Overview of Economics of Intellectual Property in EM

Research Questions

• Where does the literature say IP works and does not work?
• What are the other incentives mentioned by the literature?
• Is there data on "how much of an increase of the tendency towards enclosure", e.g. how much does the biotechnology field have patented? Has this movement increased over time?
• Transition to analysis of why this matters to the specific field

Introduction

"A significant feature of most educational resources is that they are restricted to many and can cost a lot to gain access to. This is largely because of a market economy around educational resources. They are copyrighted and packaged up as objects--books, journals, videos--that have to be bought from a store or accessed through course fees or university repositories (libraries in most cases). Even if this copyrighted material is available in public libraries, it is then effectively rationed by the numbers of copies available and the costs and opportunity costs involved in people traveling to the library to use them (with that use being further restricted by the all rights reserved copyright applied to them)." (Iiyoshi and Kumar 2008, 149)

Economics of Copying

Photocopying of Journals

Liebowitz 1985 looks at how the introduction of the Xerox 914 copier in 1959 changed the nature of journal subscriptions by studying indirect appropriability, exposure effects, and price discrimination for 80 economics journals. While specific copyright law is not examined in this article, the concepts of copyright and fair use are the context for the legal use and monetization of academic journals discussed therein.

Indirect Appropriability

Indirect Appropriability is the acquisition of some good via a method other than direct purchase, in the context of a library: lending or photocopying. Liebowitz's study found that publishers raise the prices of journals to libraries to monetize indirect appropriability, which Liebowitz illustrates the nature of using the 'Used Car Analogy'.

Used Car Analogy

Summary: Rental car companies are willing to pay a price for a new car (a durable good) that includes the resale value of the car because that portion will be recuperated when the rental car has finished its rental life. Similarly, infinitely durable intellectual products like books could be sold at a price that includes the project value of copies being made from it. Thus, the buyer of a used rental car indirectly pays the car company and the user of the copied book has his usage indirectly paid to the author (likely factor in higher price of published material for library purchase).

"Ford sells new cars to both private individuals and automobile rental companies such as Hertz. These cars are durable goods, lasting for many years. Often for individuals, and almost always for the car rental companies, the cars are resold before their useful lives are finished. The price that Hertz is willing to pay for a car depends not only on the value of a car in the car rental business but also on the resale value of the car when Hertz is finished renting it out. When Hertz buys new cars it includes the expected discounted value of the resale price of the car in the price it is willing to pay. The purchaser of the used car from Hertz does not pay anything directly to Ford, but Ford received indirect payment when it sold the new car in anticipation of this later resale. Thus direct payment is not necessary in order for Ford to appropriate revenues from future users of its used products over the useful lives of these products." (Liebowitz 1985, 947)

"The same type of analysis can be made for intellectual products, which are capable of being used over and over again regardless of their particular physical manifestation. The copyright owner sells a certain number of authorized copies, from which unauthorized copies are made. The users of unauthorized copies, like the buyers of used cars, may be indirectly paying the copyright owner for their unauthorized copies if the owners of authorized copies take the "resale" value of the authorized copies into account when they purchase them. Therefore, the impact of copying on copyright owner revenues is unclear, as are any welfare implications." (Liebowitz 1985, 947)

"The analogy to the used car market is weakened when there exists variability in the number of copies made from each original. It is much more difficult for the publisher to appropriate revenues from copiers when copies are made from some originals but not from others. Since the copying of originals will not have an equal impact on all originals when only some are copied, copying will alter the relative values provided by originals. In order to retain the same degree of appropriability in the face of this copying-induced variation in value, the publisher would need to be able to price discriminate among purchasers of originals, charging a higher price for those originals that would be used to make many copies. If price discrimination were not possible, the publisher could charge a high price, essentially allowing purchase only by those individuals planning to make copies and removing much of their surplus. Or he could charge a lower price, generating a larger quantity sold since both copiers and noncopiers would buy originals, but failing to capture much of the surplus from customers planning to make copies of their originals." (Liebowitz 1985, 948)

Exposure Effects

Exposure effects are the changes in demands in response to reprographic technology (Liebowitz 1985, 949). Over the period studied, subscriptions per individual did not seem to fall thanks to the increase in the number of journals, the greater annual growth of PhD-level personnel

Price Discrimination

Price discrimination is differentiating individual and institutional journal subscribers for pricing purposes. 'The average ratio of institutional to individual prices was 1.82 for journals founded after 1959 and 1.50 for journals existing prior to 1959. In large part, the reason that young journals are more aggressively priced seems to be that most new journals are published by commercial publishers (65 percent), whereas most of the older journals (93 percent) are published by noncommercial publishers.’ (Liebowitz 1985, 951) 'Commercial means private, not a society or university.' (Liebowitz 1985, 951, Footnote 10) 'Since photocopying enhances any differences in valuations between individuals and libraries (and this difference was very small in 1959), the now common price discrimination between individuals and institutions can be attributed mainly to photocopying. The differential pricing by publishers of books and journals conforms nicely to the differential photocopying practices toward each.' (Liebowitz 1985, 953)

Cost/Benefit Analysis of Private Reproduction

Producers potential responses to private copying ("implications of this behavior for producer profits and consumer welfare depends on whether copying is efficient or inefficient" (Besen 1986, 6)):

1. "accelerate the marketing of their products in order to make the acquisition of an original more convenient than copying"
2. "embody originals in technologies that make copying more difficult"
3. "change the price they charge for originals"

"The economics of copying is analytically similar to the economics of new and used goods markets. The central issue revolves around the effect of the existence of secondary markets on producer profits and consumer welfare.” (Besen 1986, 6) "'Free rider' behavior becomes more likely the larger is the group that 'shares' an original" (Besen 1986, 7)

Besen's Model (1986)

Besen (1986) concludes "that copying need not necessarily be harmful to producers. The introduction of copying will increase consumer welfare and producer profits in the short run if copying technologies are efficient and if producers can appropriate the use-valuation of copiers by increasing the price that is charged for originals. At the same time, the model shows that the introduction of copying can, in the short run at least, reduce consumer welfare." (Besen 1986, 7) "The paper focuses on copying of materials that have been initially sold directly to consumers and thus is relevant to the copying of books and journals, computer software, and pre-recorded audio and videocassettes." (Besen 1986, 7) "The introduction of copying may cause producers to reduce their prices in order to discourage copying if private reproduction cost is close to the price of originals before copying is introduced. The result is to make consumers better off and producers worse off than before the introduction of copying." (Besen 1986, 10) But what if the cost of copying is nearly zero?

Assumptions

1. "Consumers regard originals and copies as perfect substitutes" (Besen 1986, 8)
2. "First copy costs have already been incurred" (Besen 1986, 8)
3. "Unable to prevent copying through legal action" (Besen 1986, 8)
4. "Marginal cost of making a copy is constant and independent of the number of copies made from each original" (Besen 1986, 8)

   The economics of this assumption may be altered in considering on-demand publishing

5. "Publishers cannot alter the production process to make copying more costly" (Besen 1986, 8)

   Digital copyright protection alters this issue for electronic originals

Partial Copying

"Purchasers of originals and copies, as well as producers of originals benefit [...] if copying is less expensive than producing additional originals. Moreover, all groups are worse off if [copying is more expensive than producing additional originals], unless limit pricing prevails." When "copiers" wish to obtain a small proportion of an original, where the existence of partial copying affects neither the number of originals produced nor their prices [,...] the introduction of copying makes neither producers nor the purchasers of originals worse off and makes partial copiers better off." (Besen 1986, 19)

Academic Library Price Discrimination

"Dyl (1983, p.163) reports that for 76 academic economics journals, the mean library price was 148 percent of the mean individual price. When this is broken down by publisher type, the figures are 126 percent, 136 percent, and 191 percent for professional associations, universities, and private publishers, respectively. Moreover, where 80 percent of the private publishers discriminated, less than half of the professional associations and only about 58 percent of the universities did so. When only discriminators are considered, private publishers charged libraries 224 percent of the individual price with the figures for professional associations and only about 58 percent of the universities did so. When only discriminators are considered, private publishers charged libraries 224 percent of the individual price with the figures for professional associations and universities being 161 and 156 percent respectively. The author reports, however, that 'the difference is statistically meaningful only for private publishers.' Sphilhaus (1982, p. 25) reports that 'In publications issued by societies . . . the member receives journals at a rate near the production costs and libraries pay from 2 to 10 times more to make up the difference between actual page charge collections and the first-copy costs.'" (Besen 1986, 19, footnote 22)

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