Relevant markets for copyrighted works.

• Author: Stadler, Sara K.

1. INTRODUCTION II. THE LANGUAGE OF MARKETS A. Antitrust Law B. Copyright Law III. THE RELEVANCE OF MARKET DEFINITION TO COPYRIGHT LAW A. Tinkering with Fair Use B. Rebuilding the Copyright Entitlement IV. CONCLUSION I. INTRODUCTION

   Much of copyright scholarship can be described as an effort to confine an increasingly broad entitlement. I have argued elsewhere that copyright law no longer can afford to satisfy the actual expectations of creators, but should seek to satisfy their reasonable expectations instead. (1) While observers might disagree as to what sorts of expectations are reasonable, it seems clear enough that creators reasonably may expect to be monopolists in at least some markets for copies (2) of their works. The difficulty comes in defining the market or markets in which copyright owners can claim exclusivity. But this is nothing new. Every argument that X should be beyond the reach of copyright law is an argument that X does not harm the copyright owner, or that X benefits the public more than it harms the copyright owner. We know by now what causes the greatest harm to copyright owners: unauthorized works that "fulfill[ ] the demand for the original," (3) or, in economic terms, market substitutes. In the end, is not every argument about the proper reach of copyright law an argument about copyright markets?

   In this Article, I explore how copyright law might look if it learned to speak the language of markets. I locate that language in antitrust law because for antitrust scholars, a market is a thing that can be observed and described in familiar terms. The calculations may be complicated, but the concept is straightforward enough: a "relevant market," in antitrust terms, is "composed of products that have reasonable interchangeability for the purposes for which they are produced--price, use and qualities considered." (4)

   There is no such language of markets in copyright law, and as a result, when copyright scholars write and speak about markets, it is difficult to know exactly what they mean. Most often, scholars use the word "market" as courts do--that is, to refer to an opportunity for profit that should belong to the copyright owners (5) (as in "the potential market for or value of the copyrighted work"). (6) But this simply means that the market, in copyright terms, is nothing more than the reach of the copyright grant itself. (7) There is no such thing as market definition in copyright cases because courts almost never find it necessary to define the scope of the entitlements they are asked to enforce. (8) Further, even if they did, any markets they described would look nothing like the relevant markets an antitrust scholar might define. As the Ninth Circuit Court of Appeals put it, "[t]he relevant market for determining the ... copyright grant is determined under ... copyright law," while "[t]he relevant market[ ] for antitrust purposes [is] determined by examining economic conditions.... These are separate questions, which may result in contrary answers." (9)

   For many copyright scholars, this is precisely as it should be. (10) Some oppose the definition of relevant markets in copyright cases on the ground that it simply is not feasible: The value of creative products is so subjective, they argue, that requiring courts to measure demand for (and interchangeability of) those products would be "often impossible," (11) either because there are an "infinite" number of substitutes for copyrighted works (12) or because there are no substitutes at all. (13) (Or both.) (14) Other scholars argue that while it might be possible to define markets for copyrighted works, it might not be desirable. David McGowan has argued that a focus on relevant markets "will not do for copyright purposes" because unlike antitrust law, copyright law is interested not only in preventing monopoly, but also in promoting product diversity (presumably, from a diversity of producers). (15) He writes: "Were Sega [of Sega Enterprises Ltd. v. Accolade, Inc.] (16) a monopolist in a market with highly elastic supply, for example, antitrust would not be concerned, but copyright would ... because innovation requires investment...." (17) Thomas Cotter, for his part, argues that requiring courts to define markets for copyrighted works simply would be too costly, even "extravagant," at least in routine copyright cases. (18)

   While Cotter certainly is correct that "[t]he process of defining markets can be laborious," (19) none of the foregoing arguments adequately justifies the "field of dissonance" residing "[a]t the border of intellectual property monopolies and antitrust markets." (20) Copyright is not the exception to the antitrust rule. To the contrary, as I have argued, it may make the most sense to view copyright as a species of unfair competition law. (21) In this Article, I take a step toward this goal by seeking to identify at least some of the relevant markets for copyrighted works. In Part II, I describe and contrast the ways in which antitrust law and copyright law talk about markets. In Part III, I explore how copyright law might look if courts defined copyrights as rights in markets, using antitrust analysis to draw the boundaries of these entitlements. I conclude by observing that this inquiry has interesting implications not only for copyright law, but also for competition law-including the law governing the competitive use (and abuse) of intellectual property.

2. THE LANGUAGE OF MARKETS

   1. Antitrust Law

      Antitrust law is concerned with the exercise of market power, which Herbert Hovenkamp has defined as "the power to raise prices above competitive levels without losing so many sales that the price increase is unprofitable." (22) Because a firm can maintain higher prices, or not, depending on its share of the market, market definition is critical to the inquiry into market power. (23) If the market is defined narrowly, for example, an individual firm is likely to enjoy a larger share than if the market were defined more broadly.

      Consider the landmark case of United States v. E.I. du Pont de Nemours, (24) in which the defendant, du Pont, was charged with dominating the cellophane market. (25) In determining whether cellophane was, indeed, the relevant market, the Supreme Court applied this "constant" test: while the boundaries of markets necessarily vary with "the part of commerce under consideration," the Court wrote, an antitrust market is "composed of products that have reasonable interchangeability for the purposes for which they are produced-price, use and qualities considered." (26) In other words, "[w]hat is called for is an appraisal of the 'cross-elasticity' of demand in the trade" (27)--that is, the degree to which consumers are able (and willing) to switch to substitutes. (28) In du Pont, because the Court believed cellophane to be reasonably interchangeable with other products in the flexible packaging market, that market--and not cellophane--was the relevant market for the purpose of inquiring into market power. (29) During the relevant period, "du Pont produced almost 75% of the cellophane sold in the United States," but it produced only 17% of "flexible packaging" materials. (30) Thus, the definition of the relevant market determined the outcome of the case, for a market share of 75% tends to indicate the presence of market power, while a market share of 17% does not. (31)

      "Industrial activities cannot be confined to trim categories," (32) but they can be analyzed with some degree of precision. Courts conduct this analysis in a number of ways. First, as in du Pont, some courts simply make judgments about elasticities of demand and supply after receiving the evidence and taking the testimony of such people as product engineers, sales representatives, purchasing managers, and industry experts. (33) Other courts conduct a more structured inquiry. In asking about the existence of "submarkets," (34) for example, the Supreme Court in Brown Shoe Co. v. United States (35) weighed the facts against a list of "practical indicia" including "unique production facilities, distinct customers, distinct prices, ... and specialized vendors." (36) Finally, courts in merger cases find their structure in the Horizontal Merger Guidelines (37) issued by the Antitrust Division of the Department of Justice and the Federal Trade Commission, two federal bodies charged with enforcing the antitrust laws.

      Under the Guidelines, one begins with the product sold by the firm at issue and asks "what would happen if a hypothetical monopolist of that product imposed at least a 'small but significant and nontransitory' increase in price, but the terms of sale of all other products remained constant." (38) If that price increase (say, five or ten percent) (39) would cause customers to purchase other products instead, then the product being tested has reasonable substitutes. If a product has reasonable substitutes, a market including only the test product is too narrowly defined. To broaden that market, one adds "the product that is the next-best substitute" and performs the test again. (40) The exercise continues until the hypothetical monopolist can sustain its price increase-that is, until the test product has no reasonable substitutes within the "group of products ... identified." (41) The relevant product market is "the smallest group of products that satisfies this test." (42) Geographic markets are defined in much the same way. (43)

      In theory, the exercise is fairly straightforward. Hovenkamp provides a nice example in his antitrust treatise, in which he seeks to identify the relevant market for the products manufactured by the passenger car division of Ford Motor Company. (44) After testing markets with hypothetical price increases, he concludes that the relevant product market would be "passenger cars" because a hypothetical monopolist in that market could sustain a $1000 price increase for a significant period of time...