reiley mention that the standard economic solution to a negative externality is to levy a Pigovian tax on the externality-causing activity. This is also known as the ‘polluter pays’ principle. Various solutions have been suggested to counter email spam, for example, ‘attention bonds’ (where you get a small payment for your time) and an ‘email postage stamp’ (where the sender pays a tiny amount for each email sent).
However, no workable solution has yet been implemented. One idea may be to intervene in payment processing so that spammers cannot collect their funds from banking services or credit card providers. Some are also advocating spam-the-spammers tactics. Until then, however, we will have to rely on improving anti-spam technology.
*Rao, J. And D.H. Reiley, ‘The Economics of Spam’, Journal of Economic Perspectives 26 (3), Summer 2012, 87-110.