Hayekian Insights on Intellectual Property

I just read a fantastic paper by Tim Wu about the implications of Hayek’s insights about decentralized decision making for intellectual property policies. In the standard debate over intellectual property, supporters of stronger protections tout to the ability of IP regimes incentivize creativity, while critics point to the dead-weight losses incurred when the monopolist prices its products above marginal cost.

But Wu argues that this discussion misses an important consideration: in addition to propping up the price of intellectual creations, intellectual property regimes like patent and copyright centralize the decision making processes of creative industries. Take the case of Netflix’s patent on Internet-based video rental. This patent appears to give Netflix the exclusive right to decide who may offer online video rental services, at least those that have interfaces similar to Netflix’s own. That effectively means that anyone who wants to enter the online video rental business (such as Blockbuster) must get a license from Netflix to do so.

In a world of perfect information, that might not be a big problem. Netflix has every incentive to develop the online video rental industry. After all, Netflix wants to maximize its revenues, and a larger, healthier online video rental market means bigger licensing revenues for Netflix. Hence Netflix has every incentive to develop new and better online video rental features, and to license its patent to third parties who have the capability to expand the market. If Netflix were omniscient, giving Netflix a monopoly over online video rental might actually make the market more efficient, as Netflix could reduce wasteful competition.

Wu’s objection precisely mirror’s Hayek’s critique of the 20th Century socialists: if we assume that the central planner (the state in Hayek’s case, Netflix in mine) has perfect information, centralization could conceivably outperform decentralization. But as Hayek says, “that is emphatically not the economic problem which society faces.” Just as the state lacks the information required to determine the best way to develop the whole economy, Netflix lacks the information necessary to determine the best way to develop the online video rental business.

Hence, in the real world of limited information, a better market structure is for no one to have a monopoly. Let anyone who wants to put his capital at risk start up his own video rental service, and let the efforts succeed or fail on their merits. This will, admittedly, lead to a larger number of failed video rental efforts, but it’s also more likely that a decentralized, competitive online video rental market will find new products and techniques that a centralized industry structure would have missed. Ultimately, the decentralized structure is likely to prove more innovative.

Wu does a beautiful job of laying out a Hayekian critique of the centralizing effects of strong intellectual property regimes. He explores the various ways that a monopolist’s lack of information is likely to hamper its ability to drive technological innovation as well as decentralized processes would do. And he closes his paper by pointing some specific areas intellectual property policy choices will lead to either the centralization or decentralization of creative industries. He makes a persuasive case that we should have a bias toward policies that minimize the harmful centralizing effects of overly broad IP regimes.

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