Thursday, March 22, 2012

The Economics of Copyright

The basic tradeoff of copyright law is well-understood: It seeks to encourage investment in creation and dissemination of new works, by providing protection of intellectual property. But what is the economic evidence on whether the amount of protection provided correct and appropriate?  Ruth Towse provides a nice overview in "What We Know, What We Don't Know, and What Policy-makers Would Like Us to Know About the Economics of Copyright," appearing in December 2011 issue of Review of Economic Research on Copyright Issues.

As Towse writes: "Governments the world over are looking for evidence on the economic effects of copyright law, the more so since the increased emphasis in government growth policy on the role of the creative industries has led to the justification of copyright as a stimulus to the economy. What they usually get in response to calls for evidence are persuasive statements from stakeholder interest groups that have sufficient funds for lobbying." Here are some lessons that Towse draws from the existing evidence:

Copyright terms are too long
"Almost all economists are agreed that the copyright term is now inefficiently long with the result that costs of compliance most likely exceed any financial benefits from extensions (and it is worth remembering that the term of protection for a work in the 1709 Statute of Anne was 14 years with the
possibility of renewal as compared to 70 years plus life for authors in most developed countries in the present, which means a work could be protected for well over 150 years)."

Extending copyright protection retroactively never makes sense
"One point on which all economists agree is that there can be no possible justification for retrospective
extension to the term of copyright for existing works since it defies the economic logic of the copyright incentive, something that nevertheless has been enacted on several occasions. ... Perhaps the most notorious case was the CTEA (Sonny Bono or Mickey Mouse) extension in the USA [the Copyright Term Extension Act of 1998] which was also followed up by the European Union, thereby handing out economic rents to the rich and famous of the entertainment world and, more likely, to their descendants."

Copyright is too one-size-fits-all
"[T]he scope of copyright is very broad and nowadays covers many items of no commercial value that were never intended to be commercialized, as is the case with a great deal of material on social-networking sites. This raises the question of the incentive role of the scope of copyright since it offers the same ‘blanket’ coverage for every type of qualifying work. In general, the lack of discrimination in this ‘one-size-fits-all’ aspect of copyright is another subject on which economists are agreed: in principle, the incentive should fit the type of work depending upon the investment required, the potential durability of the work and so on - computer software and operas do not have much in common. This applies as much to the term as to the scope of copyright; some works retain their value over a very long period while others lose it very quickly. The rationale for this lack of discrimination, however, is that ‘individualizing’ incentives would be prohibitively costly both to initiate and to enforce. As it is, that copyright is recognized to have become excessively complex and therefore very costly for users and authors.

Copyright will often be managed collectively
"For many rights, such as the public performance right, individual authors and performers cannot contract with all users and the solution is collective rights management. That minimizes transaction costs for both copyright holders and users of copyright material but introduces monopoly
pricing and blunts the individual incentive — another trade-off. ... Most economists agree that collective rights management is necessary in those circumstances in order for copyright to be practicable."
Only superstars profit much from copyright
"Research on artists’ total earnings including royalties shows hat only a small minority earn an amount comparable to national earnings in other occupations and only ‘superstars’ make huge amounts. Copyright produces limited economic rewards to the ‘ordinary’ professional creator; on the other hand, what the situation would be like absent copyright protection cannot be estimated."

Copyright can encourage protecting rents ahead of actual creativity
"[E]conomists have long had concerns that copyright has a moral hazard effect on incumbent firms, including those in the creative industries, by encouraging them to rely on enforcement of the law rather than adopt new technologies and business models to deal with new technologies. ... It is well-known that creative industries have spent huge amounts of money lobbying governments for increased copyright protection both through strengthening the law and stronger enforcement, not only
within national boundaries but also through international treaties."

A Policy Proposal: Renewable Copyright
"Copyright could be become more similar to a patent by having an initial term of protection of a work, say of 20 years, renewable for further terms. ...  The advantage of this is twofold: it enables a ‘use it or lose it’ regime to function and, more relevant to the economics of copyright, it enables the market to function better in valuing a work (the vast majority of works, as we know, are anyway out of print because they are deemed to have no commercial value while the  copyright is still valid); knowing that renewal would be necessary would also alter contractual terms between creators and intermediaries, thereby improving the efficiency of contracting and the prospect of fairer contracts."

In my own Journal of Economic Perspectives, Hal Varian wrote a nice article on "Copying and Copyright" in the Spring 2005 issue. Hal discusses useful insights about the appropriate height, width, and length of copyright, and how the existence of copyright affects pricing decisions. I found especially memorable and amusing his pocket overview of the U.S. history of copyright: that is, ignoring foreign copyrights through much of the nineteenth century, because there were relatively few U.S. authors with an international reputation to protect, and pirating works from the United Kingdom was free. Here's Varian (footnotes omitted):

"The U.S. Copyright Act of 1790 was modeled on the Statute of Queen Anne, and it offered a 14-year monopoly to American authors, along with a 14-year renewal. Note carefully the emphasis on American. Foreign authors’ works were not protected by the American law. In contrast, many other advanced countries, such as Denmark, Prussia, England, France and Belgium, had laws respecting the rights of foreign authors. By 1850, only the United States, Russia and the Ottoman Empire refused to recognize  international copyright.
"The advantages of this policy to the United States were quite significant: it had a public hungry for books and a publishing industry happy to provide them. A ready supply of market-tested books was available from England. Publishing in the United States was virtually a no-risk enterprise: whatever sold well in England was likely to do well in the United States. 

"American publishers paid agents in England to acquire popular works, which were then rushed to the United States and set in type. Competition was intense, and the first to publish had an advantage of only days before they themselves were subject to competition. As might be expected, this unbridled competition led to very low prices: in 1843, Dickens’s Christmas Carol sold for six cents in the United States and $2.50 in England.

"However, there were some mitigating factors. Publishers sometimes paid well-known English authors for advance copies of their work, since priority was critically important for sales, and, according to Plant (1934), some English authors received more money from American sales, where they held no copyright, than from English sales, where copyright was enforced.

"Throughout the nineteenth century, proponents of international copyright protection lobbied Congress. They advanced five arguments for their position: 1) it was the moral thing to do; 2) it would help stimulate the production of domestic works; 3) it would prevent the English from pirating American authors; 4) it would eliminate ruthless domestic competition; and 5) it would result in better-quality books.

"The rest of the world was far ahead of the United States in copyright coordination. In 1852, Napoleon III issued a decree indicating that piracy of foreign works in France was a crime; he was motivated by the hope of reciprocal arrangements with other European countries. His action led to a series of meetings, culminating in the Bern conventions of 1883 and 1885. The Bern copyright agreement was ratified in 1887 by several nations, including Great Britain, France, Germany and Spain—but not the United States.
It was not until 1891 that Congress passed an international copyright act.

"The arguments advanced for the act were virtually the same as those advanced in 1837. However, the intellectual climate was quite different. In 1837, the United States had little to lose from copyright piracy. By 1891, it had a lot to gain from respecting international copyright, the chief benefit being the reciprocal rights granted by the British. On top of this was the growing pride in homegrown American literary culture and the recognition that American literature could only thrive if it competed with English literature on an equal footing. Although the issue was never framed in terms of “dumping,” it was clear that American authors and publishers pushed to extend copyright to foreign authors to limit cheap foreign competition—such as Charles Dickens.

"The only special interest group that was dead opposed to international copyright was the typesetters union. The ingenious solution to this problem was to buy them off: the Copyright Act of 1891 extended protection only to those foreign works that were typeset in the United States! This provision stayed in place until 1976."