Economic and Game Theory
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This essay was "inspired" by a recent book by Landes and Posner, as well as an article by Posner in the Economists' Voice. A short version was published as a letter in the Economists' Voice, which drew a response from Posner. Some further comments by us after reading Posner's response are here.
Congress, with the acquiescence of the Supreme Court, has enormously extended, most recently by 20 years, the term of copyright. This extension has been retroactive, applying not only to new works, but also to existing ones. In spite of the obvious and well known economic argument that extending copyright on existing works cannot possibly increase their supply, a number of specious arguments have been advanced as to how retroactive extension somehow serves to "promote the progress of...useful arts." The two most significant arguments are that the public domain suffers from congestion and overuse, and that intellectual property rights are necessary to provide appropriate incentives to "maintain" existing works.
One reason for rights in ordinary property is indeed to prevent congestion and overuse. For example, if a pasture is public, I do not take account of the negative effect my grazing sheep have on the availability of grass for your sheep. Because roads are public, I do not consider that my driving on the road makes it more difficult for you to get to work. Because the ocean is public, I do not consider that catching fish leaves fewer for you. This is the "tragedy of the commons" and in each case it means that the pasture, road or ocean will be overused.
Is the public domain for ideas like a common? Does my using ideas in the public domain have an adverse effect on your ability to use them? Certainly common sense suggests "there can be no overgrazing of intellectual property...because intellectual property is not destroyed or even diminished by consumption." That I might make use of an idea does not make you less able to use it. Indeed it seems obvious that welfare is increased when more people become cognizant of a useful idea, whereas overall productive capacity is not increased when more sheep try to eat from the same square foot of pasture.
Congress and the Supreme Court apparently do not agree, and recently Landes and Posner have also claimed that "Recognition of an 'overgrazing' problem in copyrightable works has lagged." In fact it has not, because there is no coherent theory or evidence that points to such a problem.
There are three key elements to understanding why the arguments in favor of retroactive copyright are incoherent. Understand first, only copies of ideas matter. If all the copies - in books and minds alike - were to vanish, the abstract existence of the idea would be of no use. Understand second, the public domain is not a common of unowned ideas or public property. When an idea is in the public domain, someone still owns each copy of the idea or work. To make copies you will have to own or purchase a copy first. Rather than being like a common, the public domain is like the ideal of a competitive market - such as that for wheat - with many owners/producers of essentially the same product competing with each other. Understand finally, although my using an idea does not make you less able to use it, it may well make you less able to sell it. Which means, my owning a copy of the same idea as you does not make the idea less valuable from a social point of view, but certainly reduces the market price of your copy of the idea.
Consider the case of food. If my restaurant sells Ricardo a large meal, he is not likely to go across the street to your restaurant and buy another; my selling him a large meal does not prevent you from using your food, but it does prevent you from selling it to Ricardo. So too with ideas. If I sell Ricardo a copy of my Bible, I do not prevent you from making copies of your Bible, but I will reduce your profit because Ricardo will not buy from you. This is an example of a "pecuniary externality:" my selling to Ricardo changes his demand for your product. By way of contrast, by taking fish from the sea I am not merely taking your customers, I am taking an economically useful good or service. Economists refer to the former as a "pecuniary" externality, and the later as a "technological" externality. Pecuniary externalities are a good thing - the incentive to steal customers is an essential part of the normal and efficient functioning of the competitive system. Technological externalities are a bad thing, leading to overuse.
Supporters of intellectual property, and of copyright extension in particular, seem to be blind to such distinction. Landes and Posner, who provide the least incoherent exposition of why retroactive extension of copyright might be a good thing, acknowledge that the "assessment of welfare effects of congestion requires distinguishing technological from mere pecuniary externalities." They then go on to say, concerning the Mickey Mouse character, "If because copyright had expired anyone were free to incorporate the Mickey Mouse character in a book, movie, song, etc., the value of the character might plummet." The value for whom? It cannot be the social value of the Mickey Mouse character that plummets - this increases when more people have access. Rather it is the market price of copies of the Mickey Mouse character that plummets. As Landes and Posner admit, "If this came about only...as the ordinary consequence of an increase in output, aggregate value would actually increase." They then assert "however, the public might rapidly tire of Mickey Mouse." But this is in fact the ordinary consequence of an increase in output. If I eat a large meal, I am less hungry - the value to me of a meal is diminished, and restaurants will find I am not willing to pay them much money. No externality is involved: as more of a good is consumed, the more tired people become of it. For there to be an externality, it would have to be the case that my consumption of Mickey Mouse made you more tired of it - an improbability, to say the least.
Although Landes and Posner make the distinction between pecuniary and technological externality, they do not appear to understand it. They quote from a book on Disney marketing: "To avoid overkill, Disney manages its character portfolio with care. It has hundreds of characters on its books, many of them just waiting to be called out of retirement...Disney practices good husbandry of its characters and extends the life of its brands by not overexposing them...They avoid debasing the currency." This is of course exactly how we would expect a monopolist to behave. If Disney were to be given a monopoly on food, we can be sure they would practice "good husbandry" of food, most likely leaving us all on the edge of starvation. This would be good for Disney, since we would all be willing to pay a high price for food. But the losses to the rest of us would far outweigh the gain to Disney. It is a relief to know that, after all, Mickey Mouse is not such an essential ingredient of the American diet.
Landes and Posner also express concern that Mickey Mouse's "image might also be blurred or even tarnished, as some authors portrayed him as a Casanova, others as catmeat, others as an animal rights advocate, still others as the henpecked husband of Minnie." Since in common parlance calling something "Mickey Mouse" is not intended as a compliment, one might wonder how Mickey Mouse's reputation could be more tarnished than it is. Regardless, bear in mind that the only thing that matters are copies of the idea of Mickey Mouse. If Mickey Mouse falls into the public domain, someone might well use his or her copy of the idea of Mickey Mouse to produce, say, a pornographic film starring Mickey Mouse. But would this tarnish the copies of the idea of Mickey Mouse in the minds of millions of 6-year-old children? It is hard to see how: ordinarily children of this age are not allowed to see pornographic films. Presumably those people that choose to see the film are those who benefit from this portrayal of Mickey Mouse. How does their doing so interfere in any way with anyone else's enjoyment of their vision of Mickey Mouse? Dozens, probably hundreds, of pornographic movies were produced in the 1970s based on Boccaccio's Decameron, but one does not have the impression this affected very much the opinion that Boccaccio's scholars have of his work.
To understand the distinction between a pecuniary and technological externality more clearly, consider the case of music. By and large, my listening to my copy of my music does not interfere with you listening to your copy of your music - there is no externality. But if I play my music very loudly, it may in fact interfere with your enjoyment. One solution to this very real technological externality would be to give a monopoly on the sale of stereo equipment to the Disney Corporation. As a good monopolist, they would limit the supply and raise the price of stereos. As a result, I would not be able to afford such powerful equipment, and would be forced to play my music less loudly, thereby reducing the externality. Mild negative externalities are common in everyday life. One "solution" is the creation of monopolies that will limit supply of the ingredients used to produce externalities. But most of us understand that this "cure" is worse than the disease. Cars are major generators of negative externalities, from air to noise pollution, but nobody has yet advocated solving the problem by creating a world monopoly on cars.
Landes and Posner go on to say "One purpose of giving the owner of a copyright a monopoly of derivative works is to facilitate the scope and timing of the exploitation of the copyrighted work - to avoid, as it were, the 'congestion' that would result if once the work was published anyone could make and sell translations, abridgements, burlesques, sequels, versions in other media from that of the original (for example, a movie version of a book), other variants...The result would be premature saturation of the market, consumer confusion (for example, as to the source of the derivative works,) and impaired demand for the original work because of the poor quality of some of the unauthorized derivative works." This seems to us to be both at odds with reality and profoundly anti-market. Yes, the competitive market is full of different products of very different quality. We can buy many brands, styles and colors of shirts, jackets and shoes. Yet apparently consumers are not so profoundly ignorant as to be unable to figure out which brands, styles, colors and products they wish to purchase; they apparently do not need the Disney Corporation to work this out for them. In the competitive markets of the free world there are lots of good products, lots of excellent products, and even more cheap and low quality products. So what? Seabright  celebrates the diversity produced by competition; Lindsey  warns us against those who do not trust the decentralization of the free market and wish to bring the "dead hand" of central authority to sort out the confusion. Unlike Landes and Posner, we do not see the need for the organizing authority of the monopolist to substitute for the diversity of the marketplace.
In an effort to give substance to their argument, Landes and Posner point to three examples of "works of...elite culture that have been damaged by unlimited reproduction:" the Mona Lisa, the opening of Beethoven's Fifth Symphony, and several of Van Gogh's most popular paintings. We would like to know what evidence Landes and Posner have for this assertion. Searching Amazon for "Beethoven" in classical music brings up three items as most popular. The first is a collection of all 9 symphonies; the second is a compilation of the 5th and the 7th. So apparently, despite the damage done by unlimited reproduction, the 5th is still well liked by many people - or are we to imagine that they skip the opening because it has been so damaged by unlimited reproduction? Or are Professors Landes and Posner suffering from the snobbish European tendency to consider works of art "debased" once they become known and appreciated by the "unrefined" masses?
More or less the opposite of the "overgrazing" argument is the "maintenance" argument. Here it is argued that only with a monopoly is there adequate incentive to "maintain" ideas. The extreme example of the "maintenance" argument is the argument that providing a copyright monopoly will actually increase availability, the registrar of copyrights going so far as to say "lack of copyright protection...restrains dissemination of the work." Lemley , who criticizes what he refers to as ex post arguments for copyright along lines that parallel our own, puts it succinctly: "It is hard to imagine Senators, lobbyists, and scholars arguing with a straight face that the government should grant one company the perpetual right to control the sale of all paper clips in the country, on the theory that otherwise no one will have an incentive to make and distribute paper clips." Lemley also cites empirical evidence showing, not surprisingly, that public domain works are far more widely available than works from the same time period that are still under copyright.
A bit less ridiculous is the following type of argument: we can imagine that Disney might have less incentive to produce new Mickey Mouse movies if they face competition in the market for Mickey Mouse dolls - some of the good feeling for Mickey Mouse generated by the movie will spillover into increased demand for other producers Mickey Mouse dolls. This would appear to be, indeed, a case of real externality, albeit positive instead of negative; lacking a way of compensating Disney for the positive effect it is having on the demand for Mickey Mouse dolls, Disney's movie output would be too low. The problem with this analysis is that it is wrong. Mickey Mouse movies and Mickey Mouse dolls are examples of goods that are complements - increasing the quantity of one raises the demand for the other. But many goods are complements: for example, peanut butter and jelly. And quite rightly no one worries that there won't be enough peanut butter produced because part of the effect of producing more peanut butter is that it will raise the demand for jelly. Basically what this argument overlooks is the reciprocal effect: when the competition produces more Mickey Mouse dolls, it will also raise the demand for the Mickey Mouse movie.
This fallacy can been seen again in Landes and Posner's example of "the Disney Corporation [spending] tens of millions of dollars refurbishing the Mickey Mouse character, both by subtle alterations in the character and by situating it in carefully selected entertainment contexts in an effort to increase the appeal of Mickey Mouse to the current generation of young children." This is a classical example of complementary goods - the release of the "improved" Mickey Mouse raises the demand for "unimproved" Mickey Mouse - but again, there is no adverse incentive as the increased supply of "unimproved" Mickey Mouse in turn raises the demand for the improved version.
Landes and Posner also try a more subtle tack. They focus not so much on tie-ins between related goods, but rather on "promotional" efforts. "Consider an old movie on which copyright had expired that a studio wanted to issue in a colorized version...Promoting the colorized version might increase the demand for the black and white version, a close substitute...the studio would have to take into account, in deciding whether to colorize, the increase in demand for the black and white version." Here it seems that promotion of the colorized film, is a complement to both consumption of the colorized film and the black and white version; insofar as it is merely a statement about goods being complements, we have already seen there is no economic issue. But more to the point: in all competitive markets producers lack incentives to promote the industry. Individual wheat producers do not have much incentive to promote the healthy virtues of wheat, fisherman do not have much incentive to promote the healthy virtues of fish and so on. It is hard to see that the problem with old movies, books and music is different either qualitatively or quantitatively than in these other competitive markets. Yet quite rightly no one argues that we need grant wheat or fish monopolies to solve the "problem" of under promotion.
It is worth reflecting briefly on promotional activities in competitive industries. Surely information about, say, the health benefits of fish, is useful to consumers; equally surely no individual fisherman has much incentive to provide this information - that is why promotional campaign for milk, cereals, and fish are usually carried out by some industry-wide association, and not by individual firms. Is this some form of market failure? No - in a private ownership economy consumers will have to pay for useful information rather than having it provided for free by producers. And pay they do - doctors, health advisors, magazine publishers all provide this type of information for a fee. There is no evidence that competitive markets under provide product information. Rather in the case of monopolist, because the value of the product mostly goes to the monopolist rather than the consumer, the consumer has little incentive to acquire information, while the monopolist has a lot of incentive to see that the consumer has access to it. So we expect different arrangement for information provision ("promotion") in competitive and non-competitive markets. In the former, the consumer pays and competitive providers generate information. In the latter, firms will subsidize the provision of information. Of course the monopolist, unlike the competitive providers, will have no incentive to provide accurate information. We rarely see Disney advertising that, however true it might be, their new Mickey Mouse movie is a real dog, and we should go see the old Mickey Mouse movie instead.
Ironically, Landes and Posner give their own arguments only a tepid endorsement. Referring to the ill effects of overgrazing, they point out "there are counterexamples: the works of Shakespeare seem unimpaired by the uncontrolled proliferation of performances and derivative works, some of them kitsch, such as Shakespeare T-shirts and the movie Shakespeare in Love." We would point out that comparing someone to Winston Churchill, unlike Mickey Mouse, is a compliment not an insult. They go on to the resounding conclusion that "there is potentially a legitimate concern here, one that economic analysis should not ignore completely." Well, we have taken their advice, as we have not ignored them completely. What is most striking about this halfhearted conclusion is that Landes and Posner begin their book with a list of arguments against copyright and reach a rather stronger conclusion: "The foregoing nine points constitute the case against an incentive-motivated need for copyright...and especially against the incentive motivated need for long copyright terms. For even with regard to expressive works especially vulnerable...copyright protection lasting [no] more than a few years [should be adequate] to recover the reasonable cost of creating the work." This is ironic, as we have seen that the non-incentive based arguments that they themselves give only tepid endorsement too are in fact wrong.
The obvious and well known economic argument that extending copyright on existing works cannot possibly increase their supply can be found, for example, at http://cyber.law.harvard.edu/openlaw/eldredvashcroft/supct/amici/economists.pdf. Specious arguments to the contrary can be found, for example, in Miller , reproduced also as Congressional Testimony. This page contains also a careful critique of Miller's arguments by Dennis S. Karjala.
"promote the progress of...useful arts" From the U.S. Constitution.
"there can be no overgrazing of intellectual property..."From Karjala  and cited in Landes and Posner .
Landes and Posner's discussion of overgrazing and maintenance can be found on pp. 222-234 of .
The quotation about husbandry of characters can be found in Britt  pp. 22 and 26, and is quoted by Landes and Posner.
The remark by the registrar of copyright is quoted in Lemley . We should point out that Lemley's argument that if monopoly rights are provided there is no reason to provide them to the creator is wrong. Regardless of who starts with the monopoly rights, as long as they can be sold without prohibitive transactions costs, they will wind up in the hands off whoever can manage them the most efficiently. In practice most copyrights are in fact transferred to corporations and publishers. If monopoly rights are to be provided, the advantage of providing them to the creator (other than the obvious difficulty of figuring who else to give them to) is that it does create an additional incentive for creation, however miniscule it might be.
For evidence on the availability of public domain works, see Karjala  and our own analysis in 2004 chapter 4.
Note that the classical fixed cost argument for intellectual property is absent in the "refurbishing" case - certainly Disney could spend a few million more or less "refurbishing the Mickey Mouse character."
The concluding quotation is from Landes and Posner  p. 50.
Boldrin, M. and D. K. Levine : "Why Mickey Mouse is Not Subject to Congestion: A Letter on 'Eldred and Fair Use'", The Economists' Voice, 1:2.
Britt, B. : "International Marketing: Disney's Global Goals," Marketing.
Karjala, D. S. : "Statement of Copyright and Intellectual Law Professors in Opposition to H.R. 604, H.R. 2589 and S. 505, The Copyright Term Extension Act, Submitted to the Joint Committees of the Judiciary."
Karjala, D. S. : "Opposing Copyright Extension."
Landes, W. M. and R. A. Posner : The Economic Structure of Intellectual Property Law, Harvard University Press
Lemley, M. A. : "Ex Ante versus Ex Post Justifications for Intellectual Property," UC Berkeley
Lindsey, B. : Against the Dead Hand: The Uncertain Struggle for Global Capitalism, Wiley
Posner, R. A. : "Posner responds to "Why Mickey Mouse is Not Subject to Congestion," by Michele Boldrin and David Levine", The Economists' Voice, 1: 2.
Seabright, P. : The Company of Strangers: A Natural History of Economic Life, Princeton University Press