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COPYRIGHT

Wendy J. Gordon
Professor of Law and Paul J. Liacos Scholar in Law
Boston University School of Law
Robert G. Bone
Professor of Law, Boston University School of Law
© Copyright 1999 Wendy J. Gordon and Robert G. Bone

Abstract
Copyright is the branch of Intellectual Property Law that governs works of
expression such as books, paintings and songs, and the expressive aspects of
computer programs. Intellectual products such as these have a partially public
goods character: they are largely inexhaustible and nonexcludable. Intellectual
Property Law responds to inexcludability by giving producers legal rights to
exclude nonpayers from certain usages of their intellectual products. The goal
is to provide incentives for new production at fairly low transaction costs.
However, the copyright owner will charge a price above marginal cost and this,
coupled with the inexhaustibility of most copyrighted products, creates
deadweight loss. Various copyright doctrines (such as the idea/expression
dichotomy, the limited duration of the copyright ownership term andthe
doctrine of ‘fair use’) work to reduce deadweight loss and other costs within a
larger structure that creates incentives. Copyright Law, unlike Patent Law,
gives owners rights only against those who actually copy the work. This
limitation, too, may serve to reduce both transaction costs and deadweight loss.
Empirically it is unclear how successful copyright has been in creating
incentives for production, reducing transaction costs and keeping deadweight
costs low.
JEL classification: O34, D23, K11, K39, L82
Keywords: Intellectual Property, Copyright, Fair Use, Public Goods, Property
Law, Art, Computers

1. Introduction

Copyright law protects works of creative expression. At its relatively
uncontroversial core lie songs, plays, novels, paintings and other works of
aesthetic value. But copyright is not confined solely to aesthetic subject matter;
in many countries, it extends to works of fact, such as maps and directories
andto works with practical value. For example, one of the most controversial
issues in copyright law today is whether and to what extent copyright should
protect data bases and computer programs.

The most distinctive feature of copyright law is its focus on actual copying:
a person infringes a copyright only if he actually copies the protected work.
This means that independent creation of an identical work does not constitute
infringement. In fact, a person who happens to create the same work
independently can claim a copyright in that work separate from the original
creator’s. In this respect, copyright differs from patent, which prohibits
independent replication as well as actual copying.

Most copyright systems share a second important feature: the rights they
confer terminate after some fixed period of years (the precise period varies from
country to country). For example, the current United States copyright law sets
the basic period at author’s life plus seventy years. Upon expiration of this
period, anyone can copy the work without the author’s consent. It is worth
noting that not all forms of intellectual property are limited in this way. For
example, trade secret and trademark rights can last indefinitely.

Most copyright systems are limited in another way. They do not prohibit all
uses of a protected work, but only certain, specifically defined uses. For
example, United States copyright law bars only reproduction in tangible copies,
adaptation and certain alterations, public distribution, public performance and
public display (Title 17 of United States Code (U.S.C.), sections 106 and
106A). Moreover, there are exceptions within each of these categories that
further limit the copyright owner’s control 17 U.S.C., sections 107-121.

Thus, for example, a person who recites someone else’s copyrighted speech
or poem to a small group in the privacy of her own home is free to do so, as
long as the speaker does not make a tape recording or other tangible
embodiment of the recitation. Although the protected speech or poem is in
some sense copied as it is recited, under the statute the recitation counts not as
a ‘copy’ but only as a ‘performance’ - 17 U.S.C. section 101 - and United States
copyright law prohibits only public performances (17 U.S.C. section 106).

The following discussion reviews the economic literature on copyright.
Economists justify copyright as they do patent law, as a way to overcome the
public-goods/free-rider obstacle to information production and distribution and
to facilitate efficient market transactions that transfer information to its highest
valued use. In this context, ‘information’ is used as a shorthand category for all
products of the mind. Different intellectual property doctrines provide
exclusivity over different products. The special province of copyright is
protecting ‘expression’, that is, the form that an author gives to her ideas.

Although we focus here on the economic rationale, it is worth mentioning
at the outset that economics is not the only way to justify copyright and it
limits. For instance, some have argued that copyright serves fairness values -
by giving authors their just deserts, by respecting the author’s natural right to
control his creation, by putting ideas in the public domain, by protecting the
personhood connection between author and creation, or by preventing the
unjust enrichment associated with free riding (Becker, 1993; Gordon, 1993).
Still others rely on what they see as ‘communitarian values’, such as the
importance of free expression to a liberal democracy (Fisher, 1988; Netanel,
1996).

In some countries, noneconomic values such as these play an important and
explicit role alongside economics in supporting artist’s rights. French law, for
example, has long recognized the doctrine of moral rights (droit moral),
generally thought to serve the values of dignity and personhood andUnited
States copyright law recently adopted the same idea, though in a much more
limited form.

The copyright literature is too voluminous to cover exhaustively in a brief
review. Indeed, work on copyright has expanded rapidly in recent decades, due
in part to the growing economic importance of copyright-related industries.
Empirical studies conducted in a number of countries spanning selected periods
from 1970 to the mid-1980s show that the copyright sector played a substantial
role in overall economic development, contributing between 2.1 and 6.6 percent
of the Gross Domestic or Gross National Product (Hummel, 1990, pp. 18-19).
Moreover, time-longitudinal data show a rate of growth outpacing the rest of
the economy (Hummel, 1990, p. 21).

Thus, the coverage in this brief review must be limited andthis means that
we cannot discuss all the important contributions to the field. Most of the more
significant economically-oriented contributions are included in the
accompanying bibliography.

A. The Basic Economic Argument

2. Background

2.1 Information as a Quasi-Public Good
The economic argument for copyright is based on the idea that works of
authorship are quasi-public goods plagued with the usual free-rider and
monopoly problems associated with nonexcludability and inexhaustibility.
While this argument is standard in the literature today, it was not common
before 1970. The few early articles that did adopt the economic approach are
considered classics today. These include Plant (1934), which questions the need
for broad copyright in books andHurt and Schuchman (1966), which discusses
publishing as well as copyright more generally (see also Plant, 1953).

Starting in the 1970s, economists began to focus on copyright issues with
some regularity. See, for example, Besen, Manning and Mitchell (1978), Novos
and Waldman (1984), Johnson (1985), Liebowitz (1985, 1986, 1987) and
Landes and Posner (1989). By then, much of the basic work on public goods
and information economics had been completed. For example, Samuelson
published his classic article on public goods in 1954, and Arrow published his
important work on the private supply of public goods in 1962 (see also Davis
and Whinston, 1967; Thompson, 1968; Demsetz, 1969, 1970). The same is true
of information economics, which can trace its rise to critical publications in the
1960s (see, for example, Stigler, 1961; Arrow, 1962).

The year 1970 also marks the publication of Breyer (1970), one of the
earliest and most influential (at least in the United States) economic treatments
of copyright in the legal literature (see also Tyerman, 1971; Breyer, 1972). An
economic analysis of fair use law was published a decade later (Gordon, 1982)
and since then the use of economics by legal academics writing about copyright
has become quite common (see, for example, Menell, 1987; Fisher, 1988).

Perhaps the most comprehensive economic treatment of copyright to date
is Landes and Posner (1989), which constructs a formal model and uses it to
explain several features of United States copyright law. This effort is distinctive
for its broad scope: Landes and Posner offer their model as a systematic account
of the entire copyright scheme.

3. Benefits of Copyright

3.1 Overcoming Nonexcludability
Once a work is made public, the author cannot easily exclude others from
copying. Copiers have an advantage in the market because they avoid creation
costs and thus can sell at a price the author cannot match without suffering a
loss. Prospective authors anticipating this outcome will hesitate before investing
in creative activity andcreative products may be undersupplied.

More specifically, if copiers are numerous enough, competition will force
the price of copies down to the copier’s marginal cost. So long as copying is
less costly than creating, the resulting market price will be less than the price
the original author must charge to recoup her fixed costs of creation (including
opportunity and risk-bearing costs). Therefore, insofar as prospective authors
are motivated by the expectation of economic reward and publication is
necessary to reap that reward, free access to works of authorship can lead to
suboptimal incentives to create ex ante. (In fact, this argument depends on a
number of assumptions examined more closely in Sections 8 and 9 below.)
Gordon (1992a) analyzes this argument as a prisoner’s dilemma in which
players simultaneously choose between creating a work of their own and
copying the work of another. For a plausible payoff structure, copying strictly
dominates creation andthe result is the Pareto-dominated equilibrium
associated with prisoner’s dilemma games - in this case, both players choose
to copy andnothing is created.

Copyright solves this nonexcludability problem andescapes the prisoner’s
dilemma by giving authors legally enforceable property rights to exclude others
from using their works without consent (or at least without paying). This is not
the only possible solution andwe discuss others in Section 9 below. However,
one important benefit of copyright is its compatibility with a market. By
eliminating the free-rider obstacle, copyright supports the creation of licensing
markets which enable the informational and allocational advantages of a
market mechanism.

3.2 Copyright and Coase
The contract alternative deserves special mention here. Contract is a feasible
option for solving the nonexcludability problem only when the author retains
some significant control over the work after it is made public. After all, when
a work is freely available, there is no reason for anyone to agree to restrictions
on use. In theory, a prospective author might try to contract with free-riders in
advance of creation. For example, he might try to get potential copiers to agree
not to copy the work or potential consumers to commit to purchasing the work
in advance. But in the real world, high transaction costs and free-riding often
frustrate pre-commitment strategies like these (Gordon, 1992c).

On the other hand, if the author can restrict access to his work after creation
- as when a playwright controls admission to a theater staging his play - the
author can, in theory at least, condition admission on a promise not to copy.
Under these circumstances andin the absence of transaction costs, it should not
matter who has the initial entitlement. According to the Coase Theorem
(Coase, 1960), whether the author has an entitlement to prevent copying or
each audience member has an entitlement to copy, the parties will bargain to
the efficient outcome, rendering copyright unnecessary.

When transaction costs are considered, however, the case for copyright
becomes much stronger (see Calabresi and Melamed, 1972; Gordon, 1992a,
1992b, 1992c). By assigning the entitlement to the author rather than the
audience, transaction costs are reduced substantially (Landes and Posner,
1989). Although some intellectual products are better left unowned or owned
by the public in general, (Lange, 1981; Litman, 1990; Gordon and Postbrief,
1998), giving rights to a small, closed class rather than to the public is a
familiar device for developing workable exchange systems (Holderness, 1985).
It is much easier for copiers to identify the author whose entitlement they must
purchase, than it is for the author to identify multiple copiers all of whose
entitlements he must purchase. Moreover, with the entitlement in the author,
only those who actually wish to copy will seek licenses, so the author need
contract with only a subset of the larger group. By contrast, if each member of
the public held an entitlement to copy, the author would have to contract with
everyone who had access to his work, thereby multiplying transaction costs
(Gordon, 1989, 1992c). (In addition, potential copiers might demand more in
the aggregate than the value of the work to the author, rendering agreement
impossible.)

Thus, the economic case for copyright is not confined to overcoming
nonexcludability and stimulating creativity. Copyright also can encourage
efficient exploitation of information assets. It does this by fashioning property
rights that minimize transaction costs and facilitate market transactions that
transfer information assets to their highest valued uses.

4. Costs of Copyright

Copyright also generates costs, however. These costs fall into four categories:
(1) monopoly pricing; (2) chilling of future creativity; (3) transaction costs of
licensing; and (4) costs of administration and enforcement.

4.1 Monopoly Prices and Deadweight Loss: Inexhaustibility
Copyright confers monopoly power andmonopolies can result in deadweight
loss whenever perfect price discrimination is not possible. The inexhaustibility
feature of information only exacerbates this problem. Normally everyone can
enjoy an information product without depleting its quantity or quality. In this
sense, information differs from tangible goods; for example, giving a particular
chair to person A means denying it to person B. It follows from inexhaustibility
that information, once created, could be supplied to everyone at the low
marginal cost of duplication. Thus, the relatively high price charged by a
copyright monopolist excludes consumers who otherwise would have purchased
the information, thereby creating a social loss.

There is, therefore, a conflict between ex ante and ex post points of view.
From an ex ante perspective, the nonexcludability feature of information means
that a legal monopoly may be necessary to induce creation. But from an ex post
perspective, the inexhaustibility feature means that any such monopoly will
create some social loss.

This point has received detailed treatment in the economic literature on the
private supply of excludable public goods. In one of the earliest articles, Davis
and Whinston (1967) demonstrate that an efficient allocation cannot be
achieved by any nondiscriminatory pricing device, even when property rights
make exclusion possible at zero cost. Moreover, since consumers have an
incentive to lie about their preferences, even a public supplier of information
will have difficulty determining how much to supply (Davis and Whinston,
1967, pp. 367-368). In a later article, Demsetz (1970) shows that an efficient
result can be achieved with exclusion when the supplier of the inexhaustible
good has perfect information about consumer preferences and can perfectly
price-discriminate.

Baumol and Ordover (1977) study the same problem when sellers have
imperfect information about consumer preferences and face a budget constraint.
They show that, under these conditions, prices will be greater than zero in order
to induce creation, thus inefficiently excluding consumers who value the
information at more than its marginal cost but less than the price. Moreover,
Kormendi (1979) shows that it is not possible to escape this loss by using a
particular incentive-compatible mechanism to force truthful revelation of
preferences.

4.2 Chilling Future Creativity: The Cumulative Nature of Information
Information is cumulative in addition to being nonexcludable and
inexhaustible: people build on past information to make new creations, adding
their own expression to elements borrowed from previous works. Thus, the
monopoly created by exclusivity raises the cost of future innovation by
requiring prospective innovators to obtain licenses. This burden is especially
high for multimedia works, such as digitalized hypertext on CD-ROM, that
borrow small amounts from a large number of previous works.

This cumulative feature of information figures prominently in the Landes
and Posner (1989) model. There the copyright monopoly has two opposing
effects on creation incentives. On the one hand, it enhances the prospective
author’s economic return from selling copies and thus strengthens the incentive
to create. On the other hand, it increases the cost of borrowing from previous
works and thus weakens the incentive to create. According to Landes and
Posner, copyright entitlements balance these two effects with the ultimate goal
of maximizing social benefit net of cost. One way that copyright law attempts
to minimize the social cost of exclusivity is by limiting the grant of exclusivity
to ‘expression’ andplacing no restraints on the public’s use of the most
important informational building blocks, namely, general ideas.

4.3 Transaction Costs of Licensing
Licensing involves transaction costs, including the cost of bargaining and the
cost of bargaining breakdown. These costs can be reduced somewhat by clear
definition of the property right, by consolidating ownership in one or very few
entities andby vesting copyright in authors rather than third parties (at least
insofar as authors have superior information about the value and potential uses
of their works). In addition, privately formed licensing collectives, such as
ASCAP and the Copyright Clearance Center, can make licensing feasible by
overcoming high transaction cost barriers to individual agreement (Gordon,
1982; Merges, 1997).

Even so, transaction costs can still be prohibitively high in some situations.
Such high transaction costs provide an economic justification for fair use in
United States copyright law (Landes, 1992; Gordon, 1982; Posner, 1992). The
doctrine of fair use is discussed at greater length in Sections 10 and 11 below.

4.4 Administration and Enforcement Costs
The copyright system also produces administrative and enforcement costs.
Administrative costs depend on such factors as the density of regulation and the
intensity of review of copyright applications. In the United States, for example,
copyright review is minimal compared to patent review, so the cost of
administration is less for copyright than it is for patent.

Enforcement costs depend on the frequency of infringement and the average
cost of enforcing rights against an infringer (such as the average cost of
litigating a copyright infringement suit). It is significant in this connection to
note that process costs can be particularly high for intangibles, such as
information, because of the difficulty determining precisely what is protected
and what has been taken. This argues for defining copyright entitlements as
clearly as possible. However, copyright has no equivalent to patent law’s
requirement that applicants for protection state clearly the boundaries of the
intellectual property rights they claim.

5. The Effect of Network Externalities

5.1 Two Types of Network Externality
Certain types of information exhibit a phenomenon called ‘network
externality’, which can have a profound effect on the economic analysis. The
network externality problem has received careful attention in the economic
literature, beginning with several articles published in the mid-1980s (Farrell
and Saloner, 1985; Katz and Shapiro, 1985, 1994; Arthur, 1989; Liebowitz and
Margolis, 1994). The idea first surfaced in the legal literature in an article
analyzing the proper scope of copyright protection for computer programs
(Menell, 1989; see also Menell, 1987, 1994; Friedman, 1994; Dam, 1995, pp.
345-352; Lemley and McGowan, 1998).

The term ‘network externality’ refers to a situation where the value of a
good to each consumer increases with the number of consumers who own the
good. The telephone illustrates one kind of network externality. The more
people who own a telephone, the more people there are to phone andthe greater
the value the telephone confers on each person who owns it. Telephone owners
form a network andby joining the network each new owner creates external
benefits for other network participants.

The second type of network externality is more indirect. It arises when
consumers purchase two compatible products, such as a computer (for example,
DOS-based, Windows-based, or MAC-based) and software compatible with that
computer. In a dynamic model, consumer choice of computer can affect
producer decisions about compatible software, which in turn can feed back to
affect future demand for that computer. For example, if consumers begin to
gravitate toward DOS-based computers, software producers will shift toward
writing more DOS-compatible software. The richer selection of software for
DOS machines will then induce more consumers to buy DOS-based computers,
which will cycle back to increase investment in DOS-compatible software.
Thus, a consumer’s choice of computer confers external benefits on all owners
of that type of computer by increasing the marginal incentive to produce
compatible software.

5.2 Network Externalities and Computer Programs
Both types of network externality are relevant to determining the optimal scope
of copyright for computer programs. For example, if switching costs are high
enough, giving copyright protection to a popular user interface that has become
an industry standard can extend the copyright owner’s monopoly into the
computer, not just the interface, market. Copyright can also retard the
formation of socially beneficial networks by increasing the cost of
interface-compatible software. And by enhancing the economic return to new
interfaces, copyright exacerbates the natural tendency toward incompatibility
in a network environment due to the spillover benefits that compatibility
confers on competitors. For a discussion of these effects, see Menell (1989, pp.
1066-1069).

Copyright can also have beneficial effects in a network environment,
however. For example, the dynamic feedback set in motion by initial computer
choice can make it difficult for consumers to switch to a clearly superior
product later on. Computer manufacturers who anticipate this lock-in effect will
have little incentive to search for better operating systems. Copyright can
counteract this to some extent by encouraging innovation rather than copying
(see Menell, 1989, pp. 1070-1071).

Thus, one must take account of network dynamics, as well as
nonexcludability, inexhaustibility and cumulative effects, when considering
information products, like computer programs, that exhibit network
externalities.

B. Two Doctrinal Applications

In Sections 6 and 7 we briefly illustrate the economic analysis by using it to
explain two basic features of copyright: the limited duration of rights andthe
requirement of actual copying for infringement.

6. Limited Duration

The limited duration of copyright follows from the declining marginal benefit
of term extension coupled with the positive marginal cost (see Landes and
Posner, 1989). First, the marginal social benefit of increasing the copyright
term is likely to decline with term length. There are several reasons for this.
Because most authors have a declining marginal utility for money, they receive
less utility from each additional extension of the copyright term. As a result,
term extensions have a diminishing positive impact on creation incentives.
Moreover, because prospective authors discount future economic return to
present value, the more temporally distant the return the less its marginal effect
on ex ante incentives (Liebowitz, 1986b; Macaulay, 1841).

Second, there are costs to increasing the copyright term, including the cost
of tracing copyrighted works, which, some argue, is more difficult the older the
work (Landes and Posner, 1989; see also Liebowitz, 1986b, describing other
costs). At least if marginal cost remains constant or increases with term length,
then the combination of declining marginal benefit and constant or increasing
marginal cost suggests a point of optimal copyright duration. This is the point
where marginal benefit just equals marginal cost.

7. The Actual Copying Requirement

The limitation of copyright to rights against actual copying rather than
independent creation can be explained by the nature of innovation in the
copyright field (Landes and Posner, 1989). It is important to note at the outset
that a right against actual copying is all that is needed to overcome a prisoner’s
dilemma (assuming perfect enforcement), since a person cannot free ride unless
she copies. Still, rights against independent creation enhance the economic
return to innovation and might make sense if there was some reason to provide
stronger incentives. Patent law, for example, confers a right against
independent replication andthe broader right confers a substantial benefit on
patent owners because of the significant risk of independent creation in the
technological field. By contrast, little of the information subject to copyright -
at least outside the field of popular music - is prone to independent replication.
A particular poem or novel, for example, is likely to be so distinctive that no
one other than the author would ever conceive it. As a result, a right against
independent replication might confer little additional benefit.

Moreover, enlarging the right in this way would likely increase costs. Given
the vast number of copyright-protected works, a prospective author would have
difficulty knowing whether his contemplated creation was likely to infringe. As
a result, it might be necessary to require registration as a condition to copyright
- as is done for patent - to assure a complete record of copyrighted works for
authors to search. This would add significantly to administrative costs
andconceivably alter the conditions for creation in a permanently negative way
(if it is true that authors thrive in a non-bureaucratic environment). Moreover,
broader rights would be likely to produce more copyright enforcement actions
and thus higher enforcement costs.

In sum, the potential benefits of recognizing a right against independent
replication are likely to be so small in the copyright field that the potential costs
should be decisive. By contrast, broad patent rights confer substantial benefits
on patent owners because of the much higher risk of independent invention -
and they also encourage early disclosure, which has special advantages in the
patent field.

C. A Closer Look at the Argument

8. Seven Core Conditions

The economic argument is not equally strong in all settings. Its persuasiveness
depends on a number of conditions that vary with the process of innovation and
the structure of information markets. For example, when a copier’s work is not
a perfect substitute, the adverse effect of copying is mitigated to some extent.
Moreover, lead-time and price discrimination can sometimes make it possible
for a creator to recoup fixed costs without the assistance of copyright.
Seven conditions, when present together, make the strongest economic case
for copyright:

(1) The cost of independent creation is very high.
(2) A second party is able to copy the creation from its originator at a cost
lower than the cost of independent creation.
(3) These copies are perfect substitutes for the originator’s product, being
identical to the originator’s product in regard to all characteristics that
affect consumer preferences. Such characteristics include, inter alia:
quality, reliability, number and quality of distribution networks,
authenticity and associational value andsupport services provided in
connection with the product.
(4) Consumers perceive the two products to be perfect substitutes. (It can be
argued that if this condition is met, it does not matter if the copies indeed
are perfect substitutes.)
(5) The difference between the cost of copying and the cost of independent
creation is high enough that the price the copyist charges will be
significantly less than the price the originator would have to charge in
order to recoup his costs of independent creation.
(6) In the absence of an opportunity to recoup the costs of independent
creation, no one will invest in creative activity.
(7) The independent creator can recoup her costs only by means of selling or
licensing copies andthat in doing so she has no effective recourse to price
discrimination.

Though oversimplified (for example, the list ignores the effects of
uncertainty), this list of seven core conditions supports a prisoner’s dilemma
whose payoff structure actively discourages independent creation (Gordon,
1992a).

Not surprisingly, one usually finds copyright proponents citing most of
these conditions as if they typically characterized most information industries.
For example, copyright proponents claim, as an empirical matter, that copying
is cheap enough and distribution easy enough - especially with technologies
such as the computer, the photocopy machine and the Internet - that copyists
can easily compete with independent creators by offering the same product at
lower prices andthus capture the market completely or force the creator to sell
at a price lower than sufficient to recoup her creation costs.

9. Challenges to the Basic Argument

Responses to this core defense of copyright are many. Most critics of copyright
dispute the empirical accuracy of the core scenario. They question how often
the core conditions discouraging creation actually arise. For example, regarding
condition 2 ( ease of copying), Breyer (1972) and Palmer (1989) discuss lead
time as a non-copyright mode of limiting strangers’ abilities to copy one’s
work. Another class of response can be analogized to the usual caveats about
the prisoner’s dilemma, such as the effect of repeated play. Thus, for example,
Breyer (1972) argues that publishers whose works are plagiarized might issue
below-cost reprisal editions, fear of which might help to prevent copying ab
initio.

An additional strategy of copyright critics is to focus on those copyright
doctrines that explicitly grant exclusivity in areas far beyond the core case. As
an example, consider the provision of American copyright law that grants an
author the exclusive right to authorize ‘derivative works’ such as translations,
dramatizations and adaptations. The typical example of a ‘derivative work’ is
a movie made from a copyrighted novel.

The right over derivative works extends the author’s monopoly into markets
other than the market for the original work. It does this by giving the author
control over copies (uses) of her work that do not serve as substitutes for her
original work and which are costly for the maker of the derivative work to
produce. For example, the author of a novel has a derivative work right that
gives her control over movies based on her novel. As a result, she receives an
economic return not only from the original market for novels but also from the
derivative market for films.

In such cases, virtually none of the core prisoner’s-dilemma conditions
apply. Even if the law did not vest control over derivative works, authors might
still be able to recoup their fixed costs by selling copies in the original market
(for example, the market of book buyers). As a result, whether the grant of a
derivative-work right is necessary to bring forth cost-justified new works is
highly debatable (Landes and Posner, 1989; Gordon, 1992b). Much more
empirical research is needed to resolve the issue (Priest, 1986).

Further empirical work is also needed to test the prevalence of the core
conditions more generally. To illustrate, consider conditions 3 through 5.
Though the cost of copying diminishes as technology advances (so that
condition 5 often applies), true equivalence between authorized and
unauthorized versions of the product is unlikely (so that conditions 3 and 4 will
often fail to apply). For example, a creator will sometimes be able to use
better-established distributional networks, call on brand (authorial) loyalty, or
provide its product prior to the copyist’s entry into the market. There are also
exceptions to condition 6 (the assumption that creation depends on
remuneration). It is argued that some originators, such as artists, will engage
in creation regardless of the likelihood of being compensated monetarily.
Moreover, consider condition 7 (the assumption that recompense comes
only through copies and that price discrimination is impracticable). In fact, it
is possible to receive an economic return without selling copies. For example,
songwriters sometimes perform at profitable concerts andacademic writers
receive university salaries. Even when sale of copies provides the copyright
owner’s primary revenue source, price discrimination may be a feasible way for
the copyright owner to capture some of the private benefits of copying. In the
latter connection, Liebowitz has shown that journal publishers may have
adapted to the practice of photocopying by charging higher subscription prices
to those institutions likely to copy journal articles (Liebowitz, 1986b).

D. The Economics Of Fair Use

10. The Market Failure Argument for Fair Use

One of the most important and most controversial features of American
copyright law is the doctrine of fair use. Fair use provides a case-specific
defense to charges of copyright infringement and is typically applied where free
copying will serve the public interest, such as in connection with news
reporting, classroom photocopying, critical analysis andparody (17 U.S.C.
section 107). While many nations include similar limitations in their copyright
laws, those nations differ in the scope of the exceptions they recognize. The fair
use doctrine in American law is quite broad - applying, for example, when
doctors need quick photocopies of medical articles to provide treatment, or
when someone needs to use portions of a work for a news report or a parody.

Although there are a number of dimensions to the fair use doctrine,
economic analysis can explain many of its applications (see, for example,
Gordon, 1982; Posner, 1992; for noneconomic approaches, see Fisher, 1988;
Gordon, 1993; Netanel, 1996). The basic idea is to allow free copying through
fair use whenever obstacles to market formation are serious enough to frustrate
access by licensing, selling, or other modes of consensual transfer.

If a market does not develop for a creative work or use because high
transaction costs impede bargaining, then prohibiting copying makes little
sense from an economic perspective. Such a prohibition would prevent socially
valuable uses without providing any monetary return to creators. Recognizing
a fair use defense under these circumstances gives copyists and other users
access to whatever works happen to be created. Thus, in the presence of
transactional barriers to bargaining, the fair use doctrine serves the important
function of facilitating diffusion without significantly chilling creativity. In
addition to providing a way around transaction-cost barriers, fair use has also
historically responded to other market imperfections such as beneficial
externalities that a copyist’s work will generate, wealth effects that make
parties’ willingness to buy or sell unreliable guides to utility maximization
andthe presence of nonmonetizable interests (Gordon, 1982; Loren, 1997).

This analysis has implications for policy in individual cases. If a defendant
faces market failure with copyright, then there is a good argument (if not a
complete one) for not enforcing the copyright against him. Thus, it can be
argued that fair use has evolved as an equitable response to market failure, as
a way to ensure that socially desirable uses will not be blocked (Gordon, 1982).

11. Some Fair Use Applications

For example, consider photocopying by individual scholars. The transaction
costs involved in contacting a copyright owner for permission to photocopy
might well outweigh the benefit the scholar expects to reap. In such a case,
enforcing the copyright would merely eliminate the photocopying without
generating any license fees for the copyright owner. On the other hand,
granting fair use to the scholar would not impair the copyright owner’s
potential income stream and would allow a socially beneficial use to go forward
that transaction costs barrier would otherwise have blocked. At the same time,
one must take into account the dynamic possibility that even without fair use,
institutional responses such as compulsory licensing (Gordon, 1982) and
voluntary copyright collectives (ibid., Besen, Kirby and Salop, 1992; Merges,
1996) might emerge to reduce transaction costs and relieve market failure.
The market failure approach is consistent with the great bulk of fair use
precedent andin recent years this analysis has found its way into judicial
opinions. However, the source and type of market failure can vary markedly.
For example, while fair use for academic photocopying might be supported by
the high transaction costs associated with a large number of potential users, fair
use for book reviews and parodies requires a different analysis (Gordon, 1990;
Posner, 1992; Yen, 1991b). Since the critic or parodist has no trouble
identifying the copyright owner, we must look for an account of market failure
to such things as holdout problems, wealth effects (Gordon, 1990, 1997),
commodification difficulties (Gordon and Postbrief, 1998), externalities (Loren,
1997); Gordon, 1982), redistribution (Merges, 1997) and informational
asymmetries.
12. Conclusion
Of the many intriguing and unsolved questions remaining to be investigated,
perhaps the most important unexamined area is the cost of exclusivity in
expression. It is usually assumed that because copyright does not give
exclusivity in ideas, or over useful objects’ utilitarian aspects, its monopolies
impose fairly low cost. As a result, copyright is remarkably easy to obtain and
subsists for a relatively long time.

Under United States law, for example, copyrights last, typically, for the life
of the author plus seventy years. By contrast, utility patents typically last twenty
years or less. Also, federal copyright subsists immediately as soon as even a
minimally creative expression is written down (or otherwise fixed in concrete
form) and the investiture of copyright occurs without any requirement of
government oversight. Even when claimants do apply to federally register their
copyrights, their applications for registration need not demark the boundaries
of their claims with any specificity. Patents, by contrast, typically issue only
after a governmental entity has examined the specific claims made andonly if
the invention passes stringent tests of nonobviousness and novelty. Given the
increasing economic importance of today’s copyright industries, the assumption
of low-cost copyright monopoly must be re-examined. The easily-granted,
long-lived copyright may prove more costly than usually expected.

 


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