Public Goods 1. Definition: Goods that do not get used up when consumed. In other words, one person’s consumption of a good doesn’t reduce anyone else’s potential consumption of the same good. 2. Examples: Ideas, television broadcasts, national defense. 3. Obviously, these are not physical items that get used up. Instead they are usually ideas and artistic expressions. 4. They are at the core of the Information Age Economy, since information is a public good.

Public Goods (cont.) 1. Some definitions of Public Goods claim that consumers can not be excluded from using them. Known as Non-excludability. 2. Some Public Goods, such as broadcasting, or national defense, appear to have this characteristic. 3. This misses the point. Any product for which consumers can not be excluded from using, e.g., apples, will give producers no incentive to produce. 4. The Demand for Public Goods is the vertical sum of individual demands.

Vertical Addition of Demands Q Q1 Σ D D3D3 D2D2 D1D1 P1P1 P3P3 P2P2 P4P4

Titles and Reproductions 1. Book titles can be thought of as public goods, but the physical copies of a single book title are private goods that embody a public good. 2. Several questions arise: how many titles are optimal to publish? How many copies of each title would be optimal? How do competitive markets work? Monopolies? Finally, is it possible to produce public goods efficiently?

Q Q1 Q2 Σ D P1P1 P3P3 P2P2 P4P4 In principle, a perfectly discriminating monopolist can produce efficient amount of public good. S

1.Reproductions of a single Title are Private Goods 2.Seller of the Reproductions can not appropriate the entire potential value of the reproductions since he is not a perfect price discriminator. 3.With a single price for the reproductions, too few reproductions are produced (Q*-Qm). One component of lack or appropriation (area 7 in figure). 4.Consumers of the reproductions get surplus, which is another loss of appropriation for the reproduction seller. (1+2 in figure) The Market for a Title

number of copies of a title MC of printing Pm Qm MR D Q*

Market for Titles 1. Because appropriability for reproductions of any title is imperfect, the sellers of titles can not achieve the vertical sum of demands (perfect discrimination demand in next figure). 2. Instead, the best the sellers can do is some distance below the vertical sum of individual demands (attainable demand curve in the next figure). 3. This leads to too few titles being produced relative to the ‘ideal’.

number of titles written MC of writing another title Pm Qm Perf Discrimination Demand for titles Q* Market Demand for Titles Attainable Demand for titles Q**

Copyright Tradeoffs This leads to two tradeoffs: –Under-consumption of individual titles. –Underproduction of titles. This same tradeoff exists in Copyright. Copyright exists to give creators of ‘artistic’ works the ability to generate revenues. The theory is that without copyright, competition in selling reproductions of a title would drive the price down to the marginal cost of producing a reproduction. Competition would also drive the (economic) profits down to zero, leaving no money with which publishers can pay the author.

Copyright Tradeoffs It isn’t clear, however, that competition leaves no payment for the author. Arnold Plant argued that being first gave enough of a head start that sufficient profits could be earned to allow authors to receive optimal remuneration. (Ex. English authors in the US market). The lead from being first is, with current technology, unlikely to allow much profit.

Optimal Copyright The figure on the next page illustrates optimal duration of copyright. It contrasts the gains from lengthier copyright (the value of additional works created) against the harms (unnecessary loss of consumer surplus)

An Example

Actual Copyright Life of the author plus 70 years ‘Work for hire’ movies, games?, 90 years. Is this too long? –Creative commons members say ‘yes.’ –17 economists say ‘yes.’ –Mark Twain says ‘no’. In fact, no one knows if it is too long.

Fair Use There is in the law an attempt to balance the interests of copyright holders and those of users. Fair use is a defense to a claim of copyright infringement. It allows copying in instances when the copying appears not to be hurting the copyright owners revenues. Betamax Case said home videotaping was fair use, and thus home videotaping was allowed.

Fair Use 4 factors –Amount of the copyright product that is copied. –Nature of the Copyright product (commercial versus academic or scholarly. –Nature of the use of the copied product –Impact on the revenues of the copyright holder. Last factor is the most important.

Potential Impacts of File-Sharing Substitution effect Sampling – Exposure impact Indirect appropriability Network effects

Potential Impacts of File-Sharing Substitution effect –Copy is a substitute for a purchase original. –After downloading, the individual does not purchase since he already has possession of the product. –This impact can only be negative.

Potential Impacts of File-Sharing Sampling – Exposure impact –Consumers download files in order to determine which songs they like best. They then go and purchase the song they like. This allows them to get more value from every CD purchased. –It has normally been assumed that this would increase sales. –Because they get sated with a smaller number of CDs, it might decrease the number of CDs they purchase. –Candy bar story. –Example of cable television and hours viewing.

Indirect Appropriability Basic Idea: Producer Can Generate Revenues from those making unauthorized copies. Consumers who make duplicates are willing to pay more for originals since they get value from making duplicates. Producer can charge more for originals, thus indirectly appropriating some of the value in the copies.

Potential Impacts of File-Sharing Network effects –Exist when the value of a good to consumers increases because other consumers use the same good—example of telephones. –Might exist for songs or movies. Do consumers of these products care how many others consume the same product? –Downloaders, therefore, by consuming the product, even if they do not purchase it, would increase the value to those who purchase, possibly increasing the revenues of the industry. –That is the theory, at least.

Diagram of Copying Impact D V D H Q P

Copying Outlawed D H Q P

Diagram of Copying Impact

Impact of Piracy This idea of indirect appropriability has been examined in a least one market. It appears that unauthorized copying has benefited copyright owners in the case of photocopying.

Evidence on Price Discrimination and Indirect Appropriability Libraries that: Price Discriminate359 Don’t Price Discriminate3521 Ratio of Book to Journal Expenditures, US Academic Libraries

Continued Dependent variable ConstantCitesNon-Profit Dummy Age of Journal R-square P lib /P Ind [1.99].65 [4.14].17 n=80 P lib /P Ind [2.14].578 [3.36] -.16 [1.01].17

Application to Napster Can indirect appropriability work in Napster-like environment? Problem: large variability in the number of copies made from each original, and identifying at time of sale which originals are going to be duplicated. Large scale Napster copying would seem almost certainly to significantly harm copyright owners. Would work better if Napster had required upload credits to be earned before downloads were possible. Still, Napster is easier to control than Gnutella based systems.

Impact of Copying So Far

Impact of Law Suits

Reaction to Copying Shutting down Napster. Legal action against other networks. Threatening to prosecute users who make copyrighted materials available to others. ‘Spoofing’ and other technologies to make the trading in copyrighted goods more difficult.

Proposals for Alternative Systems Actions of the Record Industry seem rather draconian to some. An alternative, based on a compulsory license, has been proposed. The compulsory license would require copyright owners to allow anyone to make digital copies of their works. In return, a pot of money would be established to pay copyright owners for this right. The pot most likely would come from a tax on ancillary products, such as blank discs, stereo equipment, Internet Service Providers, and so forth. A copyright Board or Panel would determine the amount of these taxes, and who would pay.

Evaluating these Proposals Two basic questions that need to be faced in any such system. –How much revenue should be generated? –Who is to pay? –Who gets the revenue? Markets normally determine prices, and consumers vote with their dollars. How would a Board attempt to determine the correct number of titles to support, which titles to support, which products to tax, how much to tax them? How can we prevent ‘authors’ from gaming a system to increase their payouts?

Other Issues Digital Rights Management (DRM) –Copyright owner can imbed code into software that will monitor use and charge accordingly. It can also prevent copying. –Copyright owner can virtually costlessly collect revenues from users. –It might be the most efficient mechanism since it approaches perfect price discrimination.

DRM This has led to a contentious debate among academics. –Question: Is this protection ‘too strong’? Too much power to copyright owner? –Does it remove or kill Fair use ? –Does it eliminate free speech? –Does it reduce the creation of copyrighted materials?