Monday, December 21, 2020

How Goethe Turned a Publishing Negotiation into a Second-Price Auction

Johann Wolfgang von Goethe (1749-1832) is one of the few writers of such historical prominence that those in the know refer to him just using his last name. I'm certainly no scholar. I remember enjoying The Sorrows of Young Werther in college, and I made it through the first part of his Faust. Here, the focus is on how Goethe tried to use some innovative mechanisms when signing a contract with publishers. Benny Moldovanu and Manfred Tietzel offer an overview of a couple of episodes in "Goethe's Second‐Price Auction" (Journal of Political Economy, 106: 4 (August 1998), pp. 854-859). 

In Goethe's time, writers were usually payed with a "sheet royalty." A sheet coming off the printing press would, after being cut up and bound into a book, be 16 pages. The author was paid by the sheet, independent of how many books were eventually sold--that is, without royalties. Also at this time, there was no copyright law governing the 314 different principalities that made up Germany, so the financial risks of actually paying an author (rather than just ripping off work already published) were quite real. 

Later in  Goethe's life, when it came time to publish his collected works, he ran an auction that attracted 36 publishers. This episode of interest here happened much earlier in Goethe's career in 1797, when he was seeking a publisher for his epic poem Hermann and Dorothea. On January 16 of that year, Goethe wrote to the publisher Vieweg with the following offer: 
I am inclined to offer Mr. Vieweg from Berlin an epic poem, Hermann and Dorothea,which will have approximately 2000 hexameters....Concerning the royalty we will proceed as follows: I will hand over to Mr. Counsel Böttiger a sealed note which contains my demand, and I wait for what Mr. Vieweg will suggest to offer for my work. If his offer is lower than my demand, then I take my note back, unopened, and the negotiation is broken. If, however, his offer is higher, then I will not ask for more than what is written in the note to be opened by Mr. Böttiger. 
Notice that the incentive here is for the publisher to bid with a true estimate of what the work is worth. The publisher need not fear bidding much more than would have been needed to secure Goethe's assent--because Goethe has promised that the publisher need not pay more than the figure in the sealed not. This is a form of what the modern auction theorists call a "second-price" auction--that is, the winner pays the second-highest bid (or in this case, the figure in Goethe's note), not the amount of the highest bid. 

But why would Goethe go to this trouble? Why not just make his demands explicit, and make the publisher a take-it-or-leave-it offer? Goethe's approach can be viewed as a way of reversing what he perceived as an asymmetry of information. If Goethe makes a take-it-or-leave-it offer, the publisher knows what Goethe wanted, but the publisher does not need to reveal any estimate of what the manuscript is likely to be worth. In Goethe's approach, the publisher needs to reveal an estimate of what the manuscript is worth, while Goethe's valuation remains secret. For an author considering what will happen in future contract negotiations, this information is valuable. 

What happened? Mr. Counsel Böttiger let Goethe down. He wrote a letter to Vieweg which said: 
The sealed note with the imprisoned Golden Wolf is really in my office. Now, tell me what can and will you pay? I put myself in your place, dear Vieweg, and feel what a spectator, who is your friend, can feel. Given what  Iapproximately know about Goethe’sfees from [other publishers Göschen, Bertuch, Cotta and Unger, let me just add one thing: you cannot bid under 200 Friedrichs d’or.
Vieweg bid as Böttiger directed, which by an enormous coincidence was the exact amount Goethe had written in  his "sealed" letter.  Moldovanu and Tietzel note that Goethe's fee was three or four times higher than the usual fee for popular authors of the time. But Hermann and Dorothea was a best-seller, and Vieweg kept printing copies until 1830, while making no further payments to Goethe. 

PPS: The 2020 Nobel prize was given for work with regard to auction theory. For an overview, see "A Nobel Prize for Auction Theory: Paul Milgrom and Robert Wilson" (October 12, 2020).