It turns out that domain squatting is but one example of a pathology in property rights that gives rise to phenomena like Microsoft’s OS as de facto standard and the US Federal Reserve’s dollars as the global reserve currency.
Economists have called it the “network externality”. Domain squatting is one of the most obvious examples.
The network externality occurs when enough people participate in a networking platform that the value of the platform becomes a de facto monopoly from which the owner may tax the community’s value with virtual impunity.
In establishing a new DNS root, designed not to be overrun by the same sorts of property rights parasites that drain value from networks — contributing nothing — it pays to think through the details of how the system will prevent such economic exploits.
The domain squatting parasite’s game is pretty simple:
- Establish a favored status with the root authority so that domains may be acquired at virtually no cost.
- Grab domain names consisting of virtually any word or phrase short enough to be a domain name, and sit on them.
- When someone actually wants a domain, it costs the domain squatter nothing to withhold the resource so the potential buyer is in a disadvantaged position and must pay the squatter the value of the domain to the buyer — not some intermediate price.
An obvious solution to this problem is for the DNS root authority to charge a fee for squatting on the domain so that there is an incentive for the squatter to actually place the domain name in service.
The question for the DNS root authority is how much of a fee to charge domain owners to prevent not only domain squatting per se, but poor utilization of domain names? After all, exceptional names embodying their own network externalities such as “google”, “yahoo”, etc. notwithstanding, the rest of us do benefit from meaningful domain names.
An obvious first step would be to allow potential buyers to place bids in escrow with the root DNS authority, and require the current owner of the domain name to pay the interest on the highest bid in escrow for that domain name. The current owner can choose to:
- Pay the interest on an ongoing basis and retain ownership.
- Accept the bid and transfer ownership to the bidder in exchange for the escrowed money.
- Refuse to pay either the interest or to accept the bid until such time as the interest owed matches the amount bid, at which point the ownership transfers to the high bidder and the prior owner receives no compensation.
This can be entirely automated with the only parameter subject to human authority being the interest rate which can be pre-specified to be some standard such as the gold leasing rate.
Posted by Andrew on Tue, 21 Dec 2010 07:12 | #
This is really good idea. Journals in the field microeconomic theory would publish this sort of thing. From an economics perspective you are trying to create a mechanism that (A) results in the domain name ending up with the ‘right’ person (the one who values it most) and (B) minimizes the rent that the person who initially holds the domain name can extract (hopefully this is zero).
In a certain theoretical sense, your mechanism doesn’t do this better than bilateral bargaining: A `tough’ seller could force the buyer to pay whatever the buyer values the domain name at (provided the seller knows how much this is).
However, in practice there is a huge difference because in bilateral bargaining, ‘tough’ means willing to walk away with nothing, while in your mechanism ‘tough’ means willing to accept infinite losses. Therefore in practice, with your mechanism the initial owner should extract a lot less rent than in bilateral bargaining.
The idea here can also be applied to any trade where bargaining power is important. What you are proposing is essentially a mechanism that reduces the bargaining power of the seller in favor of the buyer.