Beyond Copyright Industries: Publishing and digital futures 21st Sept, QUT

evolutionary economics of copyright

monopoly rents vs. business model adaptation

Economics of IP (incentive, not asset)

Why many economists are against IP- static & dynamic arguments

Innovation, uncertainty and experimentation

Jason Potts, CCI

but…Economic growth caused by new ideas

fixed costs, free copying =

no incentive

maybe the competitive process will work ok…

Need IP to deal with this market failure

so…

…or

LEGISLATIVE SOLUTION

MARKET

SOLUTION

What is copyright/IP for?

• Incentive for novelty• Temporary monopoly• Fixed costs

• All else is rent

Not to create an asset

from the economic perspective

IP is not a form of property

IP is closer to a form of market protectionism

That’s why economists don’t like it so much. They are not fooled by the word ‘property’

IP is not intended to create property

But it does create long-lived rents

Who likes IP & why?

• Creators & companies like it, as an asset (property income)

• IP lawyers like it (service revenue)

• Consumers, Librarians, etc don’t (cost)

• But economists understand IP as an institutional incentive

– artificial monopoly (rent) as a mechanism to achieve an end

– institutional configurations are ‘technologies’

– competes with other ‘institutional technologies’

– they like it or not depending upon whether it works as an incentive

novelty under competition

What is this really all about?

Some say it can’t exist

Others say it can

either there is, or there is not, market failure in the incentive and appropriation mechanism for the production of new ideas that drives economic growth

… a testable proposition

most evidence is that ‘there is not…’

• Can we find weak IP regimes where new ideas drive economic growth?

Testable how? Validation: strong IP & growthFalsification: weak IP & growth

19C Switzerland (B&L 2006)Fashion industry (R&S 2006)China music (M&P 2009)German music (Handke 2009) Open source (Benkler 2006)

Romer P (2002) ‘When should we use intellectual property rights?’ American Economic Review, 92(2) 213-6.

Klein B, A Lerner, K Murphy (2002) ‘Intellectual property: Do we need it? The economics of copyright fair use in a networked world’ American Economic Review, 92(2) 205-8.

Liebowitz, S (1985) ‘Copying and Indirect Appropriability: Photocopying of Journals.’ Journal of Political Economy,95(5): 945-57.

Hirshleifer J (1971) ‘The Private and Social Value of Information and the Reward to Inventive Activity’ American Economic Review 61: 561-574.

Boldrin M, Levine K (2002) ‘The case against intellectual property’ American Economic Review: Papers & Proceedings, 92(2) 209-12.

Boldrin, M. Levine K (2005) “The Economics of Ideas and Intellectual Property”, Proceedings of the National Academy of Sciences 102, 1252-56.

http://c4sif.org/

Centre for the study of innovative freedom

What do these strong IP ‘counterfactuals’ have in common?

all outcomes of intense innovation-driven competition

First to marketNew business modelsReputation/branding effects

19C Switzerland Fashion industry China musicGerman music Open source

Novels in 19C USSoftware (most network)Drugs (!)Design …

i.e. ‘other’ appropriation mechanisms

But without IP, won’t people just copy the successful

ideas/businesses/works?

But without IP, won’t people just copy the successful

ideas/businesses/works?

How do you know what’s successful?

• Sold lots of copies• Been widely adopted• Made lots of money• Garnered reputation

Because they’ve already…

So … explain why we need copyright again?

now

Strength of IP laws

high

low

then

timeline

IP skepticism (pre-internet age) IP abolitionism (post-internet age)

Boldrin & Levine 2008

Landes & Posner 1989Plant

1934Hurt & Schuchman 1966

Leibowitz 1985Benkler, Boyle, et al 2002

Copying by professionals

Copying by amateurs

Protectionism ends

Globalization begins

now

Real cost of copying

high

low

then

…either the copyright system adapts to the natural advantage that has evolved [digital technology & internet] or it will perish

Francis Gurry, WIPO

IP skepticism (pre-internet age) IP abolitionism (post-internet age)

Two lines of economics against IP

• Neoclassical – not property, but monopoly rents

• Evolutionary/Austrian – not effective appropriation mechanism; other mechanisms

far more important, e.g. business models

• Analysis of dynamic gains (incentive to innovate) vs. static losses (monopoly pricing)Posner (2003)

Proponents of IP must argue that:

dynamic gains > static losses

Yet many economists think:

(1) the dynamic gains are mostly rents

Vaidhyanathan 2001, Klein, Lerner & Murphy 2002, Jaffe & Lerner 2006, Boldrin & Levine 2008

(2) there are even more losses

Landes & Posner 1989, Bessen & Raskind 1991, Wu 2006

The economic issue

Innovation & evolutionary economists think IP laws are broken too

No evidence IP works as an effective appropriation mechanism

• Dynamic competition• Dynamic competence• Costly routines• Complementary assets• Absorbtive capacity

These factors explain incentive to innovate

IPR relatively unimportant

Novelty incentive & appropriation

IPR a weak solution

Effects of uncertainty

IPR can compound the problem

due to new technology…

creative industries markets are characterized by

uncertainty

explains the

role of discovery & experimentationon the producer and consumer side

problem

solution

(1) Uncertainty in supply

evolving new business modelsthree examples…

strategy:

Tim Wu (2006)

centralizes industry structure & thus decision making

The problem with strong IP is that because it creates monopoly it also

That’s not good for experimentation

Potts & Montgomery (2010) on Chinese music industry (weak IP enforcement)

• business model adaptation works

– Same finding for German music industry (Handke 2009)

That is good for experimentation

Joe Karaganis, SSRC

“Our explanation is very simple: high prices for media goods, low incomes, and cheap digital technologies are the main ingredients of global media piracy. If piracy is ubiquitous in most parts of the world, it is because these conditions are ubiquitous.”

3 year, 6 country multipartner study on causes of piracy

This is what happens when single business models are applied globally

(2) Uncertainty in demand

• Social network markets

– When choice demands on choices of others

• Novelty bundling markets

– When multiple novelty is better than single

So…

strong IP can stymie business model adaptation & innovation, and also social learning in context of uncertainty

This is…

an unintended consequence that harms industry evolution