miscellaneous factZ

This week I’m in Budapest for the EEA/ESEM annual congress. I’ll be presenting Cumulative Innovation, Sampling and the Hold-Up Problem in the ESEM stream on Friday afternoon in the 1500-1700 slot. I’ll gradually post further notes as I write them over the week.

Last week I was at the 2007 Society for Economic Research on Copyright Issues (SERCI) Annual Congress (also acronymed under the label SERCIAC). The event was a nice size with a good mix of people, well organized (a big thank-you here to Christian Handke) and with many interesting presentations (some of which I was able to take notes on — see below). I also had the chance to present my paper on optimal copyright and get some useful feedback. I’ve already mentioned this in a previous post but for those interested you can find the slides from my talk here:

http://www.rufuspollock.org/economics/papers/optimal_copyright_talk.pdf

and the full paper here:

http://www.rufuspollock.org/economics/papers/optimal_copyright.pdf

Rough Notes on Some of the Presentations

Professor Richard Lipsey: Technological Transformations, IPRs and Second Best Theory

Intro

• Real consumption 10x level 100 years ago
• Tech change the major component
  • Frequently underestimated in growth accounting because capital growth also includes payment for innovations
• General purpose technologies
  • Revolutionary
  • Lots of unexpected applications
  • Externalities too … [ed: though this is always true with innovation]
• ~20 examples of GPTs concluding with suggestions for future (Biotech and Nanotech)
• Why was it in the West that take-off occurred?
• Suggests due to scientific culture and pluralism
  • Debated among economic historians …
• Why science better in Christian West rather than China and Europe?
  • Variety of reasons, many ‘accidental’ e.g. pluralism of Roman state, discovery of Aristotle post reconquista in Spain …
  • Can not ignore historical accident in understanding history of economic growth
• Institutions are crucial
  • Though the universities: “the West took a decisive and probably irreversible step toward the inculcation of a scientific worldview that extolled the power of reason and painted the universe –human, animal, inanimate– as a rationally ordered system” (Huff 1993: 189)
  • Universities are ‘institutional memory for science’ (plough, because embodies de facto persists in a way that pure knowledge does not)
  • Differed from Islam because more unified and did not succumb to reaction later [ed: though this beg questions of direction of causation]; differed ).
  • China also did not have good institutions to act as this memory
• Shared (science-based) world-views also important
• Stuff happens slowly and is hugely cumulative and incremental not ‘out of the blue’

Modelling

• Two approaches:
  • Neoclassical (Arrow-Debreu DSGE)
  • Evolutionary/Structuralist
• Neoclassical v. powerful but bad for modelling growth
• Evolutionary is better for growth
  • Competition is ‘jostling’ not perfect
  • Technology is endogenous
  • Better able to incorporate externalities and non-convexity
• Bemoans fact that people focus on d/w loss too much and don’t see benefits of monopoly in terms of incentives for innovation
• Neoclassical advice: (static) remove anything that prevent optimum allocation in perfectly competitive market
• Evolutionary: like rents as induce more innovation
• [ed]: things are a little more complex. Most neoclassical growth models do allow for rents for innovation — usually via patents (e.g. Romer) and there are the mainstream schumpeterian models of Aghion and Howitt/Grossman and Helpman
• Lots of stuff that prevent first best
  • Fixed costs
  • Product differentiation
  • Imperfect and asymmetric information
  • Happiness (man is a social animal)
  • … (endless list)
  • [ed]: all of these are well-known to economists
• So look at second-best: ‘rules of thumb’ such as reduce the largest distortion
  • Lipsey (2007) provides a whole bunch of objections to these approaches
• Standard 2×2 matrix of rivalrous vs. non-rivalrous, excludable vs. non-excludable types of goods
• Cumulative innovation: trade-off current and future (down-stream) innovation
• Formal models are not enough need judgement
  • Knightian uncertainty …
• …

Evidence

• How important were patents in history
  • Does not seem intro (or increasing use) of patents led to higher rate of innovation
• Other examples of GPTs
  • technology came first and then IP came along after
• Cites Watt/Boulton example of hold-up
  • Leads to invention/diffusion trade-off
• Government intervention (R&D subsidies and procurement) can be very useful
  • See Ruttan (2001 and 2006)
  • ‘Governments can pick winners’ (but also many failures)

Patrick Waelbroeck: Music Variety and Retail Concentration

• Sales of music have declined in France and other countries since ~2000
• Also decline in variety of music
• Two reasons advanced for decline in sales
  • Piracy (demand side)
  • Less variety (supply side) — focus here
• Increase in retail concentration
  • More large stores
  • General purpose/food stores selling other goods (Wal-Mart etc)
• This reduces variety available => Drop in sales
• Retails reduce variety because:
  • Cost to manage inventories
  • Promotions
  • Competition between products
• Model:
  • vertical setup with 1 producer and 1/2 retailers
  • competition b/w retailers reduces double marginalization (good for welfare)
  • 3 options: vertical integration (VI), vertically separated monopolies (2M), monopoly in production and competition in retail (MC)
• Results
  • VI more likely to have variety than 2M (some parameter values where VI has 2 products where 2M does not). Can solve with 2-part tariff.
  • MC leads to more variety than 2M
  • Lack of integration reduces incentive to launch new products
  • Retail concentration hinders product variety and total quantities sold

Marcel Boyer: The Value of Music to Commercial Radio Stations

• Animated by case before Copyright Board Canada
  • 1997 Canadian copyright act was amended to include equitable remuneration for performer’s and maker’s
  • What is the correct level of equitable remuneration
• What would a commercial radio station be willing to pay for music
• Assume CR (commercial radio) allocate time between talk and music such that marginal value of each is equal
• Estimate share of program content that is music:
  • Total over whole day (0600-0000): 76% unweighted and 75% weighted by number of listening
  • Correct for advertising amount (as this varies greatly with time too)
  • Value attributed to sound recordings by day part:
    • 0600-0900: 25.9% of commercial value (12.95% sound recordings, 12.95% other)
    • 0900-000: 74.1% (49.40%, 24.70%) respectively
  • Comes out at 60% recordings, 40% talk for value generated
• Now observe payments to talk people (since in accounts)
• So get what payments for talk = total value x 0.4
• Hence recordings value = total value x 0.6 = talk/0.4 x 0.6
• Implies recordings are worth C$265 million gross
• After taking into account music related expenses of radio stations (not payemnts for the work itself but technicians etc etc) reduces to $127 million
• Commercial radio sales are $1 billion
• So copyright payments should be ~13% of sales
• Current payments were $40 million and should be $127 million

Martin Kretschmer: Copyright Earnings and Risk: An empirical study of writers’ income in Germany and the UK

• Look at earnings of authors (of text)
• Where do they get their money from
• What is distribution of earnings
• Gini coefficient: measures inequality in earnings
• UK ALCS payments 2005
  • all authors: 369 mean, 80 median, gini: 0.72
  • author with more than 50% of income from writing: mean 28k, media: 12k, gini: 0.63
• Germany (note earnings are net of tax)
  • all authors: …
  • author with more than 50% of income from writing: mean 13k, median 8k, 0.56
• Professional authors): (UK) 40% earn all income from writing (germany similar)
• Collecting society income distribution is less equal that general writing income (which is surprising given supposed ‘diversification’ role of collecting societies)

Stan Liebowitz: The Impact of Copyright on the Price of Books

• Compare prices of in and out of copyright books
• Best-selling books for each year from 1895-1940
• Collected data on list price, sales price (Amazon), number of pages, binding type, isbn#, type of writing and so forth
• 2445 observations based on 603 unique titles
  • 280 separate publishers. 188 publishers had less than 2 books in the sample
• We limited sample to publishers with more than 10 books (23 such publishers) and who published both copyrighted and non-copyrighted books (12 publishers) (and had to have at least 80/20 ratio i.e. min of 20% in copyright, 20% out of copyright)
• Leaving 872 observations, but many were thrown out because they were e-books or because some data was missing
• 66% of total is out of copyright (this is higher than number of distinct titles because pd books have more editions)
• Distributions by publisher: pretty even except for Kessinger which has ~10x everyone else (will turn out to be suspicious)
• Simple OLS: copyright dummy has no effect (r-squared 0.285
  • robustness: the same (remove outliers)
• Publisher dummies: copyright dummy has impact of around 13%
  • robustness: back to no significant (remove outliers)
• Standard royalty contract is 10-15% of price
  • So this looks very efficient because authors get no rents
• Some of these publishers may be pirates (Amereon, Buccaneer and Kessinger have had complaints)
• Exclude doubtful publishers and restrict to Simon/Schuster, Penguin and Dover
  • Number of observations are much smaller (72)
  • OLS regression: copyright effect is 22% increase in price
  • Robustness raises this to ~27%
• Suggests 50/50 split for royalty rates (but might be too high depending on author power)
• Deadweight losses:
  • 1-2 elasticity of demand with 20-25% copyright impact gives c/dw of 4-6.25
  • at 3 elasticity is 6-9.38
  • at 0.5: 1-3%
  • [ed: depending on how large costs are (and for books they seem large relative to copyright) then need to do some work to convert to ratio of d/w loss to welfare]

[ed]: Really great to see this kind of empirical work being done and this is a nice approach to an important question. Some queries:

• Looking at average prices rather than lowest price per title (and unweighted by sales) could be a problem
• Imagine that have a book selling at $10 before going in PD. Goes into PD and now two versions: the official version produced by original publisher still at $10 and a new cheap edition at $5. Then average price has only dropped to $7.50 even though all the new served demand (which was d/w loss before) comes from $4 book. Thus impact of copyright estimated at $2.50/$10 = 25% but in fact was $5/$10 = 50%
• Heald data is useful on this. He finds that on average public domain books have on average 5.2 (6.2 including ebooks) editions while copyrighted books have an average of 3.2. Turning to a subset of especially durable (popular) works, Heald provides a price comparison, finding that ‘durable’ public domain books have an average lowest cost of $3.85 while copyrighted books have an average lowest cost of $8.05 (restricting to well-known major publishers gives $5.80 and $8.90 respectively). Unfortunately he does not give average price but indicates lowest price really quite different (and restricting to well-known publishers will bias results).
• Digital world: this focuses on books in hard-copy format
  • But what about e.g. Project Gutenberg. I can get a digital version of PD stuff from there for zero.
  • Furthermore books are the least ‘digitizable’ item (most of us still want the dead-tree version).
  • So assume that for material such as music and film would likely see a bigger effect.

Update 2008-05: this paper has now split into two parts:

1. Optimal Copyright Over Time: Technological Change and the Stock of Worsk (published in RERCI, Dec 2007)
2. Forever Minus a Day? Theory and Empirics of Optimal Copyright Term (wherein can be found an updated optimal copyright term estimate)

Original Post

How long should copyright be? Should we increase or decrease the strength of copyright during periods of rapid technological innovation? These are all questions I address in my paper entitled Forever Minus a Day? Some Theory and Empirics of Optimal Copyright, which I will be presenting at the 2007 SERCI Congress in Berlin this week.

For those who want to know more, the full abstract is below and the latest version of the paper can be downloaded from:

http://www.rufuspollock.org/economics/papers/optimal_copyright.pdf

Update: (2007-07-13) there are a set of summary slides available here:

http://www.rufuspollock.org/economics/papers/optimal_copyright_talk.pdf

Update: (2007-07-16) for those interested in republishing, redacting, or otherwise reusing the paper I should state clearly that it (and this blog) are licensed under a Creative Commons Attribution (by) license v3.0

Update: (2007-08-07) I’ve produced an updated version of the paper. This includes a variety of small corrections (typos etc) and some more substantial reworking. In particular due to the reinclusion of the ’small’ middle term in the statement of Theorem 13 and in subsequent calculations (previously in the proof but omitted from the statement as small) optimal term has increased from 14 years to 15 years (which bears out the original assumption that the term was small but it is nice to explicitly include it). There is also a new figure (Fig 1 in the updated paper) which gives the most accurate representation of the results in the form of the probability distribution of optimal term given the parameter range being used.

Abstract

The optimal level for copyright has been a matter for extensive debate over the last decade. This paper contributes several new results on this issue divided into two parts. In the first, a parsimonious theoretical model is used to prove several novel propositions about the optimal level of protection. Specifically, we demonstrate that (a) optimal copyright falls as the costs of production go down (for example as a result of digitization) and that (b) the optimal level of copyright will, in general, fall over time. The second part of the paper focuses on the specific case of copyright term. Using a simple model we characterise optimal term as a function of a few key parameters. We estimate this function using a combination of new and existing data on recordings and books and find an optimal term of around fifteen years. This is substantially shorter than any current copyright term and implies that existing copyright terms are too long.

Today I’ve been at an interesting ‘mini-conference’ organized by Cambridge University’s Centre for Intellectual Property and Information Law, entitled: Inspiration, Interpretation or Infringement? Interdisciplinary Approaches to Creativity and Copyright.

The morning session discussed ‘The Nature of the Pirate and the Meanings of Piracy’ while the afternoon was dedicated to ‘The Infringing Act’. The debate is gradually changing but I’m wary that without more attention to the theoretical, and especially, empirical fundamentals these sorts of discussions will grow repetitive.

We all know that there is a trade-off inherent in copyright both at the level of creativity (no monopoly right may deprive people of the means necessary to create while too much may stifle reuse and independent creativity) and at the level of consumption (the monopoly inefficiently restricts access but again may increase the revenue received by creators). The real question we must address is not whether we draw a line but where we draw it.

This week I’ve been at the ZEW summer workshop on The Economics of Information and Communication Technologies: A European and International Perspective in Mannheim. I presented my paper on the The Control of Porting in Two-Sided Markets (slides here) and commented on The Impact of Information Diffusion on Bidding Behaviour and Seller Profit in Name-Your-Own-Price Markets by Oliver Hinz and Martin Spann.

This weekend I’ve been at the International Industrial Organisation Conference (IIOC) in Savannah, Georgia. I presented the latest version of Cumulative Innovation, Sampling and the Hold-Up Problem and provided discussant comments on Richard Gilbert and Michael Katz’s paper on the Efficient Division of Profit for Complex Technologies. In addition I include below some very partial notes on some of the sessions I attended.

Merchant or Two-Sided Platform (Andreu Hagiu)

Interesting paper on what distinguishes a ‘Merchant’ from a ‘Two-Sided Platform’ — a merchant being distinguished by it taking possession (and then reselling) the goods while a platform remains just that (it just charges an access fee or royalty). Most of results, while no doubt involving some hairy algebra, were fairly intuitive. In a sense the paper is really another look at existing ‘boundary of the firm’ questions. After all the Merchant/Platform dichotomy is really just the Firm/Market one in a new wrapping. In that sense it is not surprising that larger externalities (whether in the form of complementary goods, or larger ‘network’ effects) imply greater benefits of internalization in the form of a Merchant (firm in the old literature).

Too Many Complementors? Evidence from Software Developers (Kevin Bourdreau)

Saw this paper presented back at Toulouse Software and Internet Conference back in January. Was not convinced then by his argument that too many complementors can be bad for a platform because I didn’t buy the identification strategy (or lack thereof). Since then has narrowed its focus and bolstered the underpinnings however I’m still not convinced by the conclusion. All he has shown is that no of new titles developed is an inverted u function of the number of the developer firms — but to my mind this is a simple result of diminishing returns: as you have more developers you have more titles which means the rate of new title development should fall (since it generates less surplus both socially and privately). I don’t see why this means that a platform would not would want to maximize the number of developers (and titles) on itself.

Production Innovation Incentives: Monopoly vs. Competition (Marius Schwartz)

Extend standard results of replacement vs. efficiency effects to case of introduction of a new differentiated product.

Fundamental Patent Reform and the Private Returns to R&D - The Case of Indian Pharmaceuticals

• Claim: Product patents increase market value of Indian Pharma firms
• Paper at a rather early stage
• Too much going on in the data for one to be convinced Claim is true
• Also concerns about basic idea: introduction of product patents known since 1995 so why should effect be seen in 1999-2005?

Patent Damages and Spatial Competition (Matthew Henry and John Turner)

Model:

• Hotelling (’spatial’) competition with symmetric imitator and infringer at either end of unit line and linear transport costs (linearity turned out to be crucial to staying tractable)
• Consider three types of damages regime:
  1. Reasonable Royalty
  2. Lost Profits
  3. Unjust enrichment (infringer disgorges all profits)
• Patents which are valid with known exogenous probability gamma
• Firms engage in Coasian bargaining in the shadow of the damages regime

Results:

• Optimal regime is not unique
• Lost profits:
  • For large V (value of innovation) this maximizes incentives to innovate
  • Does not maximize static welfare (imitator prices too high and serves under half the market)
• Reasonable Royalty:
  • Maximizes static welfare as firms serve optimal amount of market (1/2 each) and thus minimize transport costs
  • For medium V this maximizes incentives to innovate
• Unjust enrichment
  • Poor for welfare
  • Poor for incentives to innovate (incentives do not change with V)

An Empirical Analysis of Patent Litigation in the Semiconductor Industry (Bronwyn Hall and Rosemarie Ziedonis)

Polanyi (1944)

“Floods of patents are issued … the validity of which is uncertain. At the meeting of the British Association, held in 1931 we hear patents described as ‘lottery tickets’. Manufaturers can never tell whether they are infringing on some patent and becoming liable to heavy damages. ‘A bad patents system … is a fetter on the hands of industry and an instrument of blackmail.’”

• NTP patents were actually overturned post RIM settlement
• Ref: Shapiro (2001), Cohen et al. 2000
• Litigation risk increased relevant to R&D spending (Zidonis 2003; Bessen and Meurer 2006) but fell or remained the same on a per-patent basis (Lanjouw and Schankerman 2004)
• More aggressive enforcement of patents by “trolls” in some sectors (Lerner 2006 on financial patents — I discussed this paper at the Toulouse Software and Internet conference back in January).
• Levi-Straus example (failing firms enforce their IP)
  • patent number: 6138595 (2001) for 5 cornered pocket
  • seems very similar to original patent from 1981 …

The paper:

• Semiconductor firms
• Estimate per-firm hazard rates
• Distinguishes between rival and non-rival litigation (rivals are those with sales in the same IC segment)
• Data:
  • Patent law suits filed in US district courts and ITC (ITC, Derwent, 10-ks, press releases)
  • Semiconductor product market data (ICE)
  • Patents (NBER, Delphion)
  • Financials (Compustat)
  • 282 obs of 547 litigation events
• Results:
  • Design firms more likely to litigate (controlling for R&D intensity)
  • … (see the paper)
  • Despite increased strength of patents stable enforcement rates
  • Residual growth (controlling for R&D intensity etc) in prob of being a target has grown significantly 1980 - 2001 (by about 10%)
  • Sharp upturn in prob of being a target of a nonrival at end of period 1998-2001

Research Joint Ventures and Leniency Policy (Michelle Goeree)

• Research joint ventures could be a way to collude since frequently members of a given venture are rivals in the end product market
• Change in Antitrust rules made it harder to collude in the product market (1993: made it easier for whistle-blowers)
• Identification strategy: if RJV are used for collusion then this change should increase RJV activity but if not used for collusion should see no effect
• Data construction: another interesting story
  • RJV data from Link (1996)
  • But that does not list firm names so you need to go to federal register to get firm names to link them in
  • Then you add in compustat data …
• Result:
  • ‘1993′ effect for Telecom, weak for Transport, weak for Pharma
  • no effect in other industries such as Software