1

2014 International Workshop

Intellectual and Industrial ‘Property’: Bridging Historical, Philosophical and Policy Concerns

National Documentation Centre of Greece

Athens, February 11-12, 2014

Economic theory in Copyright v the nature of property in Copyright

By: Marinos Papadopoulos

Attorney-at-Law, Managing Partner of PATSIS, PAPADOPOULOS, KAPONI, & ASSOCIATES (Attorneys-at-Law) Legal Lead Creative Commons Greece Founding Member Open Knowledge Foundation Greece

E: marinos@marinos.com.gr Linkedin: http://gr.linkedin.com/pub/marinos-papadopoulos/71/7a2/8bb Academia: http://uoa.academia.edu/MarinosPapadopoulos

This text is licensed under the terms of Creative Commons Attribution Non-Commercial Non-derivatives v.4.0 license.

Abstract:

This paper is focused on the subject matter of Economics and Copyright law; it is the author’s

participation in the 2014 international workshop, accompanied with a speech and presentation delivered within the scope of the International Conference titled Intellectual and Industrial ‘Property’: Bridging Historical, Philosophical and Policy Concerns; this paper is focused on

aspects of economic theory that were developed in the science of Economics under the

influence of the status quo οn the Internet. Economics have a direct effect on Copyright.

Specifically, modern economic theories developed in the field of Microeconomics have

questioned the viability and sustainability of the absolute and exclusive nature of Copyright in

the environment of the Internet. Therefore, said participation in the workshop focuses on the influence of Information Technology in Copyright’s economics as these economics are

understood in Microeconomics, and the influence that said understanding has on Copyright’s

fundamental and core notions such as the excludability in the nature of Copyright. It is the

speaker’s understanding that eventually Copyright’s economics press for changes in Copyright

legislation and question core meanings of traditional Copyright notions such as the nature of property in Copyright law. It is mainly because of economic theories as they apply in Copyright

that we need to reconsider the Copyright legal edifice, its undeniable need for existence and its

questionable smooth co-existence with technological and societal changes in the Internet

networking environment. Economic theory that considers the status quo and trends on the Internet and especially the public good nature that copyrighted works—and all information

goods, actually, that become available through the Internet—acquire when they become available online is the cause for ground-breaking reconsideration in the field of Copyright law.

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The Law and Economics movement1 has

emerged capturing various segments of policy-

making including the Copyright discipline in Law.

The roots of Law and Economics can be found in

the 18th century in the writings of Adam Smith,

Cesare Beccaria, Marquis de Condorcet, and Jeremy Bentham; as of 1960s Law

and Economics has emerged as a significant branch in the legal theory with the

seminal work of Ronald Coase, the 1991 Nobel Prize Laureate in Economics.

There has been a massive growth of interest in the Law and Economics of

intellectual property during the last years.2 Economics have a direct effect on

Copyright. The Law and Economics discourse on Copyright has become

dominant regarding policy-making with a focus on Copyright’s economic

ramifications. The economic rational of Copyright is considered the principal

justification for it in the U.S. legal doctrine. The U.S. Constitution in article 8

authorizes Congress to legislate for the purpose of securing incentives to

authors and inventors by stating that: “Congress shall have Power… to promote

the Progress of Science, and useful Arts, by securing for limited Times to Authors

and Inventors, the exclusive Right to their respective Writings and Discoveries.”

In Europe, wherein Copyright is viewed as protecting a set of natural

entitlements of authors, economic arguments of Copyright seem to play a less

significant role compares to the U.S. legal doctrine for it.3 However, the Law

and Economics on Copyright seems to gain an increasing amount of

importance and discourse during the last years both in Europe and the U.S.4

1 For the Law and Economics movement see important textbooks such as Posner, R.,

(2007), Economic Analysis of Law, US: Little Brown, 7th ed.; Cooter, R., and Ulen, T., (2011),

Law and Economics, The Pearson Seres in Economics, Prentice Hall, 6th ed. 2 See Scotchmer, S., and Menell, P.S., (2007), Intellectual Property Law, in Handbook

of Law and Economics, Polinsky and Shavell eds., 2, Amsterdam, Elsevier. 3 See Samuelson, P., (2001), Economic and Constitutional Influences on Copyright

Law in the United States, 23 European Intellectual Property Review, 9, pp.409-437, available

at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=234738 [last check, Feb.8, 2014]. 4 See Koelman, J.K., (2004), Copyright Law and Economics in the EU Copyright

Directive: Is the Droit d’Autuer Passé?, 35 International Review of Intellectual Property and Competition Law, 6, pp.603-631, available at http://cli.vu/pubdirectory/191/manuscript.pdf

[last check, Feb.8, 2014].

Law & Economics

3

One main reason for that fact is the rise of the global information economy that

is becoming more-and-more susceptible to international agreements and to a

growing trend for harmonization of intellectual property laws. For Koelman, the

European and U.S. rationales on Copyright are coming closer together as a

result of the rise of economic arguments in European Copyright doctrine.5 The

European Commission through most of its Directives on Copyright has focused

on facilitating an internal market and on advancing the Community’s economic

goals; thus, legislation produced by the European Commission and the legal

discourse upon it has increased the use of economic arguments in policy

debates related to Copyright and intellectual property at large.

It is my understanding that eventually Copyright’s economics press for

changes in Copyright legislation and question core meanings of traditional

Copyright notions such as the nature of property in Copyright law. It is mainly

because of economic theories as they apply in Copyright in the information age

and especially the online environment of Internet networking that we need to

reconsider the Copyright legal edifice, its undeniable need for existence in the

Information Society and its questionable smooth co-existence with

technological and societal changes in the Internet networking environment. The

information age enhances our dependency on information goods which become

essential for basic business and political functioning. As our dependency on

information goods grows, the costs implied by the existing Copyright system

become more severe.

Economic theory that considers the status quo and trends on the

Internet and especially the public good nature that copyrighted works—and all

information goods, actually, that become available through the Internet—

acquire when they become available online is the cause for ground-breaking

reconsideration in the discipline of Copyright law. Said economic theory rests

upon the incentives paradigm for Copyright which aims at efficiency in terms of

wealth for the Copyright holder and is geared towards wealth maximization for

5 See Koelman, J.K., (2004), ibid, pp.603 et seq.

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both the Copyright holder and any subsequent Copyright-powers’ holder.6 The

incentives paradigm in Copyright makes two assertions of paramount

importance:7 first, the assertion that information goods are public goods and

thus without central intervention the investment in creative expressions and

the resulting cultural and technological progress will be insufficient. And

second, that property rights furnished through the legal edifice of Copyright is

the cheapest and most effective way for society to hold out the incentive for

maximization of wealth via the Copyright system.

There have been many commentators attesting to the incentives

paradigm in Copyright and questioning the survivability of exclusive rights (the

exclusive nature of Copyright) in Copyright in the digital networked

environment; most of them support that exclusivity in Copyright should be

replaced at least partially by a system of levies or tax because the exclusive

nature of Copyright cannot be enforceable or its exercise cannot cope with the

free flow of information on the Internet; and, they claim, that in its present

legal framework as it is Copyright cannot work smoothly with a functioning

information society as the later shapes.8

6 See Posner, R., (2007), ibid; Landes, M., and Posner, A. R., (2003), The Economic

Structure of Intellectual Property Law, The Belknap Press of Harvard University Press,

pp.11-36. 7 Andersen, B., (2004), If ‘Intellectual Property Rights’ is the Answer, What is the

Question?, Revisiting the Patent Controversies, 13 Economics of Innovation and New

Technology, 5, pp.417-442, avilble at

http://eupat.ffii.org/dates/2005/bxl0601/papers/andersen.pdf [last check, Feb.8, 2014]. 8 Wittgenstein, P., (2000), Die digitale Agenda der WIPO-Verträge, Umsetzung in

den USA und der EU unter besonderer Beru cksichtigung der Musikindustrie, p.162

according to who copyright on the Internet should be transformed from an exclusive right to a mere remuneration right; Wandtke, A-A., (2002), Copyright und virtueller Markt in der

Informationsgesellschaft, Gewerblicher Rechtsschutz und Urheberreht (GRUR) 1, jaargang

104, who supports that the future protection of authors will probably amount to mere

remuneration rights; Geiger, C., (2004), Droit d’auteur et droit du public à l’information.

Approche de droit, comparé §370–380 (R.D.T.I.); the same, (2005), Right to Copy v. Three-Step Test, The future of the private copy exception in the digital environment, 1

Computer Law Review International, pp.7-13, who states that it would be preferable to admit

private copying as an enforceable right against technical devices and to solve the problem by a

working system of equitable remuneration; Guibault, L., (2002), ibid., pp.26-27; Griffin, J.,

(2001), At Impasse: technology, Popular Demand, and Today’s Copyright Regime; Ku,

R.S.R, (2001), The Creative Destruction of Copyright: Napster and the New Economics of Digital Technology, available at URL:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=266964 [last check, Feb.8, 2014] who

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Non-excludability is one aspect that makes

works of intellect that are protected by Copyright a

public good from an economic point of view. The

microeconomics (Microeconomic theory) of

Copyright and intellectual property effectively

demonstrates that information—any kind of information including, of course,

the content of copyrighted works—becomes a public good when it is posted

online and is characterised by concerns of under-production and under-

utilisation.9 The problem of under-production stems from the non-excludable

nature of information goods such as copyrighted works in the online

environment. A good is non-excludable when once it is produced online it is

impossible to exclude an individual from using that good even if he/she does

not contribute to the cost of producing it.10 Non-excludability, also, occurs

when the costs for the exclusion of free-riders, a.k.a. non-payers for the use of

proposes to amend the Digital Recording Act of U.S so that it become possible to fund artists

through a statutory levy scheme with the distribution of funding tied to aggregate Internet

downloading or use; the same, (2003), Consumers and Creative Destruction: Fair Use

Beyond Market Failure, 18 Berkeley Technology Law Journal, pp.539-574, available at URL: http://www.law.berkeley.edu/journals/btlj/articles/vol18/Ku.stripped.pdf [last check, Feb.8,

2014]; Lincoff, B., (2002), A Full, Fair And Feasible Solution To The Dilemma of Online

Music Licensing, available at URL: http://www.bennettlincoff.com/music.pdf [last check, Feb.8, 2014] who proposed to create a new ‘online transmission right’ that would combine the

existing reproduction, performance and distribution rights for online purposes and make this

new right subject to a statutory license, administered by a single rights collective. Lincoff’s proposition would require a system for registering and marking works and for monitoring their

online transmissions. License fees would be paid by service providers and by users of P2P file-

sharing networks; Corwin, P.S., & Hadley, L.M., (2004), P2P: The Path to Prosperity, 24

Loyola of Los Angeles Entertainment Law Review, 4, pp.649-669; Lunney, G.S., (2001), The

Death of Copyright: Digital Technology, Private Copying, and the Digital Millennium

Copyright Act, 87 Virginia Law Review, 5, pp.813-920, who proposes his alternative solutions to the problem of Copyright as it has been framed through the DMCA (pp.910-918); Jacover,

A., (2002), I Want My MP3! Creating a legal and practical scheme to combat copyright

infringement on peer-to-peer Internet applications, 90 Georgetown Law Journal, who

pleads for a similar levy or tax system as a second-best solution if the strategy of aggressively

employing traditional copyright policies in the Internet distribution market cannot ensure compensation for the use of works.

9 Arrow, K.J., (1962), Economic Welfare and the Allocation of Resources for

Invention, The Rate and Direction of Inventive Activity: Economic and Social Factors: A

Conference of the Unive, pp. 609-626, available at http://ssrn.com/abstract=1497764 [last

check, Feb.8, 2014]. 10 Leveque, F., and Meniere, Y., (2004), The Economics of Patents and Copyright,

The Berkeley Press, p.4, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=642622 [last check, Feb.8, 2014].

Non-excludability

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copyrighted work that is available online, are so high that it would be

inefficient financially to exclude in practice.11

The non-excludable nature of information goods derives from their

ingrained characteristics. Information per se has no physical boundaries, and

its duplication, copying as well as distribution over information networks such

as the Internet entails minimum costs. The marginal costs of exclusion are

often greater than the minimum costs of unauthorized use of information

works as well as of the marginal costs of provision of information works via the

Internet. Therefore, in terms of costs it becomes inefficient to spend resources

with the aim to exclude non-payers from the use of copyrighted works. A

classical example derived from the analogue world is that of a publisher who

cannot stop the same book from being borrowed and read by several people

who have not paid a dime for acquiring it. It is no worth paying the costs for

stopping people borrowing the book from each other due to their reluctance to

pay for it. In the absence of impediments on free-riding online, the prices of

works that become available online in a competitive market could fall to near

zero. Thus, the producer of an information work such as copyrightable work

who knows that the competitive market price for the aforesaid product could

equal the marginal cost for producing it, and thus could not suffice to cover the

producer’s fixed costs for production, would reasonably opt for not producing it

at all.12 Therefore, non-excludability creates the risk that the creator of a work

posted online will not have sufficient incentives to engage in creative invention

and production.13 To alleviate this risk, the system of Copyright makes a

copyrightable good excludable for some limited time with the aim to foster

11 Landes M, and Posner, A. R., (1989), An Economic Analysis of Copyright Law, 18

Journal of Legal Studies, pp.325-333, 344-353, available at http://cyber.law.harvard.edu/IPCoop/89land1.html [last check, Feb.8, 2014].

12 Geroski, P. A., (2005), Intellectual Property Rights, Competition Policy and

Innovation: Is there a Problem?, 2:4 SCRIPTed 422, available at

http://www2.law.ed.ac.uk/ahrc/script-ed/vol2-4/geroski.asp [last check, Feb.8, 2014]. 13 Leveque, F., and Meniere, Y., (2004), p.5, in which it is stressed that the difficulty of

creators in securing payment from all those who use their works make them unwilling to produce, thus there’s a loss in welfare of the public because creative works for which there is a

market will not be produced from fear of use without payment.

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production and allow creators to charge customers royalties for the

consumption of a copyrightable good.14

The fundamental paradox of information goods including copyrighted

works in the online environment rests in their double nature: As economic

objects they need to generate revenues, implying that free using by unpaid

access, redistribution and derivatives of creative products must be excluded.

As creative objects, however, they necessarily build on antecedent works of

others and inspire works by others, implying that an unbounded flow of

creative works must be enabled and enhanced by law to ensure a continuous

creative process in society. Copyrighted works seen as information goods are

created with the intent to be published, the intent to be laid open into the

highway of the Internet market(s); but once they are published, and more

vividly once they are published online, they become part of general knowledge,

naturally open for all to use either for a fee or for free, reproduce, and modify.

Since society is vitally interested in these creations and assumes that less

would be produced if investments cannot be recouped, it creates the legal

edifice of Copyright, granting through it—among other rights—various

privileges to authors, with more important the absoluteness and exclusivity in

the nature of Copyright assigned to the creators of works.

In traditional Copyright law, a right-holder appears entitled with the

power to prevent access to information through an exclusionary right, i.e.

Copyright, which is an exclusive legal power, and is furnished to the author

allowing for the author’s power to exclude others from any use of his/her

copyrighted work. By speaking of the right to “exclude others” from using works

protected as intellectual property and thinking of Copyright infringement as

“theft” of the Copyright holder’s “property” that resides in his/her exclusive

domain, property rights over copyrighted works available online seem to entail

an exclusive possessory right in intangible bits of information that would

14 Cohen, J., (1998), Lochner in Cyberspace: The New Economic Orthodoxy of

‘Rights Management’, 97 Michigan Law Review, 7, available at

http://ssrn.com/abstract=128230 [last check, Feb.8, 2014].

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entitle the right-holder to exclude the rest of society from that work seen as

merely an information asset in the online environment. While it is beyond

doubt that a copyrighted work is not simply an aggregation of bits of

information—the Copyright system in Greece, for example, is a set of laws that

rules more issues than merely digital information management issues—the

digitization of copyrighted works results undeniably in information aggregation,

at least in the form of bits. Under this transformation of a work of intellect and

creative expression into information (a.k.a. bits), it remains questionable

whether information per se can accurately be thought of as property in the

online environment where ‘information wants to be free’15.16

Having said that regarding the non-

excludability trait of information goods in the

online environment, it also remains to see the non-

rivalry trait of information goods on the Internet.

Unlike finite and scarce tangible resources,

intangible information contained in copyrighted works such as literary and

artistic works when they become available online is non-rival17 in the sense

that the use of the resource does not deplete it.18 Non-rivalry characterizes

15 Information wants to be free is a slogan of technology activists invoked against limiting

access to information. According to criticism of intellectual property rights, the system of

governmental control of exclusivity is in conflict with the development of a public domain of information. The iconic phrase Information wants to be free is attributed to Stewart Brand who,

in the late 1960s, founded the Whole Earth Catalog and argued that technology could be

liberating rather than oppressing. The earliest recorded occurrence of the expression was at the

first Hackers’ Conference in 1984. Brand told Steve Wozniak, co-founder of Apple Inc, the following: On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other. See more at Wagner, R.P., (2003), Essay--Information wants

to be free: Intellectual property and the mythologies of control, University of Pennsylvania

Law School, available at https://www.law.upenn.edu/fac/pwagner/wagner.control.pdf [last check, Feb.8, 2014].

16 Smith, H., (2007), Intellectual Property as Property: Delineating Entitlements in

Information, 116 Yale Law Journal, pp.1742-1822, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000520 [last check, Feb.8, 2014]. 17 See, Suber, P., (2012), Open Access, MIT Press, p.46 et sec. 18 Lemley, M., (2008), The Economics of Improvement in Intellectual Property Law,

75 Texas Law Review, pp.989-1094, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274199 [last check, Feb.8, 2014];

Non-rivalry

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information goods or services as intangibles for which the consumption by one

person does not detract from the ability of others to consume. Information

goods are non-rivalrous because they cannot be exhausted by consumption in

the online environment. In contrast, tangible goods are consumptible and

exhaustible in the sense that their usage by one person precludes others from

using them. Tangible and scarce resources which are traded in a market are

put to their highest valued use by those who have a legal right upon them. For

physical resources, in the absence of transaction costs, bargains in the free

market will guarantee efficient allocation of them because the user with the

highest valued usage will be able to offer the highest bid for them. However,

this is not the case with information goods which are intangible and non-

rivalrous. Information goods do not raise similar allocation problems such as

tangible resources in the market.19 The non-rivalrous nature of information

goods means that there seems to be no social cost associated with their usage

since no one else is deprived of that usage when one uses an information work.

Therefore, there’s no need to allocate information work to the most efficient

user, a.k.a. leverage on the Copyright legal edifice with the aim to allocate

copyrighted works only to those users who pay for said works’ usage.20

In addition, network externalities could emerge in the case of information

goods’ usage in the sense that said usage enhances the value of information

goods as more and more people use them. This is evidently happening

whenever the value of information goods depends on the rate of exchange and

distribution of them in the market; additional users inflict positive externalities

Leveque, F., and Meniere, Y., (2004), ibid, p.5 in which it is said that non-rivalry can be seen as

the opposite of congestion. For example, the enjoyment of watching a football game is not

diminished by the presence of a large number of other viewers around the world. In other

words, the marginal cost of serving an additional user of a creator’s work is zero, moreover when the work is available online. Consequently, when an author or other right-holder charges

for access to the work that becomes available in the market, consumption of the good is

needlessly rationed. Users whose willingness to pay is lower than the going price are excluded

from using the work, although they would have benefited from it at no cost to anyone. Thus,

social welfare is not maximized. 19 See Elkin-Koren, N., and Salzberger, E. M., (2013), The Law and Economics of

Intellectual Property in the Digital Age, The Limits of analysis, Routledge, p.133. 20 Elkin-Koren, N., and Salzberger, E. M., (2013), ibid, pp.59-62.

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on all users of information goods in the market. In other words, when content

such as literary, scientific and cultural works is more widely used and known

in the market, its marketing value through almost any activity that is identified

in Copyright law as a separate power of Copyright (e.g. presentation to the

public, distribution, creation of derivative works etc) is enhanced.21

So, from one side there is the non-rival nature of information goods such

as copyrighted works available online, in the sense that the consumption of a

copyrighted work through the Internet by one person does not detract from the

ability of others to consume the same work; and from the other side there is

also the non-excludable nature of the same work in the sense that the use of

the work can hardly be limited once it is made available through the Internet to

society for consumption.22

Thus, the presence of these two traits, the non-rivalry and non-

excludability of copyrighted works seen as information goods in the online

environment means, for example, that when one person is reading online a

book or paper licensed with a Copyleft license he/she does not diminish

another person’s ability to read the same book and understand its meanings,

nor is any person excluded by this fact from enjoying the insightfulness of that

book just because one or many persons simultaneously or not are reading it

via the Internet. This means that information contained in creative works such

as in the case of a Copyleft-licensed book or paper available for licensed use in

the Internet environment, is, much like the light from a lighthouse (the light

from the lighthouse is the most renown example in the discipline of Law &

21 Elkin-Koren, N., and Salzberger, E. M., (2013), ibid, pp.133-134. 22 Economists generally consider lighthouses to be the quintessential example of a

public good, the services for which can only be provided by the government by taxing the

public. See Coase, R., (1974), The Lighthouse in Economics, 17 Journal of Law and Economics, pp.357-376, available at http://old.ccer.edu.cn/download/7874-2.pdf [last check, Feb.8, 2014], according to which…the impossibility of securing payment from the owners of the ships that benefit from the existence of the lighthouse makes it unprofitable for any private individual or firm to build and maintain a lighthouse; Zandt, D., (1993), The Lessons of the

Lighthouse: “Government” or “Private” Provision of Goods, 22 Journal of Legal Studies,

pp.47-72; see also criticism to Coase’s work by Bertrand, E., (2006), The Coasean Analysis of

Lighthouse Financing: Myths and Realities, 30 Cambridge Journal of Economics, pp.389-402, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=904509 [last check,

Feb.8, 2014].

11

Economics), a public good that once it is made publicly available via the

Internet, it may be consumed by an infinite number of people, i.e. society at

large, in non-rival and non-excludable modus of consumption and at almost

zero marginal cost for consumption. And like the light from lighthouse, the use

of knowledge and information contained in information works by people creates

positive externalities in the sense that once information works are created and

are made available online there is a benefit to society by the widest possible

consumption of them resulting in the maximization of welfare to society and

furthering of innovation based on the knowledge and information contained in

the information good or copyrighted work. The use of information contained in

a copyrighted work available online is nurturing the human capital that could

subsequently contribute to the production of more information goods and

copyrighted works.

The non-excludability trait of information either copyrighted works or not

available online justifies central intervention in order to secure incentives for

further investment in producing new works. At the same time, the non-rivalry

trait of information goods and works online justifies setting limits on Copyright

in scope and duration in order to maximize the copyrighted works’ usage to the

extent possible for the greatest collective welfare.23 Thus, both these

characteristics of information goods, the non-excludability and the non-rivalry,

give shape to the public good nature of literary and artistic works, of

intellectual property works, generally speaking, or of Copyrighted works, to be

more specific, which requires production incentives in the form of state-granted

Copyright rights in order to create the artificial scarcity which is necessary in

order to provide competitive commercial value to such information goods and

in turn, in order to enhance their private production. For without private rights

(in the sense of Copyright law’s provisions) over public goods (in the sense of

information goods according to Microeconomic theory), producers of creative

works seen as public goods when they are available online will lose their

23 Elkin-Koren, N., and Salzberger, E. M., (2013), ibid, p.61

12

incentive of producing them as well as of making these goods available to

society if there is no way of recovering the investment made in producing

theses goods. This lurking loss of interest in their production and the under-

availability of goods such as copyrighted works can be overcome levering on the

Copyright’s legal edifice and through the artificial notion of excludability

(scarcity) in copyrighted works.24 Copyright law, thus, attempts—among other

things—to strike a balance between the incentive to create and innovate, and

the diffusion of the results obtained.25 This contradiction between the incentive

to create from the author’s point of view and the unobstructed and beneficial to

society use from the user’s point of view translates in the economic language as

a trade-off between dynamic efficiency26 and static efficiency.27

While solving the problem of under-production, excludability as a

consequence imposed by Copyright law addresses another problem of

information goods: the problem of under-utilisation that is caused by the

relentless efforts of right-holders to cope profitably with the non-rivalry nature

of information goods. As it has been noted so far, an information good is non-

rival when its consumption by an individual does not reduce the quantity of

24 Landes, W., and Posner, R., (1989), An Economic Analysis of Copyright Law, 18

Journal of Legal Studies, available at http://cyber.law.harvard.edu/IPCoop/89land1.html [last

check, Feb.8, 2014]. 25 Leveque, F., and Meniere, Y., (2004), ibid, pp.5-6. 26 Dynamic efficiency refers to the improvement and renewal of production techniques

and goods overtime. It is the result of investment in R&D, design and creation. Dynamic

efficiency refers to an economy that appropriately balances short run concerns (static

efficiency) with concerns in the long run (focusing on encouraging research and development).

Through dynamic efficiency, an economy is able to further improve efficiency over time.

Investments in education, research and innovation are important in this process. Dynamic efficiency also refers to the ability to adapt quickly and at low cost to changed economic

conditions, and thereby maintain output and productivity performance despite economic ‘shocks.’ See more on dynamic efficiency at Wikipedia at

http://en.wikipedia.org/wiki/Dynamic_efficiency#cite_ref-0 [last check, Feb.8, 2014]. 27 To achieve static efficiency, allocation of resources should maximize surplus. Surplus

in the case of copyrighted works consists from one side of a creator or subsequent right-holder’s profit, measured by the area between the work’s price and the marginal cost—i.e. the

cost of serving one additional user by making the work available to him, and on the other side

of a user’s gain, measured by the area between the demand curve for the work and the price of

the work. Static efficiency refers to a situation in which the consequences of today’s decisions

regarding a creator or subsequent right-holder’s profit are limited to shorthand gains without

considering the interests of the general public for the work. Thus, static efficiency does not take into account the social benefit in the decision-making process regarding the creator or other

right-holder’s profit and short-run concerns.

13

the same good available to others. Non-rivalry of information goods implies that

their marginal cost28 of serving with them an additional consumer is zero or

close to zero.29 If marginal cost is assumed to be zero or close to zero for non-

rival information goods such as copyrighted works available on the Internet,

then property rights set by Copyright law permitting royalties to be charged to

additional consumers of information goods—a.k.a. copyrighted works available

online—lead to an inevitable deadweight loss (allocative inefficiency)30 to society

in the following sense: if the copyrighted information good, a.k.a. the protected

work, is available at a price that is higher than the marginal cost of serving an

additional consumer then only consumers who are willing to pay the price set

by right-holders are allowed and expected to benefit from the work. If this

number of consumers who are allowed to use copyrighted information good is

diminished dramatically due to the difference between the marginal cost of

serving an additional consumer and the price set by right-holders for the use of

copyrighted work, then under-utilization of the copyrighted work as well as

deadweight loss are the outcomes.31 In classic economic analyses of

Copyright32 that look for a measurable optimal protection point at which the

creation and dissemination of new works is not negated by deadweight losses,

28 In economics and finance, marginal cost is the change in total cost that arises when

the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. See more on the meaning of the marginal cost at Wikipedia at

http://en.wikipedia.org/wiki/Marginal_cost [last check, Feb.8, 2014]. 29 Lemley, M., (2005), Property, Intellectual Property, and Free Riding, 83 Texas

Law Review, pp.1031-1087, available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=582602 [last check, Feb.8, 2014]. 30 In economics, a deadweight loss (also known as excess burden or allocative

inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or

service is not Pareto optimal (Pareto optimal: Given an initial allocation of goods among a set

of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a ‘Pareto improvement.’ An allocation

is defined as ‘Pareto efficient’ or ‘Pareto optimal’ when no further ‘Pareto improvement’ can be

made.). Thus regarding the ‘deadweight loss’ it exists in situations in which either people who

would have more marginal benefit than marginal cost are not buying the product, or people

who have more marginal cost than marginal benefit are buying the product. See more on the

meaning of deadweight loss in Wikipedia at http://en.wikipedia.org/wiki/Deadweight_loss [last

check, Feb.8, 2014]. 31 Elkin-Koren, N., and Salzberger, E. M., (2013), ibid, p.61, 88. 32 Landes, W., and Posner, R., (1989), An Economic Analysis of Copyright Law, 18

Journal of Legal Studies, pp.325-263, available at

http://cyber.law.harvard.edu/IPCoop/89land1.html [last check, Feb.8, 2014].

14

the aim of legislation in Copyright should be to achieve, at least approximately,

the maximum benefits from creating additional works minus both the losses

from limiting access to protected works plus the costs of administering

Copyright protection.33

Granting creators the right to exclude others from using their works

necessarily limits the diffusion of those works, and so prevents people from

benefiting from them, a.k.a. prevents social welfare produced through the

widespread use of copyrighted works. In economic terms, Copyright rights

prevent competition in the sale of the particular work covered by the Copyright,

and therefore allow the intellectual property owner such as the Copyright

holder to raise the price of that work above the marginal cost of reproducing

it.34 This means that consumers who are willing either to pay nothing for the

consumption of the work or to pay a price that is higher than the marginal cost

of serving additional consumers but lower than the royalty cost that is set by

right-holders of said copyrighted work, will not be allowed to utilise said

copyrighted work, thus the problem of under-utilisation crops up.

The under-utilization problem, and consequently the deadweight loss, is

easier to understand for works for which there are no substitutes in the

market. Copyright’s monopolistic price-setting operation for a work that

becomes available in the market is not that keen in case there are other works

available in the (same) market which could substitute for it. In the presence of

33 Landes, W., and Posner, R., (1989), ibid, p.326; for Landes and Posner A

distinguishing characteristic of intellectual property is its “public good” aspect. While the cost of creating a work subject to copyright protection—for example, a book, movie, song, ballet, lithograph, map, business directory, or computer software program—is often high, the cost of reproducing the work, whether by the creator or by those to whom he has made it available, is often low. And once copies are available to others, it is often inexpensive for these users to make additional copies. If the copies made by the creator of the work are priced at or close to marginal cost, others may be discouraged from making copies, but the creator’s total revenues may not be sufficient to cover the cost of creating the work. Copyright protection—the right of the copyright’s owner to prevent others from making copies—trades off the costs of limiting access to a work against the benefits of providing incentives to create the work in the first place. Striking the

correct balance between access and incentives is the central problem in copyright law. For copyright law to promote economic efficiency, its principal legal doctrines must, at least approximately, maximize the benefits from creating additional works minus both the losses from limiting access and the costs of administering copyright protection.

34 Lemley, M., (2008), ibid, p.997.

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substitutes, the right-holders of works will, most likely, be forced to sell them

at competitive market price, thus Copyright’s protection would not make much

of a difference regarding price-setting. However, for works without any

substitute in the market, Copyright’s monopolistic power will drive

monopolistic pricing for the work, too.

In ‘The Lighthouse in Economics,’ Ronald

Coase challenged the conventional economic

assumption that lighthouses, being the

quintessential public good, could only be provided

by the government by taxing the public. Coase

asserted that lighthouses may be privately

produced and provided, as long as there are State established and enforced

property rights that would allow the lighthouse owner to collect levies from

vessels benefitting from the lighthouse at the port without the lighthouse owner

having to undertake individual negotiations with vessels, or switch off the

lighthouse when a non-paying ship approaches its range, to achieve the

excludability necessary to make the provision of lighthouse services

profitable.35 The point Coase makes in ‘The Lighthouse in Economics,’ is

important because he demonstrated that state-granted property rights over a

given public resource—the lighthouses in Coase’s example, or the creative

works of authors, which become a public good that is non-rivalrous and non-

excludable when it is available online, regarding the subject matter of this

analysis on Copyright—serve to encourage the private production of a public

good by allowing private entities to recover payment for the use of the resource

without necessarily entitling the right-holder to control the resource as private

property with an exclusionary property right, a.k.a. the author’s power from

excludability in Copyright, currently. Thus, in fact Ronald Coase questioned

the very foundations of Copyright, i.e. Copyright’s nature as an excludable

State-granted right.

35 Coase, R., (1974), ibid, p.375.

The Coase Theorem

16

In consideration of Coase’s theorem, Microeconomic theory in Copyright

law similarly reasons that the provision of copyrighted works requires laws to

establish and enforce property rights to sustain creative productivity by

authors. As information in literary, scientific, and artistic works is limitless and

infinite, authors require State established and enforced property rights to allow

them to prevent non-paying members of the public from using the protected

works without paying royalties; authors require Government established and

enforced property rights that provide them with a solid legal background for the

provision of protected works to paying members of society only. Copyright

legislation establishes the creator’s exclusive rights in information goods, such

as a creator’s works. Thus, Copyright legislation propertizes information

materials that consist of a work, and facilitates the private production of

information materials by temporarily limiting public access to works.36

Public access to copyrighted works, especially those available online,

have, in recent times, become an issue of growing social concern since private

incentives to recover financial investments from public uses of literary and

artistic works appear to take precedence over the welfare of users at large.

What seems to matter more in the Copyright’s resonance as it has evolved are

the private interests of those right-holders who rely on works produced based

on the exercise of property rights which are considered as a kind of possessory

right that entails a general right to exclude society from using these works.37

When the costs for access to copyrighted works, which include transaction

costs in the transfer of property rights, become prohibitively high and are

subject only to the uncontrolled intention of Copyright holders for

maximization of their private profits levering on Copyright laws, then static

36 Landes, W., and Posner, R., (1989), ibid, p.328; Hurt, R., and Schuchman, R., (1966),

The Economic Rational of Copyright, 56 American Economic Review, pp.421-432, available

at

http://www.compilerpress.ca/Competitiveness/Anno/Anno%20Hurt%20&%20Schuchman%20Econ%20Rationale%20Copyright.htm [last check, Feb.8, 2014].

37 Boyle, J., (2003), ibid.

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efficiency38 prevails but with a significant cost, i.e. the cost of deterrence for

efficient public use of protected works aiming at garnering useful social

knowledge and producing social welfare; in that case, the use of copyrighted

works for the purposes of generating new research and producing new

knowledge is hampered, which means that dynamic efficiency39 can hardly be

achieved.

The application of the Coase Theorem in the case of copyrighted works in

the Internet environment posits that Copyright law and its edifices (such as

excludability) become meaningful only when there are transaction costs for the

acquisition of Copyrighted property online.40 In addition, in the Internet

environment the excludability that Copyright law entails should be considered

as the dominant regulatory model only where and to the extent that other non-

excludable regulatory schemes cannot achieve the same or even better results

by generating more beneficial effects for right-holders and society at large at

the same time. In economic theory this means that probably the excludability

of Copyright may persist in the online environment and the Internet era in a

sense of a regulatory mandate to users to pay a levy or tax in exchange for the

38 Static efficiency refers to a situation in which the consequences of today’s decisions

regarding a creator or subsequent right-holder’s profit are limited to shorthand gains without

considering the interests of the general public for the work. Thus, static efficiency does not take

into account the social benefit in the decision-making process regarding the creator or other

right-holder’s profit and short-run concerns. 39 Dynamic efficiency refers to an economy that appropriately balances short run

concerns (static efficiency) with concerns in the long run (focusing on encouraging research

and development). Through dynamic efficiency, an economy is able to further improve

efficiency over time. 40 Coase, R., (1960), The Problem of Social Cost, 3 Journal of Law and Economics,

pp.1-44, available at http://www.sfu.ca/~allen/CoaseJLE1960.pdf [last check, Feb.8, 2014] in which Coase claimed that legal rules are only justified by reference to a cost—benefit analysis,

and that nuisances that are often regarded as being the fault of one party are more symmetric

conflicts between the interests of the two parties. If there were no such things as the costs of

doing a transaction, legal rules would be irrelevant to the maximization of production. Because

in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-holder. See,

also, Leveque, F., and Meniere, Y., (2004), ibid, pp.12-13, available at

http://www.bepress.com/cgi/viewcontent.cgi?article=1001&context=leveque [last check,

Feb.8, 2014], according to who in a hypothetical world where rights on inventions and

creations are precisely defined and where it does not cost anything to draft, sign and execute

contracts, innovations would always be used by those who value them most, regardless of who made them in the first place. In other words, leaving aside incentive issues, if transaction costs

are zero, the allocation of the initial rights on innovations does not affect the wealth created.

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privilege of unrestricted access to works online under certain conditions such

as on condition of non-commercial use of them either in privacy or not.