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
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
paper has provoked strong reactions—some supportive, others antagonistic
). 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.
Michele and David K. Levine. “Perfectly
Competitive Innovation,” Working