1 Mod 2 Information Goods and Intellectual Property. Public goods are at the center.

2 Public Goods 1. Definition: Goods that do not get used up when consumed. In other words, one person’s consumption of a good doesn’t reduce anyone else’s potential consumption of the same good. 2. Examples: Ideas, television broadcasts, national defense. 3. Obviously, these are not physical items that get used up. Instead they are usually ideas and artistic expressions. 4. They are at the core of the Information Age Economy, since information is a public good.

3 Public Goods (cont.) 1. Some definitions of Public Goods claim that consumers can not be excluded from using them. Known as Non-excludability. 2. Some Public Goods, such as broadcasting, or national defense, appear to have this characteristic. 3. This misses the point. Any product for which consumers can not be excluded from using, e.g., apples, will give producers no incentive to produce. 4. The Demand for Public Goods is the vertical sum of individual demands.

4 Vertical Addition of Demands Q Q1 Σ D D3D3 D2D2 D1D1 P1P1 P3P3 P2P2 P4P4

5 Titles and Copies 1. Book titles can be thought of as public goods, but the physical copies of a single book title are private goods that embody a public good. 2. Several questions arise: how many titles are optimal to publish? How many copies of each title would be optimal? How do competitive markets work? Monopolies? Finally, is it possible to produce public goods efficiently?

6 Q Q1 Q2 Σ D P1P1 P3P3 P2P2 P4P4 In principle, a perfectly discriminating monopolist can produce efficient amount of public good. S

7 1.Reproductions of a single Title are Private Goods 2.Seller of the Reproductions can not appropriate the entire potential value of the reproductions since he is not a perfect price discriminator. 3.With a single price for the reproductions, too few reproductions are produced (Q*-Qm). One component of lack or appropriation (area 7 in figure). 4.Consumers of the reproductions get surplus, which is another loss of appropriation for the reproduction seller. (1+2 in figure) The Market for a Title

number of copies of a title MC of printing Pm Qm MR D Q*

9 Market for Titles 1. Because appropriability for reproductions of any title is imperfect, the sellers of titles can not achieve the vertical sum of demands (perfect discrimination demand in next figure). 2. Instead, the best the sellers can do is some distance below the vertical sum of individual demands (attainable demand curve in the next figure). 3. This leads to too few titles being produced relative to the ‘ideal’.

number of titles written MC of writing another title Pm Qm Perf Discrimination Demand for titles Q* Market Demand for Titles Attainable Demand for titles Q**

11 Copyright Tradeoffs This leads to two tradeoffs: –Under-consumption of individual titles. –Underproduction of titles. This same tradeoff exists in Copyright. Copyright exists to give creators of ‘artistic’ works the ability to generate revenues. The theory is that without copyright, competition in selling reproductions of a title would drive the price down to the marginal cost of producing a reproduction. Competition would also drive the (economic) profits down to zero, leaving no money with which publishers can pay the author.

12 Copyright Tradeoffs It isn’t clear, however, that competition leaves no payment for the author. Arnold Plant argued that being first gave enough of a head start that sufficient profits could be earned to allow authors to receive optimal remuneration. (Ex. English authors in the US market). The lead from being first is, with current technology, unlikely to allow much profit.

13 Optimal Copyright The figure on the next page illustrates optimal duration of copyright. It contrasts the gains from lengthier copyright (the value of additional works created) against the harms (unnecessary loss of consumer surplus)

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15 Fair Use There is in the law an attempt to balance the interests of copyright holders and those of users. Fair use is a defense to a claim of copyright infringement. It allows copying in instances when the copying appears not to be hurting the copyright owners revenues. Betamax Case said home videotaping was fair use, and thus home videotaping was allowed.

16 Fair Use 4 factors –Amount of the copyright product that is copied. –Nature of the Copyright product (commercial versus academic or scholarly. –Nature of the use of the copied product –Impact on the revenues of the copyright holder. Last factor is the most important.

17 Indirect Appropriability Basic Idea: Producer Can Generate Revenues from those making unauthorized copies. Consumers who make duplicates are willing to pay more for originals since they get value from making duplicates. Producer can charge more for originals, thus indirectly appropriating some of the value in the copies.

Diagram of Copying Impact D V D H Q P

Copying Outlawed D H Q P

20 Diagram of Copying Impact

21 Impact of Piracy This idea of indirect appropriability has been examined in a least one market. It appears that unauthorized copying has benefited copyright owners in the case of photocopying.

22 Evidence on Price Discrimination and Indirect Appropriability Libraries that: Price Discriminate359 Don’t Price Discriminate3521 Ratio of Book to Journal Expenditures, US Academic Libraries

23 Continued Dependent variable ConstantCitesNon-Profit Dummy Age of Journal R-square P lib /P Ind [1.99].65 [4.14].17 n=80 P lib /P Ind [2.14].578 [3.36] -.16 [1.01].17

24 Application to Napster Can indirect appropriability work in Napster-like environment? Problem: large variability in the number of copies made from each original, and identifying at time of sale which originals are going to be duplicated. Large scale Napster copying would seem almost certainly to significantly harm copyright owners. Would work better if Napster had required upload credits to be earned before downloads were possible. Still, Napster is easier to control than Gnutella based systems.

25 Impact of Copying So Far

26 Reaction to Copying Shutting down Napster. Legal action against other networks. Threatening to prosecute users who make copyrighted materials available to others. ‘Spoofing’ and other technologies to make the lives of users trading in copyrighted goods more difficult.

27 Newer Issues Digital Rights Management (DRM) –Copyright owner can imbed code into software that will monitor use and charge accordingly. It can also prevent copying. –Copyright owner can virtually costlessly collect revenues from users. –It might be the most efficient mechanism since it approaches perfect price discrimination.

28 DRM This has led to a contentious debate among academics. –Question: Is this protection ‘too strong’? Too much power to copyright owner? –Does it remove or kill Fair use ? –Does it eliminate free speech? –Does it reduce the creation of copyrighted materials?