Tuesday, December 25, 2007

Discouraging Just Enough Infringement

While rightly shuddering at specter of copyism, we should also recognize that the unauthorized use of copyrighted works can, if it does not go so far as to undercut authors' incentives, increase social wealth. Consider, for instance, an impoverished entrepreneur relying on pirated software to start her business. Supposing that she could not afford to buy an authorized copy, and that her unauthorized use would not depress software production, her infringement would generate a welcome consumer surplus. The same would hold true of, say, someone who enjoys an infringing copy of a CD despite being unwilling to pay its retail price. As [the figure below] illustrates, those exceptions to the strict enforcement of copyright law could in theory benefit us all without discouraging the production and distribution of expressive works.

When Unauthorized Uses Increase Consumer Surplus

[The above figure] surely offers too sanguine a view of the effects of copyright infringement, however. Without the limitations imposed by copyright law, some consumers who would otherwise willingly pay for authorized uses might instead opt to save their money by joining the unpaying masses of unauthorized users. The resulting exodus, from respecting copyright to infringing it, would risk decreasing the revenues afforded by copyright, bringing about the policy tragedy portrayed [earlier].

How does copyright law dispel that, the specter of copyism? By imposing high marginal costs on infringing uses of protected works. Absent the Copyright Act, and especially in digital works, an infringer would generally face the same low marginal reproduction costs as a copyright holder. Thanks to the Copyright Act, an infringer might have to pay actual or statutory damages, lost profits, costs, and/or attorney's fees to a copyright holder for every unauthorized use.

How high should lawmakers set the marginal costs of infringement? We wouldn't want them to under-deter it, lest the specter of copyism become all too real. Nor would we want them to overdo it, given that a modest level of infringement can deliver social gains. Theory suggests that lawmakers should set the marginal costs of infringement, taking into account that only some infringing uses get caught and litigated, just high enough to ensure that authorized users will have no incentive to opt for paying less than enough to sustain authorship. [The figure below] illustrates.

Copyright Increases Marginal Costs of Unauthorized Uses

So, at least, goes copyright in theory. In practice, as discussed in chapter 4, lawmakers lack both the information and incentives to calibrate copyright policy so precisely. These economic models thus only explain how copyright law should work—not how it does work.

[NB: The above text comes from chapter 1, § C.3 of my draft book, Intellectual Privilege: Copyright, Common Law, and the Common Good. I will soon upload a PDF of the entire chapter, including footnotes. I welcome your comments.]

[Crossposted to Intellectual Privilege and The Technology Liberation Front.]


Glen Whitman said...

Can you explain why the potential gains from infringement are not represented by the standard dead-weight loss from having a price above marginal cost?

I suspect the issue you're getting at -- how rigorously a given copyright standard ought to be enforced -- cannot be represented easily in a price/quantity diagram like this one.

Tom W. Bell said...

Glen: Because the area under the AR curve represents only those losses from foregone *purchases* (which alone generate revenue). I think we need to separate out the D curve, for reasons I discussed. And it is that area under the D curve and above the AR curve that captures the lost opportunities of foregone unauthorized uses.

I do think, now, that I should amend the second graph, though. For one thing, the NO area should extend to the right, filling the space above MC and AR and below MCu and D. Also, I think I should probably just get rid of the Pm, Qm, and OP stuff. The idea, after all, is to allow enough infringement to push price and quantity down to sustainable levels.