Book review: Cloud Empires

The libertarian ideal of the internet was that it was a place without borders, without gatekeepers, and without government control. However, the modern internet falls well short of that ideal. In the physical world, it is typically governments that make and enforce the rules. However, online it is increasingly large and undemocratic platform firms that make the rules and enforce them. That is the general idea underlying Vili Lehdonvirta's 2022 book Cloud Empires, which I just finished reading.

Lehdonvirta tracks in detail how we ended up in the current situation, noting that:

The Internet was supposed to free us from powerful institutions. It was supposed to cut out the middlemen, democratize markets, empower individuals, and birth a new social fabric based on self-organizing networks and communities instead of top-down authority. "We will create a civilization of the mind in Cyberspace... more humane and fair than the world your governments have made before."... This is what Silicon Valley's visionaries promised us. Then they delivered something different - something that looks a lot like government again, except that this time we don't get to vote.

Lehdonvirta outlines how the platform firms have essentially replicated the process by which governments established rules, because of the same underlying necessity to maintain control. He uses numerous examples including Amazon, eBay, and cryptocurrencies such as Bitcoin and Ethereum, to illustrate his points. These case studies demonstrate the challenges, and the close corollary between the economic institutions established by the platform firms and those established by governments. Lehdonvirta notes that the key difference between governments and platform firms is in the political institutions. Platform firms lack the accountability that is inherent in political systems, and there is little prospect of overturning the 'government' of a platform. Even the most autocratic state risks revolution in a way that is to a large extent impossible for users to achieve within a platform environment.

While Lehdonvirta does a great job of outlining the issues, where the book falls short is in terms of the solutions. The subtitle of the book promises to tell us, "how we can regain control". Lehdonvirta's solution is a 'bourgeois revolution', of the kind that western countries experienced through the late Middle Ages. The growing urban middle class ('burghers') developed significant resources and gradually pushed back against the local lords, helped by powerful allies in the Church and often the monarchy as well. These coalitions led to more devolution of political power and authority, and eventually to the modern political institutions we observe today.

Lehdonvirta notes that, with some creative licence, it is possible to imagine a similar dynamic playing out on the platforms. However, while he devotes a great deal of effort in explaining the problems and linking them to real-world case studies, he doesn't expend the same effort on his proposed solution. The reader receives a few, almost cursory, observations about how a 'bourgeois revolution' may play out in certain situations. I felt like the book needed a more detailed explanation, linking the solution to embryonic real-world efforts and charting a path forward for them. Although speculative, a 'road map' for advocates of returning some power to the platform users would have added significant value to the book.

Aside from that small gripe, I really enjoyed this book, and it was a good follow-up to reading the more textbook treatment of platforms found in The Business of Platforms (which I reviewed last week).

This week in research #121

Here's what caught my eye in research over the past week (a quiet week, as I have been travelling in Europe):

• Three articles published in the prestigious journal Nature by Miske et al., Aczel et al., and Tyner et al., investigate the replicability of research results in social and behavioural sciences (a very important set of papers that have garnered a lot of attention)
• Mišák (open access) investigates the impact of temperature on soccer team performance, and finds that attacking efficiency is enhanced in warmer conditions, leading to increased goal productivity and improved shot conversion rates, defensive performance appears to weaken in warmer conditions, with a decrease in defensive pressure and passing accuracy, and player aggression follows an inverted U-shaped pattern in relation to temperature

The impact of the 2023 Bud Light boycott on alcohol purchases

When a consumer stops buying a particular product for some reason (for example, if a product becomes unavailable), do they switch their spending to another product within the same category, or do they reallocate their spending across all available goods and services? The consumer choice model (or the constrained optimisation model for the consumer) suggests that the consumer should reallocate across all possible goods and services, rather than transferring the exact proportion of spending to the closest substitute product.

This recent article by Aljoscha Janssen (Singapore Management University), published in the journal Economics Letters (ungated earlier version here) provides an interesting test of that expected response. The context is the 2023 boycott of Bud Light in the US:

The boycott began in early April 2023 after Bud Light partnered with a transgender creator, prompting calls from conservative media to avoid the brand... Viral content amplified the message, and the manufacturer responded with advertising that emphasized traditional Americana themes... Sales declines emerged not only in conservative areas but also in regions without strong ideological leanings...

Janssen uses data from the NielsenIQ Consumer Panel from 2021 to 2023, which tracks spending by between 40,000 and 60,000 US households. Janssen drops households that did not buy alcohol, and then categorises the remaining households into three groups based on Bud Light purchases: (1) 'Bud Light households' (that purchased 18 litres of Bud Light in both 2021 and 2022); (2) 'Bud Light-dominant households' (that purchased at least twice as much Bud Light as other beers, in addition to purchasing at least 18 litres of Bud Light in both 2021 and 2022); and (3) 'Non-Bud Light beer households' (that purchased at least 18 litres of light beer in both 2021 and 2022, of which less than one-third was Bud Light). Janssen reports that:

In the full sample there are 34,470 alcohol-purchasing households; 585 qualify as Bud Light households and 439 of those are Bud Light-dominant, while 5130 are non-Bud Light beer households.

Janssen analyses monthly purchase data using a difference-in-differences approach, essentially comparing the difference in purchases between different treatment and control groups before and after the Bud Light boycott in April 2023. In practice, the comparisons show very similar results for the impact on Bud Light purchases, purchases of other beer, and total alcohol purchases. Specifically, Janssen finds that:

Across all designs, treated households reduce Bud Light by roughly 160 ounces per month (34%–37% of their pre-boycott Bud Light volume)...

Households partially replace Bud Light with other beer: other-beer purchases rise by 70–90 ounces per month. The offset is meaningful but incomplete relative to the Bud Light shortfall...

Net of substitution, total ethanol declines by about 3–4 fl-oz per month among treated households, a 5.5–7.5% drop. Converting with 0.6 fl-oz per U.S. standard drink, this equals roughly 5.0–6.7 drinks per month per treated household...I find no significant changes in wine or spirits, indicating that switching is almost entirely within the beer category.

So, the boycott led households on average to purchase less Bud Light (as you might expect from a boycott). They bought a greater quantity of other beer products, but the increase in other beer purchases was less than half the decrease in Bud Light purchases, meaning that consumers substituted to other non-beer products. Consumers also didn't switch entirely to other alcohol products, as total alcohol purchases declined. Instead, some spending appears to have shifted away from alcohol altogether. In other words, consistent with the consumer choice model, when consumers stopped buying (or reduced their purchases of) Bud Light, they reallocated their spending across all goods and services, not just switching their spending to the closest substitute to Bud Light (other beers).

Does this offer anything meaningful for advocates of reduced alcohol consumption? Probably not in any direct sense. These were fairly unusual circumstances, and consumer boycotts of particular alcohol products are uncommon. It is hard to imagine advocates or policymakers being able to engineer similar boycotts on a regular basis in order to reduce alcohol consumption. However, the findings do suggest a broader possibility. Interventions that reduce purchases of particular alcohol products, especially those associated with high levels of alcohol-related harm, may lead to at least some reduction in overall alcohol purchases, rather than consumers simply switching one-for-one to the nearest substitute. That said, this study is about purchases rather than consumption, and more evidence from other types of interventions would be needed before drawing firm policy conclusions.

Taylor Swift, look what you made fans buy

Taylor Swift released 27 versions of her 2025 album The Life of a Showgirl. That sounds excessive, but it offers a nice lesson in economics and pricing strategy, specifically price discrimination.

Price discrimination occurs when a firm charges different prices to different groups of consumers for the same good or service, and where the price differences do not arise from a difference in costs. One form of price discrimination is 'versioning', where the firm offers different versions of a product that each cost the same to produce, but which appeal to different groups of consumers (with different price elasticities of demand). Consumers that are more price sensitive (and have more elastic demand) would buy the version of the product that is less expensive, while consumers that are less price sensitive (and have less elastic demand) would buy the more expensive version.

We saw an extreme example of versioning last year, executed by the astute economist Taylor Swift. Paul Crosbie (Macquarie University) wrote about it in this article in The Conversation last October:

The Life of a Showgirl was released in dozens of formats, with physical and digital editions tailored to different levels of commitment.

In total, over the first week, there were 27 physical editions (18 CDs, eight vinyl LPs and one cassette) and seven digital download variants.

A range of covers, coloured vinyl, bonus tracks and signed inserts turned one album into a collectable series rather than a single product. Other artists – such as the Rolling Stones – have used this strategy before, but rarely at this scale or with such an intense response from fans.

Taylor Swift fans who are more price sensitive will have tended to buy the less expensive version of the album. More price-sensitive fans will include those who have lower incomes (where the album price is a higher proportion of their income) and those who are more casual Taylor Swift fans (where there are more substitutes available that they might prefer to spend their income on).

Taylor Swift fans who are less price sensitive will have tended to buy the more expensive premium version of the album. Less price-sensitive fans will include those who have higher incomes (where the album price is a smaller proportion of their income) and those who are more diehard Taylor Swift fans (where there is no close substitute for the latest Taylor Swift album).

Crosbie questions whether it is possible to have too many versions of a product. In this case, 27 versions do seem like a lot. It could be a very effective means of segmenting the market. However, that works best if each buyer only buys one version. There will be some fans who bought more than one version, and perhaps a substantial number who bought several. A non-trivial proportion of the most diehard fans probably own all 27 physical editions of the album.

This matters because the usual rationale for price discrimination through versioning is that consumers sort themselves across the available versions - the casual fans buy the standard version, while the diehard fans buy the premium one. But if some consumers buy multiple versions, the strategy is doing more than just segmenting the market. It is also encouraging multiple purchases from the same buyer. In that case, the different versions are not just substitutes for one another, but for some fans they become collectibles, with each version they collect adding a bit of extra value through completeness, exclusivity, or identity. So, the economics of versioning for Taylor Swift are not only about price discrimination between consumers, but also about extracting more surplus from the most committed fans.

There is a limit to how many versions even the most diehard fan is willing to buy, and that limit arises because of diminishing marginal utility. In economics, utility is the satisfaction or happiness the consumer gets from the goods and services they consume. Marginal utility is the extra utility the consumer gets from consuming one more unit of a good or service. Diminishing marginal utility is the idea that marginal utility declines as the consumer consumes more of a good. In the context of Taylor Swift's album, Crosbie notes that:

The first version of an album brings a lot of satisfaction. The fifth or sixth brings less. Eventually, another version does not add enough enjoyment to justify the price. Fans begin to feel they have had enough.

It is clear that there is a balance to be found between maximising profits by price discrimination using versioning, and the number of versions that are offered when some consumers will want to buy multiple versions. Price discrimination can be an incredibly profitable pricing strategy for firms, including for Taylor Swift. Maintaining fan engagement and encouraging diehard fans to spend more by making the versions collectible are also important. As Crosbie notes in his article:

Instead of leaving that money on the table, the strategy turns passion into profit. The cost of creating extra covers or vinyl colours is small, but the willingness of fans to pay more for them is high. That is exactly where versioning pays off.

In theory, it should be possible to work out the optimal number of versions that maximises long-run profit. The profit-maximising number of versions is not necessarily the number that best segments the market for the purposes of price discrimination, because diehard fans may buy multiple versions. It seems likely that Taylor Swift is well aware of this. Would you be willing to bet she hasn’t gotten close to that optimum? I wouldn’t.