The Economics of Intellectual Property
Definition of Intellectual Property
 Intellectual property can be defined as those expressions of human
creativity that are granted legal protection.
 Intellectual property rights are the legal rights that result from
intellectual activity in the industrial, scientific, literary and artistic
fields.
 They aim at safeguarding creators and producers of intellectual goods
and services by granting them a limited monopoly to control the use
made of those productions.
Source: The musician’s business and legal guide
Source: Creative Economy Report 2008 UNCTAD
An overview of Intellectual Property
Copyright
Branches of
Intellectual
property
Trademarks
Patents
Branches of Intellectual Property (IP)
 Copyright, patents and trademarks make up the bulk of what is know as
Intellectual property.
 Copyright, patents and trademarks are economic incentives to encourage the
production of new creative works.
 Patent allows inventors to recover the cost of investment in their inventions.
 Trademarks assure consumers about the source and the quality of goods and
services
 Copyright law protects the author with respect to his or her original works.
Branches of Intellectual Property

Intellectual property is usually dealt with under the following main headings:
 1) Literary, artistic and scientific works e.g. books are governed by laws concerning Copyright.
 2) Performances, broadcasts e.g. concerts are governed by laws concerning Related copyright.
 3) Inventions e.g. a new form of jet engine are covered by laws concerning Patents.
 4) Industrial designs e.g. the shape of a soft drinks bottle. Industrial Designs may be protected by its
own specialized laws.
 5) Trademarks, service marks and commercial names and designations e.g. logos or names
 6) Geographical indications promote commerce by informing the customer of the origin of goods and
services. This implies a certain quality, which the customer may be looking for with a unique
geographical origin, such as Champagne.
An overview of Patents
 a patent protects an invention, and grants to the owner the exclusive
rights to use his/her invention for a limited period of time.
 The purpose of a patent is to provide protection for technological
advances (inventions).
 an invention may be defined as a new solution to a technical problem .
 Example of inventions: band- aid, electric iron, safety pin, ball point
pen, telephone, etc.
An overview of Trademarks
 A trademark is a sign that identifies the goods of a given enterprise and
distinguishes them from the goods of its competitors.
 A trademark may consist of words, designs, letters, numerals or packaging,
slogans, devices, symbols, etc for e.g.The Coca-Cola Company ®,
PepsiCo, Inc. ®, Apple®, hp®
 Trademark must be distinctive and secondly it should not be deceptive.
 To be distinctive it must by its very nature be able to distinguish goods and
services.
 a trademark is deceptive when it claims a quality for the goods that they do
not have.
Copyright: the Legal framework
• Copyright is a bundle of exclusive or economic rights granted by law to
authors of original works e.g. books, songs, movies etc (Ruth Towse).
•
Copyright gives the author a limited monopoly over the reproduction,
distribution, adaptation and public performance of the his works
• The Economic rights in copyright can be licensed separately and in different markets. Some
rights are more valuable than others (Ruth Towse).
• Two types of market for products based on copyright works can be distinguished : primary
(initial sales) and secondary (reuse of published works by 3rd parties). (Ruth Towse).
• The secondary use cannot be controlled by author or the publisher (eg broadcast of a CD).
(Ruth Towse).
Copyright Diagram: the Legal framework
Copyright Tree
Public performance right
The right to make derivative works
Distribution right
Reproduction right
The right of public display
Copyright Concepts
 The author is first owner of the copyright in the work unless there is a
written agreement to the contrary
 The cornerstone of copyright protection is originality. Only “original”
works of authorship are protected by copyright. Original means
something that is not copied and minimally creative.
 A work must be “fixed” for it to be protected by copyright. What this
means is that the work must be put down in some tangible medium of
expression.
 Works that are not fixed – such as improvised speeches or performances
– are not protected by copyright.
Idea/Expression-Dichotomy
 The rule that copyright does protect ideas is called the
idea/expression dichotomy.
 Copyright protects the expression of ideas not the ideas
themselves.
 E.g. the movies star war and star trek are both based on the idea
of space travel.
 The originators of rap cannot stop others from writing rap
songs.
What are Neighbouring rights?
• Neighbouring rights (also referred to as related rights) belong to performers,
record producers and broadcasters.
• These are the economic rights held by performers and record companies. i.e.
they are entitled to royalties whenever their recordings are broadcast or played
in public.
• The purpose of related rights is to protect the interests of persons and entities
who contribute to making works available to the public.
• One example is the singer or musician that performs a composer's work to the
public.
• Rights for performers and recordings as opposed to authors’ copyright in
works and songs
source: Fintage House
The diagram summarizes the difference between copyright in songs and related copyright for sound recordings
Key economic concepts (IP)
 Creative products tend to have public good characteristics.
 That is, creative products are non-rivalrous and non-excludable.
 The term non-rivalrous means that consumption by one person does not
prohibit another person also using the same product.
 The term non-excludable means that people cannot easily be stopped from
consuming the product. (e.g. national defence, street lighting)
 Markets for these products tend to fail, because once they are produced, it is difficult to
prevent those who do not pay for them from consuming them.
 They are affected by the fee rider problem ─ consumers have a strong incentive to become
free-riders
Source: Creative Economy Report 2008 UNCTAD
Key economic concepts (IP)
 If there is no mechanism for the producer to recover the costs of
investment in the product, there will be an undersupply relative
to the socially optimal level.
 This means production of creative products will be less than
market demand.
 Copyright is one such mechanism to stop free-riding and
encourage the production of certain types of products with
public good characteristics.
 Copyright is viewed as an institutional solution to the free rider
problem.
Market failure in the absence of copyright
protection
 Efficiency is maximized when markets are allowed to operate unhindered.
However, some markets fail.
 A market failure exists “where the characteristics of a market are such that its
operation will not lead to the most efficient outcome possible”.
 There are four commonly accepted situations in which market failure exists:
–
public goods – these exist where provision for one person means the good or
service is available to all people at no additional cost. Public goods are said to
be non-rivalrous and non-excludable.
Market failure in the absence of
copyright protection
− Externalities – externalities (sometimes called spillovers) occur when an
activity or transaction has positive or negative welfare effects on others who
are not direct parties to the transaction.
– Severe information asymmetries – these occur where producers have
information that consumers do not.
– Natural monopoly occurs where it is more efficient for one firm to supply all of
a market’s needs than it would be for two or more firms to do so.
 The question is, in the absence of copyright, which of these market failures are
evident?
 The answer is, absent copyright, there is likely to be a market failure because of
the public good nature of much of the material that would have otherwise
been protected by copyright.
Source: Economic Perspectives on Copyright Law Centre for Copyright Studies
Economic characteristics of recorded
music
 Is the price of recorded music heading towards zero?
 A commonly held observation that’s often overheard in music industry panel debates: ‘the
price of recorded music is heading towards zero’.
 The various arguments put forward to explain this tend to lack economic foundation.
 It important explain the economics behind the observation that the price of a unit of recorded
music is heading towards zero.
 The economic approach helps show us how recorded music has long lost any notion of being a
‘pure private good’ and now risks becoming a ‘pure public good’.
Source: Will Page (2006) Is The Price of Recorded Music Heading towards Zero?
Economic characteristics of recorded
music
 In a basic demand-and-supply analysis, an increase in supply, (caused by going
from a bricks & mortar world to an online environment of itunes), would
result in downward pressure on price.
 However, demand-and-supply analysis deals with the problem in isolation.
 This analysis focuses on the theory of public, private, common pool, toll, and
club goods.
 The economics of copyright begins with the distinction between public and
private goods.
Source: Will Page (2006) Is The Price of Recorded Music Heading towards Zero?
Economic characteristics of recorded
music

A ‘pure private good’ is a good for which two conditions hold: the good is excludable &
consumption of the good is rivalrous. That is, if I consume the good, you can't, and vice
versa.
 Intellectual property is not a pure private good: law can create excludability for
information goods, but what about rivalrousness? Consumption of information is
normally nonrivalrous.
 How do we categorize goods like recorded music that satisfy enforceability but not
rivalrousness? What about those rivalrous goods that cannot be made excludable? Two
more kinds of goods need to be added to this classification scheme:
Source: Will Page (2006) Is The Price of Recorded Music Heading towards Zero?
Economic characteristics of recorded
music
 A common pool good is rivalrous but nonexcludable.
 The stock of fish in an ocean is a common pool good, because it’s difficult to
enforce fishing limits. (This is often referred to as the ‘Tragedy of the
Commons’)
 A toll good is characterized by nonrivalrous consumption and excludability.
The term ‘toll good’ is used because efficiency conditions can be established
justifying charging a toll for such a good (think of a highway toll).
 A club good has an optimum number of consumers. i.e the more persons
consumer the good, the joint utility of the good diminishes.
Source: Will Page (2006) Is The Price of Recorded Music Heading towards Zero?
Economic characteristics of recorded
music
 With this final category in place, we can summarize using the following table:
Public, Private, Common Pool, Toll, and Club Goods
Excludable
Rivalrous
Non-Rivalrous
Non-Excludable
Pure Private Good
(e.g. food, clothing,
furniture).
Common Pool Good
(e.g. the fish in the sea)
Toll Good or Club Good
(e.g. bridges, golf courses)
Pure Public Good
(e.g. national defence)
Intellectual property laws moves information from a ‘pure public good’ towards a ‘toll
good’ because they create excludability but not rivalrousness.
Copyright law gives you the power to exclude others from making copies of your writings,
but it does not make consumption of the information rivalrous. This distinction is
fundamental in explaining why the price of a unit of recorded music is heading towards
zero.
Source: Will Page (2006) Is The Price of Recorded Music Heading towards Zero?
Economic characteristics of recorded
music
This matrix can be put into practice by applying it to an industry that’s easy for us to
interpret: broadcasting. TVJ, for example, can be classified as a ‘pure public good’. RE TV,
on the other hand, is a ‘toll good’, as it’s excludable through a fee and conditional access
technology.
Public, Private, Common Pool, Toll, and Club Goods
Excludable
Rivalrous
Non-Rivalrous
.
Non-Excludable
A Physical DVD of TVJ’s
broadcast of the Olympics
TVJ’s Live in the car park
Or listen for free outside
Re TV (Toll Good)
TVJ free to air
(Pure Public Good)
Tragedy of the Anti-Commons
 What is the tragedy of the Anti - commons ?
 An anti-commons leads to market ‘gridlock’; a term coined by the author
Michael Heller in his book The Gridlock Economy
 Private ownership creates wealth but too much ownership can have the
opposite effect– ownership gridlock
 According to Michael Heller, the tragedy of the anti-commons refers to the
problem of too many owners of a resource leading to too little prosperity.
 A tragedy of the commons is said to exist where failure to assign individual
property copyright results in overuse of a resource.

Private ownership is viewed as a solution to the overuse of scarce resources.
Tragedy of the Anti-Commons

According to Michael Heller, property copyright can overshoot.
 Heller notes that the movie ‘eyes on the prize’ was removed from the television
because of copyright anti-commons problem.
 Heller argued that when gridlock happens, the action of ‘patent pooling’ or
collective licensing provides a rational response as it helps keep transaction
costs down, prevents further fragmentation and solves coordination.

CMOs solve the copyright anti-commons problem through collective
licensing.
Cost structure of copyright works
 Copyright gives the copyright owner a temporary monopoly on the original
work. Economists Cooter and Ulen note that “without a legal monopoly not
enough information will be produced, but with the legal monopoly too little of
the information will be used”.
 The cost structure of information-based goods such as copyright ─high fixed
costs of production but low marginal costs of reproduction and distribution.
 In order to recover the costs of production the price must be set above marginal
cost.
 Setting price above marginal cost results in a “deadweight loss”, as consumers
who value the copyright material at more than marginal cost but less than the
set price will not purchase the good, resulting in a loss in social welfare.
Source: Economic Perspectives on Copyright Law Centre for Copyright Studies
Note: Qm is the quantity the monopolist produces. Qc is the amount at which a perfectly
competitive industry would supply. Pm is the price the monopolist charges.
Cost structure of copyright works
 Pricing copyright goods is difficult. The first copy of a copyright good is often
very costly to produce, while subsequent copies may cost next to nothing.
 High fixed costs and low marginal costs create difficulties for conventional
forms of pricing. For e.g, economic theory argues that goods should be
priced at marginal cost.

But marginal cost pricing will not recover costs and the copyright goods will
therefore not be produced.
 The economics of copyright is largely based on an analysis of how markets
fail in the absence of legal protection. It is based on market failure analysis
regarding public goods and information asymmetries.
The Copyright Licensing system
 The copyright system is a network or group of copyright markets, users of copyright
material, copyright owners, collective management organizations and governments that
participate in and regulate its operation.
 The licensing of music copyright takes different forms
 Direct licensing – an arrangement whereby a copyright owner and music user deal with
each other directly with respect to a music copyright transaction. e.g. synch license
 Semi-direct licensing – the transaction between the copyright owner and music user is
completed by a third party e.g. an music copyright agent
 Indirect/collective licensing or copyright intermediation – copyright collecting societies
intermediate between creators/owners of music copyright and commercial users of these
copyright
The Role of Collective Management
Organizations (CMOs)
 Copyright collecting societies are private, non profit, cooperative
membership organization set up by authors and publishers i.e. nonprofit societies owned and operated by their members (Ruth Towe,
2013).

‘Most collection societies operations are based on a model… where
creators and rights owners pool together their copyrighted works
together and license them collectively to commercial users at
negotiated or statutory royalty rates (Mckellar, 2014).
 CMOs occupy an important position in the market for the copyright
they represent and manage collectively on behalf on their members
Source: Music collecting societies Evolution or regulation? PricewaterhouseCoopers, 2005
Types of CMOs
 Performing copyright organizations (PROs) representing songwriters,
composers and publishers e.g. JACAP, ASCAP.
 Neighboring copyright collection societies for performers and record
companies e.g. JAMMS.
 Mechanical copyright collection societies for music publishers and
songwriters e.g. MCPS in Britain, CMMRA in Cananda
 Reprographic copyright Organization (RROs) for author and
publishers of literary works e.g. Jamcopy in Jamaica
JACAP has agreements with
similar collecting societies in
many countries around the
world
The Role of CMOs
 CMOs have emerged in most countries as the primary organizational
structure for licensing copyright in secondary markets .
 They perform a number of common roles:
− they provide a single point of access to content for those wishing to use
copyright material and help to keep administrative costs of secondary
licensing to a minimum.
−They also ensure content creators are rewarded for any copying or
reproduction of their works and they act as advocates for their members
Source: An economic analysis of copyright, secondary copyright and collective licensing PricewaterhouseCoopers, 2011
The economic rationale for collective licensing
 The emergence of CMOs as the mechanism for licensing secondary exploitation reflects the
economic advantages of collective licensing over other forms of licensing. It reflects the
difference in transaction costs.

The role of the CMOs is to bring together many copyright owners and users who make
frequent use of copyrighted material.
 A prospective user of protected material faces several transaction costs associated with
secondary licensing:

Identification costs – potential users of a copyright work may find it costly to identify and
locate the copyright owner;
 Search costs – the time required to obtain the information needed to negotiate a price for a
given use; and
Source: An economic analysis of copyright, secondary copyright and collective licensing PricewaterhouseCoopers, 2011
The economic rationale for collective licensing
 Transaction time costs – the time taken to negotiate with individual
copyright owners for reproduction or performance copyright. copyright
owners face equivalent transaction time costs.
 If copyright owners and users licensed every time a photocopy was made, the
costs of identification, search and transaction time would be very large
relative to the (user) value of the reproduction copyright.
 This creates the risk that high transaction costs would bring about market
failure in secondary licensing.
 The CMOs are able to realize economies of scale by working with copyright
owners and users to support a more efficient market in secondary copyright.
 The benefit of CMOs, therefore, is that they can lower transaction costs, pass
the cost savings to users and maintain a reward for copyright owners.
Source: An economic analysis of copyright, secondary copyright and collective licensing, PricewaterhouseCoopers, 2011
The collecting society natural monopoly
 CMOs are ‘natural’ monopolies – a term used to describe a market where having a single
monopoly supplier can be more efficient than if there were competition.
 Natural monopoly is where market forces lead to a single seller. Collecting society is a single seller
of collective management services. Common for utilities- networks.
 The reason is increasing returns to scale – the greater the output, the lower the average costs.
 The larger the market, the lower are average costs and marginal costs..
 The natural monopoly in colleting society lies in matching databases of works, owners, licensees,
members’ details for distribution etc.
 Widespread acceptance of natural monopoly and blanket licensing by government and courts,
through many enquiries, cases, etc.
Economic trends in IP
 Amid uncertain global economic prospects, it is heartening to be able to report that
intellectual property (IP) activity continues to grow robustly in most countries.
 Intellectual Property Indicators reports global growth in patent and trademark filings in
2014 of 4.5% and 6.0%, respectively.
 China – more than ever – has been driving that growth. Fueled by filings from local
residents, it saw patent applications increase by 12.5% and trademark applications rise
by 18.2%.
 Most IP offices outside China also recorded growth in patent and trademark filings.
Patent applications increased by 3.2% at the European Patent Office, 2.8% in the
Republic of Korea and 1.3% in the US. Among the largest offices, only Japan saw a drop
(0.7%) in patent filings.
 Trademark filing activity increased markedly in Japan and India, with growth rates of
16.9% and 15.4%, respectively.
 The United States also saw strong growth of 6.7% and the European Union’s Office for
Harmonization in the Internal Market (OHIM) registered growth of 2.7%.
Source: World Intellectual Property Indicators (WIPO) 2015
Patent filings
Trends in patent filings
Trademark filings
References
Pitt, Ivan (2010) Economic Analysis of Music Copyright
PricewaterhouseCoopers (2011) An economic analysis of copyright, secondary copyright and collective
licensing
http://www.cla.co.uk/data/corporate_material/submissions/2011_pwc_final_report.pdf
PricewaterhouseCoopers (2005) Music collecting societies Evolution or regulation?
The Allen Consulting Group (2003) Economic perspectives on copyright law
http://copyright.com.au/wp-content/uploads/2015/08/CentreCopyrightStudies_AllenGroupEconomicPerspectivesonCopyrightLaw.pdf
U.S. Copyright Office (2015) Copyright and the Music Marketplace. Retrieved from
http://copyright.gov/docs/musiclicensingstudy/copyright-and-the-music-marketplace.pdf
WIPO (2014) World Intellectual Property Indicators