Christian Handke

21st May 2013

handke@eshcc.eur.nl

www.eshcc.eur.nl/handke

The Economics of Copyright New insights from the dismal science?

Procedure

• Questions allowed any time.

• At least one break, hopefully two.

Today’s topics

• The welfare economics of copyright ...

... and common misunderstandings.

• The state of the art in the empirical evidence ...

... and noteworthy gaps.

If time allows, we can also discuss:

• Further empirical evidence needed to inform copyright policy.

• Policy implications, e.g. regarding the system of collective

management of copyright.

Welfare economics and copyright - 1

TABLE 1: Costs and benefits of a copyright system

Benefits Costs

Short run Greater rewards to rights

holders

1. Access costs to users

2. Administration costs

3. Transaction costs in trading

rights

Long run Greater incentives to supply

copyright works for

prospective rights holders

User innovation is obstructed by

the costs of compliance

Key points:

1. Innovation is essential in the economic rationale of copyright, and …

2. … more copyright does not necessarily mean more innovation.

3. Theory provides no solid guidelines; empirical evidence is important.

4. It is desirable to retain market mechanisms – Decisions should be taken by those who carry the consequences. – Suppliers’ rewards should be proportional to the value they generate. – Suppliers should be able to react to market signals. – Pre-purchase information should be widely available to users.

5. We want to minimize administration and transaction costs.

6. Points 4 and 5 are hard to reconcile. -> flexibility and simplicity trade-off

Welfare economics and copyright - 2

A sequence of empirical questions for rational copyright policy:

1. To what extent does unauthorized use harm rights holders?

2. To what extent do users benefit from unauthorized use?

3. What is the net effect on innovation in the regulated sectors?

4. How much does it cost to inhibit any adverse consequences of unauthorized use in practice?

Welfare economics and copyright - 3

The empirical evidence - 1

TABLE 1: Costs and benefits of a copyright system

Benefits Costs

Short run Greater rewards to rights

holders

22 Studies

1. Access costs to users

2 Studies

2. Administration costs

3. Transaction costs in trading

rights

Long run Greater incentives to supply

copyright works for

prospective rights holders

User innovation is obstructed by

the costs of compliance

Supply of copyright works: 6 studies

Industry adaptation: 3 studies

In summary, the empirical literature is patchy, not particularly balanced, and

may easily be misleading.

A range of markets:

• The markets for recorded music and movies have received most

attention.

• Less evidence regarding software, literary works, academic publications,

photographs, etc.

A range of copyright aspects:

• Over the last 15 years, variations in the duration of copyrights and the

diffusion of digital copying technology have been studied.

• Less attention regarding (a) the scope of copyright; (b) enforcement

measures; (c) fair use; (d) moral rights, etc.

The long-run implications require more attention.

The empirical evidence - 2

Rights holders Users

Short

run

Probably harms rights

holders. (displacing demand for authorized copies)

Benefits end-users. (users’ short-run benefits probably exceed any harm to rights holders)

Benefits suppliers of complementary goods and services.

Long run

Mixed evidence regarding successful adaptation.

No evidence that the supply of copyright works would have diminished (very preliminary)

The empirical evidence - 3

TABLE 2: Summary of empirical results regarding digital copying

1. Different types of innovation, ... … in particular content creation and technological innovation.

2. Mitigating mechanism like indirect appropriability or positive network effects.

3. Effects of copyright/unauthorized copying on the contestability of markets and industry structure.

4. Consumer Learning:

- Better informed consumers through sampling

- Increasing demand with taste formation.

5. Intrinsic motivation and prosumption.

6. Adaptation of business models and industry structure over time.

Extensions of the economic analysis

• Economic theory provides a useful structure to think about the various trade-offs associated with copyright.

• In order to inform the copyright debate, empirical research is also needed.

• Useful empirical results so far:

– Unauthorized, digital copying probably displaces demand for authorized copies of recorded music and movies.

– Nevertheless, there is no evidence that the supply of creative works would have decreased.

– Unauthorized copying is probably associated with greater contestability of markets for creative works.

– Many users do value authorized services and the notion that creators are rewarded, and are concerned with legal risks.

Conclusions - 1

• It is puzzling how the copyright systems needs to adapt to digitization.

• The copyright often seems to be in a deadlock … … while current arrangements leave many stakeholders dissatisfied.

• Economics and empirical work should help to develop a copyright system that is more widely acceptable.

.

Conclusions - 2

Handke, C. 2011. The Economic Effects of Copyright – The Empirical Evidence So Far. Report for the National Academies of the Sciences, Washington DC. Online: http://sites.nationalacademies.org/pga/step/PGA_063399

Handke, C. 2010. The Economics of Copyright and Digitisation. Report for the Strategic

Advisory Board for Intellectual Property Policy (SABIP) and the Intellectual

Property Office, London, UK.

Online: http://www.ipo.gov.uk/ipresearch-economics-201005.pdf

Further Reading