The Case Against Intellectual Property
by Michele Boldrin (University of Minnesota) and David K. Levine (UCLA)
American Economic Review Papers and Proceedings, v92, n2 (May 2002): 209-12
--Summary by James Bessen
(Research on Innovation and MIT Sloan, visiting)

This short and important paper may seem puzzling or disturbing to legal and economic specialists in intellectual property. And for good reason: it challenges some of their most basic assumptions.

Boldrin and Levine begin by recognizing the appeal of the common argument that property rights provide strong incentives to innovate. “If property rights provide good incentives for the production of potatoes, they must also provide good incentives for the production of ideas.” This argument, they agree, is appealing and sensible.

However, they go on to point out an often overlooked feature of copyrights and patents: these systems do not simply confer rights to own and sell intellectual property; they also confer rights to control the subsequent use of that property. “When you buy a potato you can eat it, throw it away, plant it, or make it into a sculpture. Current law allows producers of CDs and books to take this freedom away from you. When you buy a potato you can use the ‘idea’ of a potato embodied in it to make better potatoes or to invent French fries. Current law allows producers of computer software or medical drugs to take this freedom away from you.” The authors consider this discrepancy a distortion of basic property rights, a kind of “intellectual monopoly.”

Generally speaking, the initial sale of a commodity typically captures the value of its subsequent uses. With all other commodities, economists assume that the normal operation of the market allows property owners to realize this value in the sale price. For ideas, however, this normal market function is presumed to fail; instead, the copyright or patent holder enjoys a so-called downstream monopoly. In the case of normal markets, economists usually agree that such monopolies are socially detrimental.

Boldrin and Levine argue that the singling out of intellectual property has been justified on an extreme assumption—that it costs exactly nothing to reproduce ideas. If this is the case, then the first purchasers of intellectual property will not be willing to pay enough to cover the costs of developing the embodied ideas—why pay for something when you can use it for free?. But Boldrin and Levine argue that in practice, it does cost something to reproduce ideas, although this cost may be small. This is the scenario they use in their model. With a small, positive reproduction cost, the first sale of an intellectual property may, in fact, generate sufficient profits to cover development costs. In other words, the difference between “zero” costs and “small” costs of reproduction may be far greater than one might assume.

Some readers will undoubtedly find Boldrin and Levine’s model also rather extreme. The authors readily admit that their preferred scenario arises only in some circumstances, while in others competitive profits will indeed be insufficient to cover development costs.

Nevertheless, Boldrin and Levine point out that downstream monopoly rights are often a poor policy solution to such a problem, one that bears social costs beyond those commonly recognized in much economic analysis. Typical economic models recognize that intellectual monopolies are inefficient because they generate what economists call “deadweight” losses. These losses arise because monopolies charge prices that are higher than are socially optimal. The high prices reduce demand, which in turn leads monopolists to produce less than is socially optimal. But Boldrin and Levine argue that monopolies do “collateral damage” in a number of other ways, and that some of this damage may be much larger than deadweight losses. When innovations build cumulatively one on another, monopoly rights can suppress subsequent innovation. Monopolies also encourage so-called “rent seeking” manipulation of the political and legal systems, as is the case with the music industry.

Boldrin and Levine also point out a form of inefficient behavior that arises when there exist non-infringing substitutes for a protected product. For example, different firms may offer equivalent cholesterol-lowering drugs that are patented and non-infringing. The R&D investment to produce such “me-too” products is socially unnecessary. This development effort could be put to more socially beneficial ends if competitors could produce generic versions of the initial cholesterol-lowering drug.

This paper has provoked strong reactions—some supportive, others antagonistic (see “Was Naptster Right?” ). Either way, it is a healthy tonic, for it reminds us that no matter how often economists make the same assumptions, the assumptions are only as good as the empirical evidence that supports them.

See Also

Boldrin, Michele and David K. Levine. “Perfectly Competitive Innovation,” Working Paper.

2003. Verbatim copying and distribution of this entire article for noncommerical use are permitted provided this notice is preserved.

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