Sunday, December 23, 2007

The Standard Economic Model of Copyright

Creating a work can cost authors a lot, whereas copying a work costs others very little. Absent copyright, then, authors might find it discouragingly difficult to recoup the costs of creating fixed expressive works. Authors might then underproduce expressive works, and the public consequently suffer.

To avoid that policy tragedy, the Copyright Act empowers authors to control the reuse of their fixed expressive works. By selling those special statutory privileges, authors can offset their production costs. Thus does copyright arguably do what the common law allegedly cannot: ensure that the public enjoys an adequate supply of expressive works.

The benefits of copyright policy come at a price, however. Although it may cost a great deal to make the first copy of a fixed expression, it usually costs very little to make and distribute subsequent copies. Absent copyright protection, those works would constitute public goods. Copyright bars the public from freely enjoying the very goods labeled "public." Instead, the Act vests copyright holders with the power to charge whatever the market will bear to escape liability for infringement. Though the monopoly rents that copyright holders thereby win allegedly provide a necessary stimulus to creativity, non-holders suffer the opportunity costs of losing cheap access to fixed expressive works. Most commentators thus understand copyright policy to aim at striking a balance between giving authors sufficient incentives to create expressive works and providing the public with adequate access to the works thereby created. [The figure below] illustrates that, the standard economic model of copyright policy.

Standard Economic Model of Copyright

As portrayed in [the above] figure [], an author incurs large costs upon creating a fixed work but very low marginal costs of production (MC) thereafter. The author's average costs of production (AC) thus drop with each additional copy she—or, more likely, the party to whom she sells her copyrighted work—produces. She faces the usual sort of downward-sloping aggregate demand curve (D), which also marks the average revenue (AR) she can make by selling any given number of copies. How many should copies should she sell? Were social efficiency the test, she would sell the quantity (Qe) corresponding to the point where her marginal cost curve crosses the demand curve, earning the corresponding price (Pe). But that would discourage her (and other would-be authors) from creating fixed expressive works, as it would not allow her to recover her average costs. For her to break even in the authorship business, she would need to sell at least the quantity (Qs) corresponding to the point where her average cost curve crosses the demand curve, thereby earning a sustaining price (Ps). Happily for her, though, the monopoly privilege afforded by copyright law allows her, at least in theory, to sell even fewer copies, and at a higher price (Pm). Specifically, she will want to sell a quantity (Qm) that corresponds to the point where her marginal revenue (MR) curve crosses her marginal cost curve. At higher quantities than that, her marginal costs would exceed her marginal revenues, giving her marginal losses. If our hypothetical author manages to sell at the monopoly quantity and price that maximizes her benefits, she will earn profits (OP) equal to the amount her revenue exceeds the amount necessary to recoup her average costs. In that event, consumers to whom she sells will enjoy a surplus (CS) representing the different between what they pay and how much they value her work. Non-holders unwilling to pay what she demands, however, will suffer opportunity costs (NO) equal to how much they would have paid for the uses barred by her assertion of copyright.

We could doubtless say more about that, the standard economic model of copyright, adding complications, quibbles, and criticisms. I will, below, in explaining why we stand a good chance of outgrowing copyright. For now, though, let us assume that [the above] figure [] offers a conventional and useful economic model of copyright.

[NB: The above text comes from chapter 1, § C.1 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.]

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