Copyright and Coase

by on February 13, 2009 · 24 comments

copyright balancingOne of the biggest problems with the present copyright system is transaction costs, inhibiting Coasian bargaining. If I want to make a movie and have to get permission from dozens of different copyright owners, I may just give up – especially if I can’t locate some of them. (For more on the specific problem of orphan works, see Tim Lee’s techknowledge article at Cato and some of the many discussions on TLF.)

What copyright regime would best deal with the problem of transaction costs, while ensuring sufficient incentives to create? Robert Merges argues that the fair use doctrine may hamper the formation of copyright clearing-houses (or “collective rights organizations”) and thus increase transaction costs because fair use results in somewhat uncertain rights. See Robert Merges, Contracting into Liability Rules, 84 Cal. L. Rev. 1293 (1996).

Would compulsory licensing, as is required of song covers, radio, and cable retransmission, solve this problem? But, as I have argued elsewhere, compulsory licensing is price-fixing… and makes particularly little sense in industries where the players are all well-known to each other (like cable rebroadcasting network TV).

I don’t know what the solution is, but I’d like to hear everyone’s proposals for a more efficient (and decently liberty-friendly) system. Registration? Some stringent form of equitable estoppel?

  • MikeRT

    A legal presumption of innocent intent regarding infringement would help. The system should not allow copyright holders to impose massive fines on those who don't mean to commit flagrant violations of copyright law, but should have to legally come to a very equitable agreement on how to redress it where the cost can be no more than revenues lost and reasonable legal bills.

  • http://srynas.blogspot.com/ Steve R.

    There exists a “creative” issue that tends to be overlooked. We tend to think of copyright as something that is clearly “defined”, it isn't. When a new innovative use or new technology comes along some “creative” person asserts that they have an entitlement to erect a “toll-both” and that you are obligated to pay them.

    Over at TechDirt they have an article; According To Author's Guild, You Cannot Read Books Out Loud. TechDirt writes: “The latest such example comes from an absolutely extraordinary statement from Paul Aitken, the executive director of the Authors Guild, upon hearing that the new Amazon Kindle has an experimental text-to-speech factor. Rather than think about how this feature might expand readership, he immediately insisted that it's illegal to use it:”

    Paul Aiken is quoted in TechDirt as saying: “”They don't have the right to read a book out loud. That's an audio right, which is derivative under copyright law.””

    The “best” copyright regime to appropriately deal with the problem of transaction costs is to limit copyright to a short period of time (5 years) and to limit the ability of people to expand upon what copyright covers. Copyright was never meant to be a welfare system for content creators. Eliminate the incentive to create toll booths and the problem of transaction costs is solved.

    PS: To me the phrase “incentive to create”, is logically flawed and is highly misleading. People do NOT need copyright to create, they do it all the time. In many cases, as an altruistic endeavor, without the expectation of ever getting paid. Additionally, the goal of copyright is to further the arts and sciences for the benefit of society, not the creator. A liberty-friendly system would acknowledge that the creator, should be entitled to a short period of time to make money, but after that period of time the product falls into the public domain so that society can benefit by other artists building on that work. Additionally “liberty” also does not entitle the content creator to aggrandize copyright and extort revenue from content users. The consumer has “liberty” rights too.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    Robert Merges argues that the fair use doctrine may hamper the formation of copyright clearing-houses (or “collective rights organizations”) and thus increase transaction costs because fair use results in somewhat uncertain rights.

    I don't understand this argument. Broader fair use doesn't prevent any given potential user from obtaining a license. If a use is fair, then the transaction costs of that use are zero, right?

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    Right, for that particular transaction. But fair use makes the rights less well-defined, so the rights are less certain and therefore less marketable (like having property divided into life estates, subject to condition subsequents, with easements, etc.). I don't think it's a particularly good argument, since it seems like it would just reduce the average value of each right on aggregate, but maybe he has empirical data about how people don't form collective rights organizations for less-than-absolute rights. I don't know.

  • http://gondwanaland.com/mlog/ Mike Linksvayer

    What copyright regime would best deal with the problem of transaction costs, while ensuring sufficient incentives to create?

    One that paid attention to the much less defined “sufficient” part of the question.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    (like having property divided into life estates, subject to condition subsequents, with easements, etc.)

    But that's a totally different situation because with real estate, you have to assemble all of the fragmented rights before you can do anything useful with the property. In contrast, an unlimited number of people can simultaneously use a copyrighted work, so it doesn't create the same kind of coordination problems if the law gives multiple people permission to use the same work.

    You're absolutely right that stronger fair use reduces the overall value of copyright protection, and that may be a bad thing from a policy perspective. But that's a distinct issue from the matter of transaction costs. Indeed, it seems to me that the transaction cost argument runs in the opposite direction: transaction costs only exist in cases where transactions are necessary. Broader fair use means more situations in which no transaction is needed. So more fair use means fewer transaction costs for the system as a whole.

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    I think you're probably right. Merges is talking about incentives to create collective rights organizations, but this effect is probably swamped by the larger number of individual transactions that have zero transaction costs…

    Or perhaps you and Merges differ on the question how predictable fair use is. If you have to go to court every time you want to get a fair use because it's totally unpredictable what will be held fair use and what won't, then obviously fair use won't save any transaction costs and it will create too uncertain of an environment in which to create a collective rights organization.

    So, maybe the solution is to make fair use rights really clear and well-defined? More categorical, perhaps.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    If you have to go to court every time you want to get a fair use because it's totally unpredictable what will be held fair use and what won't, then obviously fair use won't save any transaction costs

    Well, given that I'm exercizing fair use in this comment, and didn't have to go to court to do it, we know that that's not true. ;-)

  • Jardinero1

    Some libertarians and anarchists argue that copyright is a legal fiction designed to create property, scarcity and transaction costs where in reality there are none of those things. Solution: dispense with the legal fiction. For elaboration on this radical perspective, do read Stephan Kinsella's paper; Against Intellectual Property. Link below.

    http://mises.org/books/against.pdf

  • Jardinero1

    Some libertarians and anarchists argue that copyright is a legal fiction designed to create property, scarcity and transaction costs where in reality there are none of those things. Solution: dispense with the legal fiction. For elaboration on this radical perspective, do read Stephan Kinsella's paper; Against Intellectual Property. Link below.

    http://mises.org/books/against.pdf

  • Jardinero1

    Some libertarians and anarchists argue that copyright is a legal fiction designed to create property, scarcity and transaction costs where in reality there are none of those things. Solution: dispense with the legal fiction. For elaboration on this radical perspective, do read Stephan Kinsella's paper; Against Intellectual Property. Link below.

    http://mises.org/books/against.pdf

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