Chapter 2, section 1

John Stuart Mill, On Liberty |Table of Contents | Chapter 2: Summary Discuss The Diversity of Strategies in our Current Information Production System Chapter 2 Some Basic Economics of Information Production and Innovation Introduction Chapter 2 The Diversity of Strategies in our Current Information Production System The actual universe of information production in the economy then, is not as dependent on property rights and markets in information goods as the last quarter century's increasing obsession with "intellectual property" might suggest. Instead, what we see both from empirical work and theoretical work is that individuals and firms in the economy produce information using a wide range of strategies. Some of these strategies indeed rely on exclusive rights like patents or copyrights, and aim at selling information as a good into an information market. Many, however, do not. In order to provide some texture to what these models look like, we can outline a series of ideal-type "business" strategies for producing information. The point here is not to provide an exhaustive map of the empirical business literature. It is, instead, to offer a simple analytic framework within which to understand the mix of strategies available for firms and individuals to appropriate the benefits of their investments - of time, money, or both, in activities that result in the production of information, knowledge, and culture. The differentiating parameters are simple: cost minimization and benefit maximization. Any of these strategies could use inputs that are already owned - such as existing lyrics for a song or a patented invention to improve on - by buying a license from the owner of the exclusive rights for the existing information. Cost minimization here refers purely to ideal-type strategies for obtaining as many of the information inputs as possible at their marginal cost of zero, instead of buying licenses to inputs at a positive market price. It can be pursued by using materials from the public domain, by using materials the producer itself owns, or by sharing/bartering for information inputs owned by others in exchange for one's own information inputs. Benefits can be obtained either in reliance on asserting one's exclusive rights, or by following a non-exclusive strategy, using some other mechanism that improves the position of the information producer because they invested in producing the information. Nonexclusive strategies for benefit maximization can be pursued both by market actors and by nonmarket actors. Table 2.1 maps nine ideal-type strategies characterized by these components. Table 2.1: Ideal-Type Information Production Strategies Cost Minimization/ Benefit Acquisition Public Domain Intrafirm Barter/Sharing Rights-based exclusion (make money by exercising exclusive rights-licensing or blocking competition) Romantic Maximizers (authors, composers; sell to publishers; sometimes sell to Mickeys) Mickey (Disney reuses inventory for derivative works; buy outputs of Romantic Maximizers) RCA (small number of companies hold blocking patents; they create patent pools to build valuable goods) Nonexclusion-Market (make money from information production but not by exercising the exclusive rights) Scholarly Lawyers (write articles to get clients; other examples include bands that give music out for free as advertisements for touring and charge money for performance; software developers who develop software and make money from customizing it to a particular client, on-site management, advice and training, not from licensing) Know-How (firms that have cheaper or better production processes because of their research, lower their costs or improve the quality of other goods or services; lawyer offices that build on existing forms) Learning Networks (share information with similar organizations - make money from early access to information. For example, newspapers join together to create a wire service; firms where engineers and scientists from different firms attend professional societies to diffuse knowledge) Nonexclusion-Nonmarket Joe Einstein (give away information for free in return for status, benefits to reputation, value of the innovation to themselves; wide range of motivations. Includes members of amateur choirs who perform for free, academics who write articles for fame, people who write op-eds, contribute to mailing lists; many free software developers and free software generally for most uses) Los Alamos (share in-house information, rely on in-house inputs to produce valuable public goods used to secure additional government funding and status) Limited sharing networks (release paper to small number of colleagues to get comments so you can improve it before publication. Make use of time delay to gain relative advantage later on using Joe Einstein strategy. Share one's information on formal condition of reciprocity: like "copyleft" conditions on derivative works for distribution) The ideal-type strategy that underlies patents and copyrights can be thought of as the "Romantic Maximizer." It conceives of the information producer as a single author or inventor laboring creatively - hence romantic - but in expectation of royalties, rather than immortality, beauty, or truth. An individual or small start-up firm that sells software it developed to a larger firm, or an author selling rights to a book or a film typify this model. The second ideal type that arises within exclusive-rights based industries, "Mickey," is a larger firm that already owns an inventory of exclusive rights, some through in-house development, some by buying from Romantic Maximizers. A defining cost-reduction mechanism for Mickey is that it applies creative people to work on its own inventory, for which it need not pay above marginal cost prices in the market. This strategy is the most advantageous in an environment of very strong exclusive rights protection for a number of reasons. First, the ability to extract higher rents from the existing inventory of information goods is greatest for firms that (a) have an inventory and (b) rely on asserting exclusive rights as their mode of extracting value. Second, the increased costs of production associated with strong exclusive rights are cushioned by the ability of such firms to rework their existing inventory, rather than trying to work with materials from an ever-shrinking public domain or paying for every source of inspiration and element of a new composition. The coarsest version of this strategy might be found if Disney were to produce a "winter sports" thirty-minute television program by tying together scenes from existing cartoons, say, one in which Goofy plays hockey followed by a snippet of Donald Duck ice skating, and so on. More subtle, and representative of the type of reuse relevant to the analysis here, would be the case where Disney buys the rights to Winnie-the-Pooh, and, after producing an animated version of stories from the original books, then continues to work with the same characters and relationships to create a new film, say, Winnie-the-Pooh-Frankenpooh (or Beauty and the Beast-Enchanted Christmas; or The Little Mermaid-Stormy the Wild Seahorse). The third exclusive-rights-based strategy, which I call "RCA," is barter among the owners of inventories. Patent pools, cross-licensing, and market-sharing agreements among the radio patents holders in 1920-1921, which I describe in chapter 6, are a perfect example. RCA, GE, AT