The Economics of Copyright

With the topic of Copyright Infringement and "Intellectual Property" being widely debated topics lately there is rarely an analysis of how these ideas affect the market of the works they seek to protect. This post will be an analysis of how the idea of Copyright and its concrete laws affect the demand and supply for the works it seeks to protect.

Copyright is a long established idea and the power to regulate it is granted to the Federal government in the United States Constitution with the following clause, "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." This clause clearly identifies its purpose as to "promote the Progress of Science and useful Arts" by granting a temporary monopoly to the authors of creative works and to inventors. Copyright was created to protect the works of authors and patents were created to protect the works of inventors.

These protections are in their very definition a government granted monopoly. Without any protection creative works would face a perfectly competitive market which would have an unlimited supply. The lack of exclusive duplication rights creates an unlimited number of free-riding suppliers and by the nature of ideas and text it is inexpensive to create a new copy so the average cost for the suppliers on the whole will be low. Since the original creator had to spend time and possibly money to create their creative work they will have a much higher marginal and average cost than the other suppliers in the market and it will take a large number of sales to decrease their average cost to at or below the market price. This creates an environment where the only people who really profit from creative works are the people who don't even initially create the works, only the people who copy them.

Since copyright grants the creator of a creative work a temporary monopoly, they have all the power of a monopoly to maximize their profits by setting their price to control the quantity and set it to the spot where their marginal revenue equals their marginal cost. This allows the creator to generate revenue from their creative work and gives the creators an incentive to create even more works.

The wording in the constitution makes specific reference to a "limited" term copyright so that society as a whole can then freely benefit from the creative work. Creative works often are a large part of what defines culture so the original idea was to set a term which balances the incentive for creators to create and for society as a whole to freely benefit from the works and incorporate it into its culture. The original term was set to fourteen years which was considered enough time that the creator could use their monopoly power to generate a profit from their work but once a profit was made society could benefit from the creation. After the fourteen years were up the work entered the public domain and the author no longer had exclusive control over the work.

Since then the term of copyright has increased dramatically. Through extensive lobbying by the copyright industry and their inherent influence on public opinion, the current term is now set to the life of the author plus 70 years. In that time however technology has increased to the point where a creative work can be marketed and distributed world wide in under a year. This means that the average cost will lower to below the market price for the author's work in a much quicker time but they hold exclusive rights for a much longer time. Any new work the creator chooses to make will only increase the average cost of their creative works on the whole. The effect of this creates a negative incentive for the creation of new works of art since the creator has a large buffer time, the rest of their life, after they finally turn a profit on their existing work that they maintain exclusive right to sell their existing work with a near zero marginal cost. Examples of this happening are readily available, such as Disney's constant retire-rerelease cycle with their popular movies.

Copyright originally was a well thought out solution to encourage the production of a valuble good that is very succeptible to a free-rider situation. Over time the original idea of the purpose of copyright was lost and the modern laws in place fall short of their inital purpose of encouraging the creation of new works of art. Instead the mordern laws do little but ensure a steady, continued revenue stream for the enourmous industry that has sprung up around copyright.