When someone speaks of "the law and economics of intellectual property rights" (IPRs), an image along the lines of the following diagram is apt to come to mind:
This is the basic illustration of monopoly price and output, familiar from introductory microeconomic texts. It is often used to explain the effects of IPRs, with the twist that, in this case, monopoly is good because it elicits desired investment in new intellectual creations.
Critics of law and economics dispute the proper characterization of this diagram and all that it represents. Some say it is highly simplistic, even misleading; others deem it an abomination, as wrong for its normative assumptions and implications as for its positive misrepresentations of economic reality.
Critics might be surprised to learn how many within the economics trade agree with them. Within economics, and even law and economics, many scholars have been working assiduously to unpack the assumptions, and to elaborate the conditions, behind diagrams such as this one. The past thirty to forty years has produced an eclectic and open-ended strain of economics that parallels, and in some ways rivals, neoclassical economics. The New Institutional Economics ("NIE") appears with increasing frequency in the law and economics literature. This brief Paper explains why it also has a central place in research on IPRs. To convey a sense of the applicability of the NIE to IPRs, I begin with a critique of the basic microeconomic diagram we started with.
1. UNPACKING THE SIMPLE DIAGRAM: OF PRODUCTS AND MARKETS
The diagram follows the conventions of the economic literature on IPRs, which customarily views property rights and product markets as coextensive. Most work in this genre assumes (however implicitly) that one, and only one, property right covers the entirety of a marketable product.
This is not always an accurate picture. A commercially viable product will often be assembled from a number of components. One or more of these components may be covered by IPRs, but it is not always true that a complete product will be covered by one, and only one, comprehensive IPR. Complex, multi-component products are the norm in many industries (e.g., autos and consumer electronics), and individual patents often cover only a single component or sub-component. In the "copyright industries," a single, comprehensive copyright often covers a discrete product, such as a novel or scholarly monograph. Nonetheless, multi-component works are far from uncommon. Indeed, motion pictures, sound recordings, and magazines all have multiple "components" or inputs.
Often, then, there is no simple "one-to-one" mapping of products and property rights. Some components may not be subject to proprietary rights. Others may be, but the rights will be of different types (patents and copyrights), scopes, and durations. This means that, at the least, the simple monopoly pricing story may be inaccurate. Property rights may have little effect on the market, or they may create "monopolistic competition," a hybrid market structure midway between monopoly and perfect competition. In the end, IPRs may well have an effect on price, entry, and the like. But it will likely not be the simple, straightforward effect of creating a monopoly over a discrete product.
II. COORDINATION, TRANSACTIONS, INSTITUTIONS
My critique of the simple diagram we started with boils down to this: it assumes a "one-to-one mapping" between property rights and markets, and this is too simple. Multiple, overlapping property rights often lie behind economic markets. Especially where rights are held by different firms, this entails some coordination among rightsholders before a product can be sold on a market.' This need for coordination opens the door for analysis in the spirit of NIE.2
To apply NIE concepts to IPRs, we first need to understand the basic building blocks of the theory. …