From: Daniel Fabulich (daniel.fabulich@yale.edu)
Date: Fri May 29 1998 - 02:19:03 MDT
On Thu, 28 May 1998, Dan Clemmensen wrote:
> Perhaps you should each list your ideas of the costs and the benefits,
> First just name them, and then try to analyze them. I would be
> able to follow the debate more easily if you started with an
> agreed-upon list of disagreements before you continue the debate,
> but I realize I'm asking for a lot.
OK. At my website, http://pantheon.yale.edu/~dgf4/incent.html I analyze
the incentive to invent. Looking at this will make my point much clearer,
but here is my analysis in sum:
The benefit of IP enforcement is that it increases the incentive to
invent. The incentive to invent is given by the increased revenues which
an inventor receives by inventing; this value is larger under a monopoly
than under competition.
The cost of IP enforcement is twofold: first, there is the actual cost of
paying for police investigations, arrests, imprisonment, trials, and all
of that other stuff. I have argued that investigation would be
exceptionally costly over a system like TC May's BlackNet. I have also
argued that attempting to enforce the terms of a contract on someone who
has not signed the contract is economically inefficient in the long run;
Lorrey argues that simply by buying an illegal copy of the good, you have
implicitly agreed to the rules of "caveat emptor," accepting liability and
responsibility for your purchase.
Second, there is "deadweight loss" in the copy market. Deadweight loss
happens when prices are set higher than that which would be reached by
perfect competition or if the quantity is lower; if the total surplus
reached under perfect competition is the area below the demand curve and
above the supply curve, the deadweight loss is given by the total surplus
under perfect competition (the surplus we could have had) minus the area
below the demand curve, above the supply curve and to the left of the
quantity sold (the surplus we actually got). Under perfect competition,
there is no deadweight loss; but when you give someone a monopoly over a
good, deadweight loss inevitably results.
I argued that this cost alone would be larger than the benefit of IP.
Since monopolies control the entire market for their good, they must lower
the price of the good in order to increase sales beyond a certain value;
in other words, the marginal revenue for monopolies decreases twice as
fast as that for competitive firms. This means that while monopolies will
have an incentive to produce fewer products, they will still be able to
charge the higher price given by the demand curve at that quantity.
(Hence deadweight loss.) More specifically, if prices were 0, then a
monopolistic firm would produce only half as much as a competitive firm
would; 50% of the potential market would go to deadweight loss. I argued
that since prices were not actually zero, but nonetheless quite low and
nearly completely elastic, at least 40% of the copy market would be lost
to economic inefficiency.
I concluded on my website that if D was the deadweight loss in the copy
market, M the monopolistic increase in revenues due to invention, A the
competitive increase in revenues due to invention, and E the cost of
enforcement, then we should eliminate IP if the costs outweighed the
benefits, or if D + E > M - A, or A + D + E > M.
This analysis is a lot clearer with graphs. Go check out the website and
see for yourself.
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