Elementary and Persistent Errors in the Economic Analysis of Intellectual Property

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The literature on the economic analysis of intellectual property rights evidences a broad scholarly consensus on a number of central and important issues. First, intellectual property rights enable economic actors to capture some of the benefits of the investment they make in establishing a good reputation, creating expressive works, and inventing new and improved technology. Absent intellectual property rights, copiers are free to take for themselves a significant part of the economic benefit generated by these types of investment and to undermine the incentive to make these investments in the first place. Second, the investment activities induced by intellectual property rights-developing a positive reputation with consumers, creating expressive works that consumers want to read, view, or hear, and developing improved technologyare efficient investments up to the point that consumers are willing re efficient investments up to the point that consumers are willing to pay for their fruits. Third, a decentralized system of incentives such as that created by a system of intellectual property rights will over time produce results better preferred by consumers than will any kind of centrally directed, subsidy system. Fourth, intellectual property rights systems have costs, costs involved in identifying, defining and enforcing the subject matter of the rights. Fifth, the intellectual property regimes of the United States, in particular, and of the developed economies are, as a general matter, economically sensible, no matter what particular details may concern a particular author. Even Justice Stephen Breyer, that once youthful Harvard skeptic,1 has said that the issue is not whether to have intellectual property rights, but what form they should take.2

Scholars made considerable progress over the last century understanding the economics of intellectual property rights.3 Yet, much remains to be done. There is ample room for additional progress in the literature. Indeed, it seems likely that this progress will result in part from the work of the scholars who assembled for this conference.

A continuing problem is that the literature contains a number of elementary but persistently repeated errors.4 The literature, by many different authors from a number of different fields and with different perspectives, has over a long period of time not infrequently (1) analyzed intellectual property rights on the assumption that they confer an economic monopoly on their owner, (2) analyzed intellectual property rights one at a time, rather than as part of a system, (3) analyzed the rights as issued and ignored the recontracting possibilities, and (4) tended to consider only a limited number of the possible policy variables available in the design of intellectual property rights. This Essay will discuss each of these four errors.

The first of these errors-the monopoly error-is a different type from the other three. It has been the cause of much unnecessary complication and distraction for an enterprise that is quite difficult enough to begin with. The other three are errors of oversimplification, errors that might be methodologically useful if they helped lead to clearer but relevant analysis. Unfortunately, their simplification comes at a high cost-a lack of reality.

I. INTELLECTUAL PROPERTY RIGHTS ARE ECONOMIC MONOPOLIES5

Numerous authors begin their analysis of intellectual property rights with the assumption that the important case for analysis is the one in which the owner of an intellectual property right possesses an economic monopoly. Not just a monopoly in the sense of an exclusive right-an intellectual property right, like all property rights, is an exclusive right which enables the owner to exclude others from the use of the subject matter of the right-but a monopoly in the sense that the owner of an intellectual property right is protected from competition and able to sell into a market with a downward sloping demand curve. …