I was reading the comments on a recent blogpost on the freakonomics blog. Someone suggested (tongue firmly in cheek, I hope) that if libraries were invented today, copyright enforcement bodies (the DMCA was labelled directly) would hunt down anyone who tried to set one up.
The comparison of the lending of books to the piracy of electronic media is disingenuous.
Why pirating books is a limited problem
Books are generally sold under the “licence” that allows them to be resold or loaned. Although there is arguably a different value/cost associated with a book purchased for a single reader versus one for a library, the scalability of a printed book is naturally limited. A physical book can only be read by a single person at a time, and transport and distribution are not costless.
The need for careful agreement between buyer and seller around what is allowed is not critical and probably not worth the cost of having separate licences to cover individual consumers versus libraries.
At the limit, pirating of electronic media implies no production
For electronic media, the scalability of copying and redistribution is, for most practical purposes, limitless if we assume perfect, universal, costless reproduction and distribution. For impractical purposes (and pedants, you know who you are) there are limitations around the total population of earth, the market for that particular work, and costs of distribution are not zero. While I haven’t gone through the entire process of relaxing these assumptions to understand the impact, this theoretical framework is still instructive.
Thus, without careful agreement between buyer and seller, buyers will be inclined to extract maximum value. Taken to the extreme, this implies that only one copy of the work will be bought. I’ll explain how we get to this now. In the rest of this example, I am assuming no restrictions on copying, which includes no social pressure or stigma attached with using or distributing pirated media.
Once there are two sellers in the market, the market price will be pushed down due to competition between the two sellers. If one seller wants to sell the product at any price above zero, the competition will undercut that price since profit can still be made until the price hits zero. The aggregate supply curve is effectively horizontal at a price of zero since the marginal costs of production are zero.
In this analysis I am implicitly assuming that perfect competition will result even when there are only two suppliers in the market. Ordinarily this would be a poor model for this type of market. However, for two reasons, this is probably a good first order approximation:
- The “goods” being supplied, the creative work in this case, are exactly identical in every way. The differences or perceived differences of monopolistic competition and other market forms do not apply.
- Every additional buyer instantly becomes a potential supplier. Thus, the number of suppliers in the market grows exponentially by doubling every “turn” of the process. It should be relatively clear that the market will inevitably fall into perfect competition in a relatively short amount of time.
With a typical downward sloping market demand curve, this implies that an infinite amount of the product will be “sold” at a “price” of zero. This is approximated through current distribution and pricing of pirated media.
The creator of the work knows that he or she will only ever be able to make one sale (where I define “sale” to be a transaction with a positive price). All future sales will have zero total revenue. So the price at which that first sale is transacted must be very high if it is to be worthwhile to the creator to produce. However, the first purchaser knows that once he or she has purchased the work, competitive forces mean that he or she will not be able to sell the work for more than 0 in future. Thus, the price paid by the first purchaser will only be equal to the consumptive value to that purchaser.
Any creative work that will cost more to the creator to create than the value that one purchaser places on it (albeit the purchaser who values the item most) will not be created. Not for commercial reasons anyway.
Conclusion?
I am wary to conclude too strongly on an area that is new to me and where I haven’t necessarily thought through all the consequences, or understood the impact of relaxing certain assumptions. However, this little thought experiment naively suggest that, under these strict assumptions, a huge variety of creative works may never see the light of day.
The start of a practical solution
Live concerts cannot be perfectly replicated. If one assumes that a large portion of the value derived from a live performance (or live “creation”) is being there in person, then that “first sale” can be made to many consumers simultaneously. That same instance of creation cannot be resold since a live performance cannot be stored. However, a second, third and Nth live performance could be sold where the creator has pricing power due to the natural monopoly created through their own talent, brand and creative abilities.
Several performers (including Madonna) have signed huge financial deals with concert promoters (e.g. Live Nation, suggesting that the real world is already tackling the changing economics of artistic creation in an electronic media world.
This is unlikely to be the only solution that is tested, but it will be interesting to see how this section of the economy develops through this testing phase.
In this post I haven’t expressed an idealogical view on whether piracy is “good” or “bad” according to some normative standard. The hope is that we can follow the logical, economic arguments to their conclusion rather than be sidetracked by emotion and politics.
