Fair use and copyright protection: a price theory explanation

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Abstract

Copyright scholars suggest that computer technology has reduced transaction costs associated with copyright transfer, allegedly eliminating the need for the fair-use doctrines that were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. According to this emerging view, in an ideal world with no contracting costs, third party use of copyrighted material could realistically only take place with the express consent of the copyright holder. This would give the author absolute power to dispose of his work, including the right to veto uses, without the possibility of a fair use “override” of any sort.

This paper shows the limits of such transaction cost-based arguments. If transaction costs provide the dominant economic justification of “fair-use” doctrines, an exogenous reduction of such transaction costs would limit the scope and application of the defense of fair use. Nevertheless, in this paper we suggest that, when viewed in light of the anticommons theory, fair-use doctrines retain a valid efficiency justification even in a zero transaction-cost environment. Fair-use defenses are justifiable, and in fact instrumental, in minimizing the welfare losses prompted by the strategic behavior of the copyright holders. Even if copyright licenses can be transferred at no cost (for instance, in a “click and pay” frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses.

In this context, we identify a number of critical variables that should guide and constrain the application of fair-use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate.

Section snippets

The doctrine of fair use

The general purpose of intellectual property protection, and more specifically, copyright protection, is to provide authors with incentives to create, by providing ‘an avenue for obtaining remuneration’.

The market failure approach to fair use and its echo in subsequent case law

In 1982, Wendy Gordon proposed a market failure rationale for the doctrine of fair use.

The proclaimed demise of fair use

From Princeton and American Geophysical, it is only a short step to the theory, articulated in a recent strand of literature, that the advent of the Internet26 has brought with it the demise of fair use. Based upon the misguided premise that the fair-use

Other economic rationales for fair-use doctrines

Gordon’s seminal explanation of fair use hinges in large part on market failures based on transaction costs. Although the first part of her three part test is contingent upon the existence of market failures of some sort, she alludes to three broad types of impediments: market barriers, externalities, and anti-dissemination motives. Transaction costs, in the classic sense of the costs of reaching and enforcing a bargain, are listed as one specific type of market barrier.36

Revisiting the economic rationale: anticommons and the doctrine of fair use

A new term of art has recently gained acceptance among law and economics scholars of property law: the anticommons. Michelman (1982) coined the term anticommons in an article on ethics, economics, and the law of property, defining it as ‘a type of property in which everyone always has rights respecting the objects in the regime, and no one, consequently, is ever privileged to use any of them except as particularly authorized by others’. The concept has been revitalized in recent literature (

The price theory of copyright protection: a numerical example

Building on the general framework of Buchanan and Yoon (2000) and Parisi et al. (2000), we shall illustrate the problem of the anticommons in the context of copyright protection considering the case of two copyright holders who have autonomous exclusion rights over two distinct works (primary works). In our hypothetical, the copyrighted primary works are complementary inputs for the production of a derivative work, such as an anthology or review essay on the topic of the Coase theorem. Such

The limits of copyright protection and the Tragedy of the Anticommons

In Section 6, we have shown that independent pricing of copyright licenses for the production of a final derivative work results in a sub-optimal equilibrium. We should note that an increase in the number of copyright holders exercising independent control on the price of their respective licenses exacerbates the degree of underutilization.

Recalling our example, let’s imagine that the planned anthology will present and analyze excerpts from the acceptance speeches of all the Nobel laureates in

The boundaries of the anticommons problem in copyright protection

The examples above demonstrate that independent pricing of copyright licenses for the production of a final derivative work will result in a sub-optimal equilibrium. We should note that the equations utilized above assume a strict complementarity of the copyright licenses as factors of production for the anthology. A more general model which allows, but does not require, the strict complementarity of the inputs can be shown to produce qualitatively similar results. The relationship between

The absence of price coordination

This paper’s analysis reveals the puzzling result that price coordination and monopolistic pricing do not in all circumstances produce inefficient equilibria. More specifically, the effect of monopolistic price coordination on the efficiency of the equilibrium pricing depends on the nature of the various copyrights as factors of production. As suggested above, the failure of copyright holders to coordinate prices among themselves always leads to a loss of profit from anticommons pricing.

The

The effect of price coordination

In an ideal world where copyright owners could effectively coordinate their on-line licensing efforts, the above result would be considerably changed. If the fragmented group of copyright holders could coordinate the pricing of their licenses—when each copyrighted material serves as complementary input in the production of a final good, such as in our review essay example—they would clearly be able to act as a single monopolist, jointly maximizing their gains. In fact, one important aspect of

Conclusion

This paper revisits the economic rationale for fair-use defenses suggesting that, in light of the anticommons insight, fair-use doctrines retain a valid efficiency justification even in low transaction-cost environments. Expanding upon the traditional economic logic of copyright law, we suggest that fair-use defenses are instrumental in minimizing the welfare losses caused by the strategic behavior of the copyright holders. The defense of fair use can be regarded as a corrective response to the

Acknowledgments

We would like to express our gratitude to Fernando Gomez, Gerrit De Geest, Joseph Bromley, Randy Picker, Ejan Mackaay, Katie Sutton and the participants to the 17th Annual Conference of Law and Economics at Ghent University for their comments and suggestions. Special thanks goes out to Deirdre Foley for valuable research assistance.

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