An industrial organization approach to copyright law.

Author:Abramowicz, Michael

TABLE OF CONTENTS INTRODUCTION I. COPYRIGHT AND THE ECONOMICS OF PRODUCT DIFFERENTIATION A. The Salop Model 1. The Setup 2. The Results 3. The Counterintuition: Pecuniary Externalities B. Modifying the Salop Model 1. Variability in Consumer Surplus 2. Additional Modifications 3. A Simulation Study II. ADDITIONAL ECONOMIC AND NONECONOMIC CONSIDERATIONS A. Other Economic Considerations 1. Distribution a. Producers vs. Consumers b. Winner-Take-All Markets c. Positional Goods 2. Externalities a. Information Externalities b. Congestion Externalities c. Network Externalities B. Differentiation and Democracy 1. Democracy vs. Economics 2. A Democratic Assessment of Production Incentives III. APPLICATIONS AND IMPLICATIONS A. Applications 1. Peer-to-Peer Technology 2. The Copyright Term B. Implications 1. Copyright and Distributive Justice 2. Copyright Across Time CONCLUSION APPENDIX INTRODUCTION

Copyright law's paramount goal is often said to be the provision of incentives for producing new works, (1) yet the literature on copyright offers few concrete examples of how any legislatively plausible changes in copyright law would have meaningful effects on the variety of copyrighted works available to consumers. Those who favor restricting copyright's scope or duration note that authors necessarily build on the works of their predecessors. (2) Because copyright law does not protect ideas, (3) however, they can point only to peripheral categories of works that copyright law stymies, such as counter-culture Mickey Mouse cartoon strips (4) or digital sampling of existing works. (5) Meanwhile, those who defend copyright and seek to extend it bemoan the decline in profits that record companies have suffered (6) and that Hollywood may face. (7) Yet they do not name the musical groups that may be sent over the edge into bankruptcy or the movies that would not have been made if anticipated sales were slightly lower, and with good reason. In general, the works on the borderline of being created are not the ones that consumers would care about the most, and the outcome of contemporary debates about copyright law's scope will impact only those marginal works. It would thus be easy to conclude that debates on copyright law, though perhaps a useful form of intellectual exercise, matter only a bit in the real world.

Such a conclusion, however, would be unwarranted. Copyright theorists often consider trade-offs between incentives to produce new works and other values, in particular maximizing dissemination of existing works to users, (8) a trade-off that is sometimes called the incentives-access paradigrn. (9) An expansive doctrine of fair use, for example, may allow users greater access to copyrighted works, but any expansion will decrease incentives to produce new works. (10) Yet there have been few attempts to make the trade-off any more precise. In particular, scholars have not considered whether this trade-off is the same regardless of the number of works that copyright law generates. This Article argues that the greater the success of copyright law in generating large numbers of works, the more copyright law should care about access. Just because incentives are the paramount goal of the copyright system as a whole does not mean that they are the most important consideration at the margins.

Copyrighted works can serve as imperfect substitutes for one another, so the more works that exist of a particular type, the greater the number of substitutes that will exist for any particular work. The importance of incentives to produce new works is less significant when the number of existing works and the chance that a new work will be largely redundant are greater. Equivalently, the goal of disseminating existing works should be of relatively great significance in markets with large numbers of copyrighted works. A world without copyright would be an impoverished one, (11) but changes along the edges of copyright law that lead to slight reductions in the number of works produced but greater dissemination of other works could increase social welfare. Similarly, efforts to improve the ability of authors to control use and limit duplication of copyrighted works might reduce social welfare, even if they result in modest increases in the number of works.

This Article elaborates the insight that marginal copyrighted works are not likely to produce large contributions to social welfare. It does so by focusing on the economics of product differentiation, a venerable area of study in industrial organization that until very recently has received no sustained attention in copyright scholarship, (12) and limited attention in law-and-economics scholarship more generally. (13) The basic insight is a straightforward elaboration of the intuition that once a number of choices exist in a particular genre, further expansion of choice adds relatively little social value. The problem, as it is termed in the literature, is that of demand diversion, sometimes called "business stealing." (14) A producer entering a market with differentiated products cares about its own profit and ignores the effect of entry on other producers. By writing a vegetarian cookbook, I may be able to win many sales that otherwise would have gone to the 445 vegetarian cookbooks that already exist. (15) My entry into the cookbook market might thus be an example of rent dissipation, because my investment in the cookbook project is aimed in part at taking away rents (more commonly known as profits) that the authors of existing cookbooks otherwise would have enjoyed. Of course, my cookbook may offer some new recipes, improvements on existing recipes, and other features that benefit consumers, so my entry into the market might increase the total rents available. The more cookbooks of a particular type that already exist, however, the smaller this increase is likely to be.

In theory, I might rationally choose to write the cookbook even though the increase in consumer welfare is less than the cost of producing the cookbook. In such a circumstance, society might be better off if I had opened a restaurant instead of written a cookbook. (16) Though theoretically possible, the specter of overentry, that is of a greater than socially optimal number of producers entering the market, does not drive this Article's analysis. The danger of overentry, after all, is not limited to markets for copyrighted works. Perhaps we have too many restaurants, but we probably would not tolerate a "restaurant board" that would block entry in the restaurant market. (17) Such distrust in government solutions would be even more appropriate in response to a proposal for a "copyright board" that would screen new works. In addition, we may suspect that many copyrighted works produce positive externalities, making overentry far less likely to be a problem. (18)

Even if there is no overentry in markets for copyrighted works, however, this means only that existing copyrighted works produce more benefits to consumers than they cost to produce, not that copyright law itself has achieved some form of global optimality. Copyright theory cares about dissemination of existing works in addition to production of new works, therefore, a legal change that increases dissemination may be justified even if it imposes some cost by reducing the number of new works. It is hard to imagine a legal change that could reduce the number of restaurants while still leaving restaurant patrons better off. An expansive fair use doctrine, however, provides consumers greater access to existing works while decreasing producers' incentives to produce new works. (19) Copyright scholars may be correct in assuming that this is a trade-off, with the decreased production incentives counting as a social cost. (20) Demand diversion, however, reveals that a marginal decrease in the number of new works might not be as much of a cost as would otherwise appear. More concretely, demand diversion reveals that the proportional increase in the size of the market attributable to a new work generally will be greater than the proportional increase in social welfare; the 446th vegetarian cookbook is unlikely to increase consumer surplus from cookbooks by even 1/446th. Rent dissipation analysis suggests that although copyright law's paramount goal may be to increase incentives for the production of new works, this goal may not be of as much significance at the margin, and relatively more attention should be paid to ensuring dissemination. The analysis provides some support to those who argue that copyright law should provide consumers with relatively broad, though presumably not unlimited, rights to copy copyrighted works.

Demand diversion also deserves special attention in copyright law because this area presents doctrinal questions that implicate broad social welfare concerns for which the possibility of demand diversion is relevant. The courts face questions like whether copyright can protect a graphical user interface, (21) or whether one song should be found to infringe a similar but not identical song. (22) In answering close questions about the breadth of property rights, judges may consider policy ramifications such as the effects of decisions on incentives to produce new works. Copyright law is a crude instrument developed under conditions of gross uncertainty, (23) but it must be made and developed under such conditions nonetheless. As long as the copyright context, unlike many other economic contexts in which demand diversion is a concern, routinely requires judges to make decisions about the scope of property rights, judges might as well take demand diversion into account. Some judges may even intuit that it would not make much difference if society had somewhat fewer books, movies or compact discs, but squelch the sentiment, thinking they are being curmudgeonly. (24)

There is an additional reason that the phenomenon of demand diversion is...

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