On the standard economic view of copyrights, as on the economic view of other monopolies, average revenue equals demand. Those two measures trace one and the same line. Why? Because for most products and services, consumption closely matches supply at the market-clearing price. Sales reveal consumer demand and, in the case of copyright and other supposed monopolies, only one seller reaps revenue from those sales. Thus, for instance, might a utility’s sales show the aggregate consumer demand for electric power.
Even a so-called monopolist might face competition, however. The sole authorized seller of hard liquor might fail to capture the entire market of drinkers, for instance, losing some to the resale of stolen goods and others to moonshine. So, too, might an electrical utility suffer theft, competition from home-brewed power, and exit to gas appliances.
The caveats to “monopoly” prove especially strong in the case of copyright, which permits some unauthorized uses of protected works, such as fair uses, and fails to prevent many infringing uses. We might fairly say that the former category of uses, because copyright holders have no statutory power to bar them, do not really cut into the market share for a copyrighted work. Copyright holders cannot lose what never have, on that view. I here thus focus on infringing uses. Still, though, it bears noting that, whether due to permitted or forbidden uses, a copyright holder never commands all of the market for an expressive work.
That conflict between theory and facts shows why we should perhaps eschew speaking of “the copyright monopoly” and instead talk about copyright in terms of market power. Whether or not it hands out monopolies, after all, the Copyright Act does give a powerful subsidy to those it protects: the privilege of invoking State power to inhibit infringing uses of expressive works. The standard economic model of copyright usefully captures that effect, but somewhat exaggerates it. We can get a more accurate picture of copyright by splitting consumer demand from average revenue.
The consumption of an expressive work—and thus the revealed demand for it—may greatly exceed the supply legally permitted under copyright law. Effectively, some consumers treat copyrighted works like public goods, paying only very low marginal costs of reproduction. That payment typically comes not in cash but in the opportunity costs, in terms of time and effort, of copying. At all events, none of it goes to copyright holders, leaving them aggrieved and, sometimes, litigious. But copyright holders seldom find it worthwhile, or even possible, to fully defend their rights under the Act. Many infringing acts go undetected or for other reasons elude enforcement. [The figure below] illustrates that phenomenon, showing how in the case of a copyrighted work aggregate consumer demand might diverge from the copyright holder’s average revenue.
Copyright holders understandably object when, due to infringement, they earn less revenue than the law entitles them to. But why should the rest of us care? Recall that copyright aims to cure a looming market failure: we will suffer an undersupply of expressive works if authors cannot recoup their production costs. Copyright aims to cure that failure by giving authors the privilege of controlling, and thus profiting from, certain uses of their works. Infringement threatens to upset that statutory mechanism, depriving authors and their transferees the revenues necessary to stimulate the production and distribution of expressive works.
We might call that threat, after Marx and Engels, “the specter of copyism.” And, as the allusion to communism suggests, we should all worry that poverty will follow if production does not pay. In the case of copyright policy, in other words, we should worry that infringement will decrease copyright holders’ revenues below the level necessary to sustain authorship. As [the figure below] illustrates, that threatens to deny the market new expressive works.
[NB: The above text comes from chapter 1, § C.2 of my draft book, Intellectual Privilege: Copyright, Common Law, and the Common Good. I will soon upload a PDF of the entire chapter, including footnotes. I welcome your comments.]