Wednesday, October 03, 2007

Binary Demand for Copyrighted Goods

Does my draft paper, Outgrowing Copyright: The Effect of Market Size on Copyright Policy [PDF] commit economic heresy? At several points, at least, it appears to stray from what you might hear in Econ 101. Consider the following excerpt (footnotes omitted), in which I argue that demand for copyrighted goods follows a binary function: Consumers typically demand one copy, or no copy, but not fractions of copies.
A typical consumer generally purchases only one copy of an expressive work. Exceptions exist of course. Because the owner of a copy of an expressive work can consume it many times over, however, one copy typically satisfies any given consumer's demand. An economist might thus describe copies of expressive works as goods non-rivalrous in consumption over time and intra-consumer. Within the household, in other words, copies of expressive works function like club goods (if one member of the household can exclude others from consuming the work) or like public goods (if not). Each consumer of such a good will pay up to his or her reservation price for one copy and, finding that a sufficient supply of the work, nothing for any additional copies.

In geometric terms, we can picture consumer demand for any particular expressive work by comparing reservation prices to the number of consumers. By way of example, figure 2 illustrates the demand distribution curve for four different consumers of a hypothetical expressive work. The consumer graphed farthest to the left, puts no value on a copy of the work. The next consumer to the right would pay up to $.50 for a single copy. The next, an even dollar. Farthest to the right, the work's biggest fan would pay up to $1.50 for a one—no more, no less—copy of it.

Figure 2:   Example of Demand Distribution Among Four Consumers for Copies of an Expressive Work

This [] assumption—that each consumer of an expressive work buys only one copy of it—presents a case somewhat different from that portrayed in the standard supply/demand graph, though not one unknown in economic literature. Economists typically assume that each individual consumer has a downward sloping demand curve, with an elasticity comfortably between zero and infinity. Thus, for instance, someone willing to buy a bag of flour at $2/bag might also willingly pay $4 for two bags, or $1 for half a bag. Expressive works, in contrast to flour, do not easily admit to division. Who buys only half a book? And, as explained above, one copy generally suffices to satisfy one consumer's demand for a particular expressive work.

Other types of goods share this feature with expressive works. Most individuals—indeed, most households—find that one washing machine satisfies their demand for clothes-cleaning appliances. Televisions present a notably different, and to an economist, more typical, case.


[Crossposted to The Technology Liberation Front.]

2 comments:

Glen Whitman said...

I would say that assumption is unusual -- in the sense that economists rarely use it -- but not heretical. I suspect most economists would accept your reasoning, and I can think of at least a couple of economic models for specific applications that assume a consumer buys only one unit (at a time, at least).

Simon Clark - Formerly The Cynical Libertarian said...

In my economics A-Level coursework (sort of like a thesis you do at age 17/18) I proposed that recorded music is in fact a public good in the more general sense.

A public good is a good that is non-rival and non-excludable. Music today is essentially non-excludable because there is no practical way to stop people from sharing music for free online. It is also non-rivalrous becuase one person downloading a song, be it through file sharing or iTunes, does not decrease the quantity of music available for others in any meaningful way.

If my proposition was commonly accepted, I wonder how many people would call for government provision of music? Perhaps if file sharing had been around since medieval times we might have a nationalised music industry today and no one would think twice about it.