A Theoretical Framework for the Economic Analysis of Intellectual Property Rights

No.133
April 2002
Research Fellow Satoshi Hamaya

1. Accompanying the increasing digitalization and networking of intellectual property, debates about Japan's copyright laws are flourishing. However, at the center of these debates on copyrights-and property rights of works in particular-juristic investigations regarding the harmonization of interests of copyright holders versus users have been very common. At the same time, the U.S. has established special analyses of "law and economics", and economic studies of copyrights and copyright law are also being explored.
2. According to the representative examples of this research in the U.S., when authors use past works in order to create a new work, excessive copyright protection means that the cost of using prior works in order to create a new work rises exorbitantly. As a result, the amount of new works being produced declines. When copyright protection is strengthened, profits from royalties rise and the incentive to create is increased; however, if copyright protection is strengthened beyond a certain level, it will become cost-prohibitive to create new works and thus the number of works produced will fall. Furthermore, an optimal level of copyright protection exists for the welfare of the entire society; if these bounds are overstepped, not only will the amount of new works fall, but access to works will also decrease, and the cost to support the copyright system will rise, thereby harming social welfare.
3. When analyzing the effects of private copying there are three main points: (1) marginal cost of copying, (2) the potential for profit attribution (appropriability), and (3) the substitutability of copies for the original. If these three conditions change, the effects of private copying on economic welfare will also change, but there are also instances where these changes can be positive. For example, if the marginal cost of copying is constant and the potential for appropriability is direct, copies will not be completely interchangeable with the original. Furthermore, in cases where the author's marginal cost is low, though the author's profits from copies will decrease, the consumer surplus will increase and thus economic welfare on the whole will rise. In other words, depending on the circumstances, allowing private copying can actually increase economic welfare in some cases.
4. Digitalization and networking is causing a major shift in the premises of existing research. Within the new environment resulting from the diffusion of computers and the Internet, the late 1990s saw the emergence of academic articles analyzing the economic effects of sharing information goods. Such studies posited that if authors (copyright holders) were able to know beforehand the attributes of users of their information goods, price discrimination for goods based on the attributes of the users would become possible, thereby increasing profits.

This paper is an expanded and revised version of the report presented at the "Conference on Copyrights in the Digital Age", hosted by FRI on December 5, 2001.

CONTENTS

1. Economics of Copyright
2. Economic Analysis of Private Copying

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