Scrabulous and Other Failures of the Coase Theorem

So, as many of you know, the Facebook application Scrabulous went down today for American and Canadian users. Due to legal action on the part of Hasbro, the rights-holder in the US, the Indian-based developers took down the site. A full write up can be found on the front page of the major news outlets (below the excellent stories about a SoCal earthquake that makes me glad to live in Michigan again and Ted Stevens finally getting indicted for being corrupt). Here’s the Times on the subject:

Scrabulous Barred to North American Users

NEW DELHI — The Calcutta-based brothers who developed the popular online game Scrabulous bowed to legal pressure Tuesday and barred North American users from playing the game on Facebook.

Both Hasbro and Mattel introduced Facebook versions of Scrabble to compete with Scrabulous this year, but neither gaming giant has attracted the users or praise of Scrabulous. The Agarwalla brothers put the game on Facebook in 2007, and it quickly became a hit, attracting millions of registered users.

Hasbro on Tuesday seemed to thank Facebook for helping to get the application removed. “Hasbro is pleased that the developers have voluntarily removed their infringing Scrabulous application on Facebook, and we appreciate Facebook’s assistance in expediting this matter,” said Hasbro in a statement. “In deference to the fans, we waited in pursuing legal action until Electronic Arts had a legitimate alternative available,” Hasbro said, referring to its online games partner, and added that it invited fans to try out the “authentic” game.

Hasbro introduced its own Facebook version of Scrabble, called Scrabble Beta, earlier this month through Electronic Arts, which is based in Redwood City, Calif. The game has attracted about 15,000 daily users, and mixed reviews, including criticism from Facebook reviewers for its “pathetic” load up time.

The official Hasbro game was only sporadically working on Facebook on Tuesday. Several times when would-be players tried to log in, they were greeted with a frozen screen. Hasbro’s public relations person referred questions about the online game’s functionality to Electronic Arts. An Electronic Arts spokeswoman, Trudy Muller, said, “We’re working on some tech problems and Scrabble will be ready to play as soon as possible.”

I love the Times coverage of Scrabble Beta and its “pathetic” load time. I think there might be a bit of sympathy there… But to get to the title of this post, does anyone else see a serious failure in Coasian bargaining?

To quickly recap, the economist Coase argued in one of the most highly-cited papers ever that the assignment of property rights will not alter the outcome of a dispute as long as there is transation-cost free bargaining. His killer examples included the decision to build a fence to keep a herd of animals from grazing on a neighboring farm. If the fence is cheaper than the damage to the crops, it will not matter who is obligated to pay for the fence, it will get built anyway. If the farmer has the right to receive damages, the shepherd will instead build the fence. If the sheperd is not responsible for damages, then the farmer will build it. Similarly, if the fence is not cost-effective (“efficient”) then it will not get built either way. Ergo, the assignment of property rights alters distribution of resources but nothing else. This result is called the “Coase Theorem”.

Unfortunately, like many economics theorems, it rarely if ever obtains and should not be read as a description of reality. Instead the theorem highlights the importance of transaction costs, in line with Coase’s earlier groundbreaking work on the firm (where he argued that firms exist because there is a cost to using the market mechanism, i.e. a literal transcation cost, and thus if you had to make the same transaction over and over again it was cheaper to do it in a firm than on the market).

Ok, so back to Scrabulous. Why did Hasbro and Mattel not bargain with the creators of Scrabulous, using their property rights to exercise a claim on the profits from those programs, but letting the outcome stay the same (i.e. that I get to play Scrabble on Facebook with software that doesn’t stink). Better yet, why not hire the creators of Scrabulous and buy out their software? Either of these options seem more efficient than shutting the program down and losing the massive userbase Scrabulous has accumulated. Were the creators trying to hold out for too good a deal? Or, more likely, did Hasbro and Mattel think they could get everything? In any case, it looks like there was a failure in bargaining (transaction cost) that has led to an inefficient outcome (no Scrabble).

Sad.

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4 Comments

  1. The problem here was that there was no single person to talk to or do a deal with.

    Scrabulous was global and yet the rights to Scrabble were split between arch rivals Hasbro and Mattel. it’s a very unusual and unfortunate situation.

    The morale of the story is if you plan to create something based on someone else’s IP make sure there’s just one owner.

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  3. Joseph de Sousa

     /  April 20, 2012

    I would have thought this example is not a failure of bargaining per se (because the important fact about the “no transaction cost” condition is the cost of bargaining relative to the size of the profit to be made). Rather it is a problem of ill-defined property rights on the Internet (one of the other conditions of the Coase Theorem). The central question of the legal case will be whether Scrabble had a patent for the concept of the game we understand as Scrabble that was applicable in all domains, including the online world.

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