The Economics of Spam : Externalities, Market Institutions, and Strategic Games

Spam, or unsolicited email advertising, has been the scourge of email inboxes for nearly twenty years. Spam attempts to generate attention for a merchant’s products or services, but unlike most forms of advertising, spam does not provide users with valuable entertainment or other services in exchange for their limited attention resources. The uncompensated nature of spam makes it an excellent teaching example of a negative externality. We document the history of the market for spam, paying special attention to the strategic arms race between spammers and anti-spam technologists, and how this battle has shaped various market institutions, from ”botnets” to international labor markets for breaking computer security. For example, economies of scale in spam prevention have contributed to the concentration of email provision among several players. Taking advantage of recent empirical research by computer scientists, we estimate that society loses $100 for every $1 of profit to a spammer. This ”externality ratio” is at least 100 times higher than that of automobile pollution and is three times higher than the notoriously inefficient activity of automobile theft. We conclude with a discussion of economic and legal policies proposed to reduce the inefficiencies of spam