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June 13, 2002

"Fair Use" Rhetoric Revisited — Again [8:21 pm]

(entry last updated: 2002-06-13 22:31:38)

Some of the links I posted today got me thinking (always dangerous) - so here’s another pass at Donna’s question

(See this, this and this to catch up)

Today’s Salon article (the hot link around the legal weblogs today!) got me to read Leibowitz’ Cato Institute policy paper on file sharing, Policing Pirates in the Networked Age. As others who have read both articles note, Leibowitz has some notions about digital rights management that leave people cold (see the Slashdot discussion, for example).

But, it got me thinking. Leibowitz argues that digital rights management software affords the vendor of content a new set of ways to price discriminate - for example, these vendors can sell a base CD, then sell a digital key allowing MP3 ripping, another allowing playing the CD in a portable device, another allowing use in a player hooked up to a cassette recorder, or a radio transmitter, or a CD burner, etc. In the past, all these different uses had to be covered by the single transaction of a CD sale, and those who used the CD for more than the “designed” purpose, got those uses for free.

Of course, this getting something at a price lower than you were willing to pay has always happened - economists refer to it as “consumer surplus” and it’s the area between a downward-sloping supply curve and the horizontal line drawn through the sales price of a good. Leibowitz points out in his paper that digital rights management software is essentially a way for sellers to extract this consumer surplus without having any effect on market efficiency (because it’s just extracting the surplus, the transaction still takes place - the consumer just doesn’t come out as far ahead as he would have otherwise).

Now, in the world of the Cato Institute, giving business new ways to extract consumer surplus is a good thing. But in other spheres, the extraction of this consumer surplus means a net transfer of value from consumers to firms, potentially lowering social welfare - especially in the case of digital distribution, where there are substantial cost reductions in distribution costs to be had. Traditionally, governments worry about the distribution of of social welfare, so of course the Cato Institute is happy seeing market “efficiencies” supplanting another government function.

But, more importantly to this discussion, what if we think of “fair use” as part of the consumer surplus in exchange transcations involving intellectual property? Consider “first sale” or the other elements of practical copyright application. In most (if not all) of these cases, the reason that these practices have been accepted in the courts and/or in the markets is that the transaction costs of enforcing the extraction of this consumer surplus is either onerous or implementable only through the application of restrictive mechanisms inconsistent with our notions of liberty.

If “fair use” is a kind of consumer surplus, shouldn’t we be very careful to ensure that social welfare does not suffer as new technologies are employed to take it away? When the Audio Home Recording Act enshrined fair use in law, taking it out of the common law realm, was this part of the rationale?

Maybe what we are facing is a new kind of challenge to our doctrines of copyright. In the past, new technology always meant a challenge to the value proposition of the holder of intellectual property. Maybe we need to face up to the fact that this set of technologies holds dangers not only for the owners of intellectual property, but also the buyers of it.

What do you think? I grant you, "consumer surplus" is not the sexiest idea, but the fact that it is being reallocated through the application of laws and technologies without consideration of the impacts on social welfare seems like a good starting point.

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2002 June 13 Links [9:45 am]

(entry last updated: 2002-06-13 12:16:14)

An interesting article from Salon, following up on a Cato Institute study that should get a lot of people talking (but I somehow missed the first time around), leads off today. And I discover that joelgrus has added me to his IP blogs list - thanks!

(2 items listed below)

  • Salon has an interview with Stan Liebowitz, author of a recent Cato Institute study that concluded that the only reason that Napster’s file sharing didn’t effect the recording industry more was the low penetration of CD burners in the user market and general bandwidth constraints. (More distressing, although perfectly consistent with the Cato Institute world-view, is the report’s conclusion that universal DRM merely is a mechanism for near-perfect price discrimination in IP transactions, thereby allowing IP owners to absorb all the consumer surplus in these transactions and, since the price discrimination is so good, with no effect on market efficiency). In this Salon interview, however, Liebowitz frankly admits that now he’s not sure why the recording industry isn’t being effected by file sharing. An interesting read. (A Slashdot discussion just popped up: The Economics of File Sharing
  • Following up on yesterday’s announcement of pending plans to offer (possibly) unfettered music downloads, LawMeme has put up a discussion with more links that expresses serious doubts about just how easy it will be to make copies. Of course, as Liebowitz insists in the article listed above, fair use isn’t supposed to be free, just possible - so why should anyone complain??!

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