Arnold Kling  

Is Copyright Necessary?

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Douglas Clement does an outstanding job of providing background on the way that economists have dealt with the issue of copyright in the context of economic growth. (An earlier version of Clement's article first appeared here.)

Clement's article revolves around a controversial proposition articulated by Michele Boldrin and David K. Levine. They argue that copyright is unnecessary to reward innovation. According to their theory, if people are allowed to copy freely, then this will raise the value of the first few copies (which presumably are made by the creator) to the same point that would be reached if the initial creator were given the right to restrict copying.

When I sell a book to a publisher, the publisher makes a guess as to what it will be worth to print copies of my book, and pays me accordingly. Boldrin and Levine argue that this mechanism also could work if other publishers could freely copy the book--because those publishers would pay my publisher a lot in order to get their hands on early copies.

Clement describes some real-world cases in which innovation takes place in spite of a lack of copy protection.

The fashion world -- highly competitive, with designs largely unprotected -- innovates constantly and profitably. A Gucci is a Gucci; knock-offs are mere imitations and worth less than the original, so Gucci -- for better or worse -- still has an incentive to create. The financial securities industry makes millions by developing and selling complex securities and options without benefit of intellectual property protection. Competitors are free to copy a firm’s security package, but doing so takes time. The initial developer’s first-mover advantage secures enough profit to justify "inventing" the security.

Note, however, that the people who pay high prices for a Gucci or for a new type of security are not the people who make the copies. The profit mechanism differs from the one given by Boldrin and Levine.

In fact, the Boldrin-Levine proposition has the feel of an intellectual swindle, in which the conclusion follows from some unrealistic assumptions that are well hidden. Clement describes the skepticism of many prominent economists.

For example, few economists believe that pharmaceuticals would be developed without patent protection. I think that what differs from the Boldrin-Levine model in the case of a new drug is that the formula for a new drug can be known by competitors before the developer has even obtained permission to market the drug. Without patent protection, the first copy could be sold by a competitor, which leaves the company that developed and tested the drug with nothing.

In general, I think that in the real world there is a long time between when the first copy can be made and when the market value of the intellectual property can be determined. By the time that my publisher knows whether or not my book will be popular, it will have been easy to copy. Without copyright, publishing becomes a game in which it pays to wait and "cherry-pick" the successful works, rather than bear the risk of publishing a dog. But if everyone waits and no one bears the risk, then no publication takes place. Publishers need copyright protection between the time they choose to publish and the time that the uncertainty of the value of the work gets resolved.

For Discussion. Economists tend to believe intuitively that music receives too much copy protection, but that pharmaceuticals do not. How might this intuition be justified on the basis of the characeristics of the two industries?

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COMMENTS (6 to date)
Jane Galt writes:

Nor do Gucci's fit the low-marginal cost model of traditional intellectual property. The materials cost more, they're extremely labor intensive relative to an off-the-rack model, and a large part of the value is produced by artificial scarcity, which is not true of, say, non-recreational pharmaceuticals or software.

Jim Glass writes:

I think Mark Twain would agree with you as to books. We seem to have gone from "Since 95 years is too much copyright protection, no protection must be best of all."

In my experience in discussions about all this, people who get most upset by it usually seem to be thinking that it's wrong that they can't get the big, rich company's stuff that is protected. Why can't we do what we want with Disney's old cartoons for free? Why can't I make Simpsons cartoons and sell them? Why do we have to pay for Microsoft's crap software? But they rarely think of how IP rights protect little guys like them from the big guy. Cherry picking, like you say, is what the big would do to the little, to the cost of all.

E.g., say a company like Microsoft gets a commanding hold of the computer desktop. Then a Netscape comes along and creates a new product that threatens that grip. In our world, Netscape has IP protection for its product. Thus Microsoft has to try to match it from behind, investing large amounts in its own staff and development. A battle takes place with new browser models coming out with improvements so fast that the term "product cycle" no longer applies. Microsoft plays dirty with its size, Netscape makes some bad blunders, and Microsoft wins. Netscape is driven "out of business," finally being sold for a mere $ 4 billion -- we should all form start-ups and be driven out of business that way! And we're all left stuck with the crap Microsoft browser, unless we choose Netscape like I'm using to post this, or Opera, or whatever.

But now let's look at the better world with no property rights. A largest company emerges, call it Microsoft (though since IBM could copy all Bill's software for free it might still be IBM. Whoever.) Netscape's investors then decide to put up $50 million or $100 million to innovate the browser to create a new generation internet and web. Microsoft says "So what? They have no downstream copyright protection. We'll just buy the second copy they sell, make as many copies as we want and sell it ourselves for less, using our huge marketing resources and economies of scale and advantages of incumbency. Give the product away for free even -- after all we don't have any development costs to recover! And any improvement they pay to innovate we can immediately copy for free."

So then Netscape's investors think about this likely competitive response for a minute, and ask , "Why is it again that are we incurring a $50 million to $100 million sunk cost?"

I don't see the answer . Without one they kill the investment, as do other would-be innovator competitors of Microsoft. Of course, Microsoft shuts down all its research too, since it is profitable as is and can just take any innovation any competitor develops without paying for it. That's a whole lot cheaper than R&D. So where's the browser supposed to come from?

Bernard Yomtov writes:

Neither example is compelling.

Gucci has trademark protection. And this is vital because much of the appeal of goods like this is simply the desire for conspicuous consumption. A pair of shoes manufactured by Gucci, using Gucci designs and Gucci quality standards, but without the label, will not command the same price as a pair with the label.

As far as complex securities go, there is not only a time advantage in their design. The inventors also get more experience in the practicalities of trading them in the market. That's important.

Of course, copyrights should run out, and sooner than current law says, since at some point they do more to stilfe innovation than to stimulate it.

Eric Savage writes:

Re: Mr. Glass' comment

While I agree with your overall position and don't want to start a my-browser-is-better discussion, I think your example is a bit faulty. Most tech people know the real reason that MS won the browser war, it was a superior product in every conceivable way. Websites look better in IE, why? Because it had better standards compliance and page developers like myself like to write our pages based on standards, not based on the Netscape bug-o-the-week. Just to show I haven't gone completely off-topic, I'll reference this article I saw today:

Basically what NS did was to be a loner by adopting and extending the standard in a way only it saw fit (I'll spare you all the geek details). IE however was really just trying to compete, not trying to win, and adhered to the standard*, and ultimately won.

*IE extended the standard, but in a way that did not hurt its compliance.

Also Netscape was sold not because of its browser, which AOL never actually used, and not even because of its brand, which was abandoned shortly after acquisition (changed to iPlanet). It was bought because they had a whole suite of other software like the servers that actually had a good reputation and a business model.

Arnold Kling writes:

I'll throw in my $.02 on Netscape vs. Microsoft.

1. The browser market was most competitive before Netscape's IPO. That IPO drove most of the others out of business.

2. When the "browser wars" broke out, Netscape tried to fight dirty. As Eric Savage describes, they broke with standards, to the frustration of web developers.

3. In my opinion, the browser war was orthogonal to Netscape's potential. The market that they needed to win was the server market. But Netscape was blown out of the server market by Microsoft Internet Information Server in the Windows market and by Apache in the Unix market. I tried using Netscape's server to run my web site, and it practically killed the business. It combined all the worst features of proprietary and open source software. It was closed and buggy, on the one hand, and undocumented and unsupported on the other.

4. In my opinion, what AOL (over-) paid for when they bought Netscape was the eyeballs represented by the Netscape home page, which was where Netscape browsers were automatically set to go.

Jack writes:

So what if drug companies did not develop pharmaceuticals? Artificially incentivising them with the private tax that is a patent and ensuring that the consumer is never the one who pays for the product must surely be distorting. Certainly there is onone incentivised to say "actually all you need to do to stave of heart disease is go for a walk" by this scheme, this thrice daily drug that only I can make on the other hand is currently a compelling proposition.

To take a completely incosistent tack, the active lifetime of most recorded music is about six months and the marginal cost of production is near zero whereas drugs have higher capital costs, higher production costs, regulatory costs and but the product is protected for only 17 instead of 95 years. Also once I have bought the drug I can do pretty much what I like with it -- I own it and can share it or sell it.

So a simple point is that music receives far more protection than drugs for a far smaller investment.

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