Not defending Oracle here, but the fact that the decision in Google's favor has been overturned twice suggests Oracle's not 100% crazy to pursue this. And the upside is mandatory licensing fees for every Android device.
Cases tend to run back and forth until one party gives up, or goes bankrupt. Lords, even SCO v Linux is still going.
Sorry, how could that be an upside? It's plain, zero-sum rent-seeking. I.e. only an upside if you happen to collect the rent.
It is zero-sum iff the benefit to Oracle is exactly equal to the deadweight loss imposed by the tax.
I tried to calculate this in the simplest econ 101 way, and got a surprising result. I would appreciate someone else commenting...
Assume that the schedule of supply and the schedule of demand are straight lines. We have three groups: (1) purchasers of phones; (2) vendors of phones; (3) Oracle.
In the absence of a tax imposed by Oracle, an equilibrium quantity Q_e of phones trade at an equilibrium price P_e. [1] This generates gains from trade, producer and consumer surplus, equal to the area circumscribed by the schedule of supply, the schedule of demand, and the line Q = 0.
When Oracle imposes a fee on phone sales of value F, the price and quantity-traded of phones adjust. The new quantity traded Q_f is lower than Q_e, and the new price P_f is higher than P_e. The gains from trade are now the trapezoid circumscribed by the line Q = 0, the line Q = Q_f, the supply schedule, and the demand schedule. The missing gains, the deadweight loss, are equal to the triangle circumscribed by the line Q = Q_f, the supply schedule, and the demand schedule.
Oracle receives F×Q_f in fees, a benefit equal to F×Q_f.
The deadweight loss is a triangle with base F and height (Q_e - Q_f). It is therefore equal to (F×Q_e - F×Q_f)/2.
Balancing the gains to Oracle against the deadweight loss, we see that they are equal when Q_f is one third of Q_e, or in other words when the fee is so massive that it cuts the quantity traded by 66%. If Q_f is larger than that, the benefits to Oracle exceed the loss imposed on purchasers and vendors.
This result would seem to imply that we could improve the efficiency of the marketplace by allowing random third parties to impose large taxes on pretty much any good. This is hard to believe. Where did I go wrong?
[1] In reality, there are a variety of models available at a variety of price points. This doesn't affect the problem I have with my result, though it is probably relevant to the phone market in specific.
You inverted the sign. The zero sum thing is the prospective transfer to Oracle. If you pay $100 and Oracle receives $100, net across everyone is zero.
Then whatever lack of commerce caused by the higher prices occurs is a deadweight loss with negative sum. You start from zero and go down.
To get a positive sum you need to be creating something with value greater than its creation cost.
After the fee, there's less producer surplus, less consumer surplus, and more Oracle surplus. As a consumer, I don't see which part of the price of the phone goes to the producer (generating metaphysical good) and which part goes to Oracle (generating metaphysical evil). I just see that the phone is worth more than its price by an amount equal to my consumer surplus. My surplus is measured in dollars just like Oracle's surplus.
But it seems that after Oracle imposes the fee, it generates so much Oracle surplus that it could cover the deadweight loss out of its own pocket and leave everyone better off. This is surprising.
I think your comment is mostly correct, but I'm going to try to put it in terms that make more sense to me.
The answer is that the loss of producer/consumer surplus is being calculated incorrectly. Deadweight loss is the triangle described, but the loss of consumer surplus is more than just the consumer-surplus part of the deadweight loss. It also includes the rectangle separating the price the consumer would pay in the absence of the fee, P_e, from the price the consumer does pay, P_f. My mistake isn't that I inverted a sign, it's that I compared the wrong quantities -- I included a benefit to Oracle without accounting for the cost to consumers and producers who are still willing to trade under the new regime. (Where the deadweight loss only includes consumers and producers who were willing to trade under the old regime, but not under the new one.)
(bananamulch and 34624523 both said the same thing I'm saying here.)
> When Oracle imposes a fee on phone sales of value F, the price and quantity-traded of phones adjust. The new quantity traded Q_f is lower than Q_e, and the new price P_f is higher than P_e.
The producers/consumers combined would lose both the oracle tax and the deadweight loss (lack of opportunities that otherwise would have occured).
But then again, what if phones have a negative externality from a society where no one talks to eachother? The oracle tax might be good for society.
I don't think this is necessarily true. Google and/or handset vendors could just eat the additional cost and keep prices the same for consumers.