Introduction to Intellectual
Property
Thursday, January 15, 2004
The Economic Case for IP law
Public and Private Goods
Private goods are best provided by
markets, but public goods are best
provided by government.
Criteria for public goods:


Nonrival consumption
Nonexcludability
Private Goods
Many tangible resources are private goods.
Example: Book.
Consumption is rivalrous.

If I am reading the book, you cannot read it at the
same time.
Consumption is excludable.

I can prevent others from reading my copy of the
book.
Lighthouse Example
Lighthouse is a good
to every passing ship.
Nonrival: Ship A’s use
of the light doesn’t
diminish ship B’s
ability to use it.
Nonexcludability:
Cannot fence it off or
exclude access to it.
Markets & Public Goods
Claim:

Markets do not provide optimum levels of
public goods.
Example:




Suppose a private firm built a lighthouse.
How could they collect a fee?
Therefore, the market would not provide
lighthouse service.
So government should provide lighthouse
service.
Innovation as a public good
Imagine that there
is no intellectual
property.
Should I take out a
loan to research and
develop a better
mousetrap?
Better Mousetrap
Should I build a better mousetrap?
If I build the better mousetrap without
IP, what will happen?



My design will be copied.
The imitator can charge a lower price,
because they do not need to pay off the
loan.
They will drive me out of business.
Without IP, I would be irrational to
borrow money to innovate.
Should I build a better mousetrap?
What if I can patent my better
mousetrap?




No one can copy my mousetrap without
my permission for 20 years.
So I can either build it myself without
competition, or
Grant nonexclusive rights (license) to my
design to other firms in exchange for a flat
fee or royalty, or
Sell my rights to someone else.
IP Law Creates Excludability for
Information
Rivalrous
Nonrivalrous
Excludable
Nonexcludable
Private Good
Common Pool
Good
Tariff Good
Public Good
IP Law Creates Excludability for
Information
Rivalrous
Nonrivalrous
Excludable
Nonexcludable
Land
Chattels
Fish on the
high seas
Intellectual
Property
Lighthouse
Nat’l defense
IP Law Creates Excludability for
Information
Rivalrous
Nonrivalrous
Excludable
Nonexcludable
Private Good
(Information)
Common Pool
Good
Tariff Good
Public Good
(Intellectual Property)
P2P Eliminates Excludability for
Information
P2P programs
Excludable
make legal
enforcement of
copyright in digital
information very
Rivalrous
Private Good
costly.
(Information)
Nonrivalrous
Tariff Good
(Intellectual Property)
Nonexcludable
Common Pool
Good
Public Good
The Coase Theorem
If we assume zero
transaction costs,
then the market will
produce the efficient
outcome irrespective
of the initial allocation
of entitlements.
Ronald Coase
Terminology
Transaction cost


Transaction costs are the costs of reaching
agreement.
Transactional lawyers = transaction costs!
Efficiency

An outcome is efficient if it produces the
greatest net benefit (benefits-costs).
Coasian case for IP rights
Could we contract?



I agree to invent a better
mouse trap.
Everyone else agrees not to
copy my invention without my
permission for a period of 20
years.
Transaction costs:
 Too many parties.
 Too costly.
 Holdout & free rider problems.
Coasian case for IP rights
What about the shrink wrap alternative?


At time of purchase, you agree not to
make copies of the book.
Privity problems.
 wrap
Subsequent sellers are not in privity.
“Shrink
agreement”
 First= sale doctrine.
agreement where
My remedy
against the first purchaser
youconsent
by
opening
the box.
insufficient.
Why?
is
Therefore, government should
create IP property rights
Without government intervention, the
market will lead to underinvestment in
innovation.
The extent of intellectual property
rights should be set at?


The price that would be set in a no
transaction cost bargain.
The level that will produce the optimum
level of innovation.
One final note on the economics
of IP
Does IP create a monopoly?


There is a “monopoly” right in the writing
or invention.
But this is not the same thing as an
economic monopoly in a line of commerce.
 Why not?
 Because of competition with similar products.


Books. Why not $100 for latest Stephen King novel?
Auto. Why not $100,000 for a Mini Cooper?
 IP rights rarely create true monopolies.
End