miscellaneous factZ

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.

Friedrich Hayek, p35, The Fatal Conceit: The Errors of Socialism, 1988:

Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made.

[… discussion of various immaterial property rights invented recently having to do with e.g. literary productions and technological inventions]

The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.

Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents for invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period (Machlup, 1962).

Back in July the Institute for Public Policy Research (IPPR) published, as part of the their series on IP and the Public Sphere, my paper entitled The Value of the Public Domain. This essay was’t intended to be original research but rather to provide an overview of the social and commercial benefits to be derived from open (public-domain) approaches to knowledge production.

Since publication, the paper has managed to travel fairly widely (helped I hope by its open licence) including a recent appearance on Lessig’s blog so its appropriate that I’ve now, finally, got around to adding it to the listing on my economics papers page. I’ve also put up an html version though not the plaintext (markdown-formatted) source (email me at comments at rufus dot pollock dot org if you want this version).

1876-1878 Commision on Copyright. Metadata: http://www.bopcris.ac.uk/bop1833/ref2103.html

My copy came from Cambridge University Library.

Main Report

General Remarks:

• Contains summary in appendix of the law up to that point in a form of a digest
• NO discussion of principles at all and very little hard evidence

Their comments on existing law (vii, para 7-9):

The first observation which a study of the existing law suggests is that its form, as distinguished from its substance, seems to us bad. The law is wholly destitute of any sort of arrangement, incomplete, often obscure, and even when it is intelligible upon long study, it is in many parts so ill-expressed that no one who does not give it such study to it can expect to understand it.

The common law principles which lie at the root of the law have nevere been settleed. The well-known cases of Millar v. Taylor, Donaldson v. Becket, and Jeffries v. Boosey, ended in a difference of opinion amongst many of the most eminent judges who have ever sat upon the Bench.

The fourteen Acts of Parliament which deal with the subject were passed at different times between 1735 and 1875. They are drawn in different styles, and some are dwan so as to be hardly intelligible. Obscurity of style, however, is only one of the defects of these Acts. Their arrangement is often worse than their style. Of this the Copyright Act of 1842 is a conspicuous instance.

The need for copyright protection (viii-ix): Taking the law as it stands, we entertain no doubt that the interest of authors and of the public alike requires that some specific protection should be afforded by legislation to owners of copyright; and we have at the the conclusion that copyright should continue to be treated as a proprietary right, and that it is not expedient to substitute a right to a royalty defined by statute, or any other right of similar kind.

p. ix: dismiss royalty system - though not for great reason and without any evaluation of its costs and benefits - on the classic grounds that no-one else is doing it.

p.x-xii: should extend and harmonize terms to life + 30 years. Note that most other countries have longer terms (except US and Canada)

should introduce compulsory registration and modernize the registration system.

p. xxxvi ff.: ‘The American Question’

• Interesting discussion of the US situation.
• However there is a rather serious lack of HARD evidence
• advocate strongly a copyright treaty with the US and state that British authors are being damaged by not having protection

Separate (Dissenting) Report by Sir Louis Mallet:

• excellent, need i say more than the person has some acquaintance with economic reasoning and actually applies himself to the principles. It is amazing - it’s all there, all the arguments of a century later.
• every para is worth quoting but i shall confine myself
• [xlvi]: I do not consider that a copyright law, or, in other words, a law which enables a copyright owner to prevent other persons from copying published works, rest upon the same rounds of public expediency as those which justify the recognition by law of proprietary rights generally. Nor does it appear that in modern times it has been ever so regarded by the legislation of the countries where it exists.
• [xlix para 15]: From this point of view the question becomes a purely practical one, viz., whether any special interference by law is required to ensure for a community the best possible literature at the cheapest possible price.
• [l para 32]: A monopoly should never be created with the view of remunerating a person or class, if that object can be effected without it; the profits of authorship are one thing, and the profits of publication another; and even if some form of monopoly is necessary to protect the first, it is equally desirable, in the interest of the author and that of the public, that the profits of publication, which are purely of a commercial character, should be regulated and controlled by the ordinary laws of trade.
• [li para 35]: In the two great markets for English literature, the United Kingdom and the United States of America, the existing system has been described as one of monopoly tempered by piracy.

Just came across another paper evaluating the effect of filesharing published earlier this year. Authored by Norbert J. Michel (now of Nicholls State University) and is entitled The Impact of Digital File Sharing on the Music Industry: An Empirical Analysis (Berkley Press’ Topics in Economic Analysis & Policy: Vol. 6: No. 1, Article 18) is available at: http://www.bepress.com/bejeap/topics/vol6/iss1/art18 under a ‘quasi-open-acess’ policy (which so far has at least had the effect of preventing me accessing it).

ABSTRACT:

The first file-sharing software, Napster, was shut down in 2001, but the copying technology’s impact on the music industry is still passionately debated. This paper uses micro-level data from the Consumer Expenditure Survey to examine the impact of Internet file sharing on music sales. Music industry representatives argue that the practice decreases CD sales, while supporters of file-sharing allege the practice could actually increase sales. Using household-level data from the Consumer Expenditure Survey, we find support for the claim that file-sharing has decreased sales.

May have some commonality with the same author’s earlier Digital File Sharing and the Music Industry: Was There A Substitution Effect?, Review of Economic Research on Copyright Issues, 2005 Issue, vol. 2(2), pp. 20-32.

Summary

Exact same approach as Hong’s previous work (see summary in http://www.thefactz.org/economics/p2p_summary.html) but less detailed:

• Hong uses data 1996-2001 (p.31) while Norbert uses data from 1995-2003 (p.4).

• Identification strategy: Compare CD purchases (available at micro-level from the CEX) between ‘computer owner’ and non-’computer owners’ (CEX variable again) and attribute differences to file-sharing.

• Both use a Difference-in-Differences (DiD) approach

• Hong does quite a bit of extra such as
  • estimating a demand system for entertainment goods (17 ff.) in an effort to account for the affect of the changing prices of other entertainment goods (videos declined in price over the sample period)
  • kernel matching (12 ff.) to deal with possibility of other underlying differences between treatment (owners) and control group (non-owners)
• Conclusions: Norbert estimates a 13% decline while Hong settled on an 18% decline (or 33% taking the less conservative figure on p.28)

Just as with Hong (and Zentner’s Broadband variable) the major concern is regarding identification strategy: it is difficult to be confident of estimates that depend on assuming that differences in purchases between computer owners and non-owners can be attribued entirely to file-sharing, particularly when computer-ownership may be associated with so many other activities and characteristics.

Lessig reports on some work done by Claus Pedersen on filesharing in Denmark. Unfortunately the full paper is in danish but a summary has been translated by Marie Elisabeth Pade and is available at http://www.lessig.org/blog/archives/danish_filesharing.pdf.

Back on June 19th I presented Cumulative Innovation, Sampling and the Hold-up Problem (pdf) (xml src version) at the 2006 DRUID conference on Knowledge, Innovation and Competitiveness. If you want to get a sense of paper without reading the whole thing there is a set of summary slides.

Another interesting paper I saw presented (by Marc Cohen) was a joint paper of Cohen, Walsh and Cho entitled View from the Bench: Patents, licensing and upstream biomedical innovation.

Summary:

• Patents aren’t having much impact in terms of holdup on R&D activity (at least where you don’t need access to the physical material)
• Primarily because patents are ignored by those doing R&D
• Other factors such as commercial interests seemed to be as, if not more, important than patents

Full Paper

Abstract

This paper examines the impact of patents and licensing on access to research inputs for academic biomedical research through a survey of 1125 academic researchers (including university, non-profits and government labs) and 563 industry researchers (1688 total).Our results suggest that commercial activity is widespread among academic researchers. However, patenting does not seem to limit research activity significantly, particularly among those doing basic research. Access to tangible research inputs from others is somewhat more problematic. Yet, scientific competition and the costs and effort involved seemed to dominate as the main reasons for not fulfilling such requests. A key reason for the negligible impact of patents on the conduct of academic biomedical research is that researchers largely ignore them. While such disregard for IP may, for the time being, minimize the social costs that might otherwise emerge due to restricted access (Walsh, Arora, and Cohen 2003a), it is still important that the institutional environment maintain a free space for academic research. Furthermore, the importance of scientific competition, transaction costs and commercial interests for limiting access to material research inputs suggests that policymakers should devote their attention to alleviating these causes of friction in the flow of needed research materials.

Caught an interesting presentation at DRUID by Scott Stern of an interesting paper he’s been working on with Fiona Murray entitled: Does Formal Intellectual Property Impact The Market For Scientific Collaboration? Evicence From Patent-Paper Pairs.

Take-away: 1 in 9 research projects considered is not taken forward because of patent issues (remember this doesn’t mean a reduction in the number of research projects but just that there is substitution)

Full Paper

Abstract

Cumulative scientific research depends on access to inputs associated with prior discoveries, such as databases, research tools and models, and organic materials. While follow-on researchers may be able to limit the price of access to these inputs to providing an appropriate citation, input developers may seek to use their control rights over such inputs to extract additional concessions from follow-on researchers, including co-authorship of followon research articles. By obtaining formal intellectual property rights over nowledge disclosed in scientific publications, input developers may seek to enhance their bargaining power in the market for scientific collaboration. One implication of such rent-seeking is the creation of “patent-paper pairs,” in which a given discovery is instantiated as both a scientific research article and in the form of a patent disclosure. This paper investigates the impact of these IP rights on the market for scientific collaboration. To do so, we exploit the fact that patents are granted with a substantial lag, often many years after the knowledge is initially disclosed through paper publication. Since patent applicants cannot enforce rights over knowledge until their patents are actually granted, authors of patent-paper pairs experience an enhancement in their bargaining power with potential collaborators after a patent is granted. To evaluate the equilibrium implications of these shifts in bargaining power, we examine how the pattern of scientific citations to a research article changes after patent rights over the knowledge in that article are granted. Employing a differences-in-differences estimator for XXX patentpaper pairs (and including a control group of publications from the same journal for which no patent is granted), we find evidence that patent grant results in a sharp reduction in the number of citations from “independent” research teams and an increase in citations associated with “collaborative” research teams. These shifts are particularly important for follow-on articles published by public sector authors, etc. Overall, the evidence suggests that scientists use intellectual property to enhance their market power in the market for scientific collaboration.

A few months ago I came across a fascinating short paper authored by David Goodman (Polytechnic University, Brooklyn, NY)and Robert Myers (Fairfield Resource International) entitled 3G Cellular Standars and Patents (IEEE WirelessCom 2005, June 13, 2005).

The authors had participated in a project which had analyzed the 7,796 patents deemed ‘essential’_[1] to the 483 technical specifications promulgated under one or other of the two competing 3G cellular standards: CDMA2000 under the auspices of 3GPP2 and WCDMA under 3GPP. The paper provides a powerful example of the problems that multiple overlapping monopoly rights can engender in practice, particularly in relation to the promulgation of standards. As they state at the outset:

Governments issue patents to reward innovation and stimulate technology creation. However, distortions in the patent system can stifle creativity and block deployment of the best technology [2], [3]. The problem is especially acute when … a user needs access to multiple patented inputs to create a single userful product. In these circumstances the patent system can retard, rather than encourage innovation [4].

It also gives some indication of the transaction costs involved. For example this limited investigation involved:

• resolving 7,796 patents into 887 patent families (372 patent familes were common)
• employing an expert to evaluate each claim against the standard at an average of 1 hour per claim

If we assume between 15 claims per patent and rate of 100 pounds per hour for the relevant expert this gives a total of 1.33 Million pounds simply to form a preliminary judgement as to what patents were or were not essential to the standard.

Summary of Results

Thus the great majority of patents declared essential turned out not to be upon a preliminary evaluation. However as the authors point out: Nevertheless, a company that creates equipment or services for third generation cellular systems still faces a formidable task obtaining rights to patented technology. Even with the narrow definition of essential … it may be necessary to acquire rights to several dozens of patents, depending on the equipment or service to be produced. In addition to the patents that are technically essential, there are probably other patents that are commercially essential because they contain the best (albeit not the only) possible implementation of the standard. They also note that some companies may have decided not to declare their patents to standards organizations at all (e.g. Lucent).

Footnotes

[1] The official definition of ‘essential’ from ETSI is: “ESSENTIAL” as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT of METHODS which comply with a STANDARD without infringing that IPR

[2] The members of a [patent] family are patents and patent applications produced in different countries for a single invention. Note that 372 inventions were found to be common to both standards.

[3] This is only the result of a preliminary evaluation: Each patent was assigned to one panelist [an expert] according to the technical area of the patent. The panelists examined the independent claims of each patent and spent on average one hour comparing the independent claims with the standard to which the patent was declared. Based on this evaluation, the panelist formed a preliminary judgement as to whether the technology in at least one independent claim is necessary to implement the standard.

Appendix