IPcentral Weblog: October 2004 Archives

October 2004 Archives

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10.30.2004

Antitrust

PFF's Adam Peters attended a Federalist Society conference on Antitrust Modernization and Public Choice last Wednesday. His report is here.

And if you wonder why you are being told about an antitrust conference on an IP website, see here.

posted by James DeLong @ 9:45 AM | General

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10.29.2004

Induce Act and the California Legal Climate

In the negotiations over the proposed Induce Act, the Silicon Valley participants have been obsessed over the need to prevent frivolous law suits.

Perhaps one explanation is the legal climate in which they live -- see the article by Walter Olson, quoted at length by Professor Bainbridge today, on California's consumer rights law and its harvest of vexatious litigation. For more, see Olson's OverLawyered.

posted by James DeLong @ 4:20 PM | General

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More on Fantasyland

Marginal Revolution has a post by Alex Tabborok on pharmaceuticals, linking to a recent New Yorker piece by Malcolm Gladwell.

One key point of both: U.S. prices are actually lower than prices in other nations for drugs that are off-patent because competition from generics keeps the price down. Few who favor re-importation would be willing to give up this part of our system.

posted by James DeLong @ 3:30 PM | General

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P2P and the FTC

The FTC has scheduled a two-day workshop on Peer-to-Peer File-Sharing Technology: Consumer Protection and Competition Issues, for December 15-16, 2004.

Comments and requests to participate as a panelist are due by Nov. 15.

posted by James DeLong @ 10:20 AM | General

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Fantasyland[s]

The latest Fortune (Nov. 1, 2004) (subscription required) has a column by Geoffrey Colvin on how "Both candidates are on a drug trip to fantasyland" over the issue of re-importation from Canada.

In a few words, he neatly sums up the problem: Pharmaceuticals are an industry that requires massive investment to produce the first pill, then only pennies each to produce the next zillion. So the system is that U.S. consumers pay for the investment, then foreign governments bargain with the drug companies, pushing the price down toward marginal cost and free riding on the original investment by the U.S. consumers.

This is exactly what Canada does, by controlling prices so they are 70% lower than those in the U.S. So politicians who want to force re-importation so as to lower prices believe that "by enacting a law, they can make the U.S. a free rider on itself. In fantasyland, no one would have to pay for drug development at all."

He continues: "The real issue is the excruciating choice between higher drug quality and availability on the one hand, and lower costs on the other. In the real world, where nothing is free, you can't have both." (Except I disagree with his use of the adjective "excruciating" to describe a trade-off that is simply inherent in the nature of the world.)

Colvin could have pointed out that pharmaceuticals are not the only fantasyland around. Debate about all kinds of content and delivery systems -- music, movies, publishing, software, games, file-sharing, TiVo, and so on -- is permeated with the same type of delusion -- that because the marginal cost of distribution is so low, content should be dirt-cheap, and we should all get to free ride, ignoring the cost of creation.

Years ago, I heard a radio interview with noted economist and de-regulator Alfred Kahn, in which the professor was finally moved to say to his economically illiterate torturer, with infinite weary exasperation in his voice, "But we can't all of us subsidize all of us; the world simply does not work that way."

posted by James DeLong @ 9:56 AM | General

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10.27.2004

European Site Opposing Software Patents

A site has been launched in Europe demonizing the idea of software patents. The tone of the site is utterly hysterical, and I found myself a little baffled while reading it. The thrust of the argument seems to be that large corporations can manipulate the patent system to eliminate smaller competitors, resulting in consumers being swamping by offerings of inferior, buggy software. But it isn't clear why that just hasn't happened in the United States, or why this problem would be unique to the patent system (surely it happens with copyright as well, or indeed with any type of legal claim?). And surely small companies have used patent claims for protection against large ones in many cases. The site also makes the now rather tired claim that open source products are superior because they are subject to public scrutiny--as if patents were not published, as if the teams of open-sourcers pouring over ever bit of GPL code with nothing better to do than look for bugs for free (yeah, right) would do something substantially different from the teams of programmers paid to debug for a proprietary software release. There surely are some interesting arguments somewhere out there about the wisdom of patenting software, but one won't find them at this site.

posted by Solveig Singleton @ 6:56 AM | International , Patents , Software

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Grokster Settles Copyright Suit

Grokster has settled a copyright suit arising from their effort to set up a for-pay music service without getting permission from copyright holders.

posted by Solveig Singleton @ 6:41 AM | Internet: P2P, Search Engines...

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10.26.2004

Antitrust Doctrine, IP, Property, and Dynamic Efficiency

The Fall 2004 issue of Regulation has an article by Fred McChesney, Professor of Law in Northwestern's Kellogg School of Management, on "Talking 'Bout My Antitrust Generation."

It has some shrewd comments on the intersection of antitrust doctrine, IP, and property rights generally:

The standard antitrust paradigm, even in the current era where price (or, reciprocally, quantity) is the principal focus, takes for granted that property rights are well defined and enforced. While that assumption may be warranted in the typical case, it does not apply across the board. And when it does not, the antitrust model has proven difficult to apply, sometimes leading to perverse results.

The tension between antitrust and property is well understood in the context of intellectual property. Legal protections afforded by patents, copyrights, and trademarks recognize that creation and enforcement of intellectual property entail a separate cost--the item must not only be produced but first created--that does not apply to the standard widget already in existence. If so, prices above marginal production costs must be charged as an incentive to compensate for the fixed costs of creating the good in the first place. The higher prices necessarily result in lower quantities sold, compared to a price covering just production costs, as in the standard economic model of competition.

This distinction between the static model, with well-defined property rights, and a more dynamic model that takes into account the need to create assets first would seem self-evident. But traditionally it has not been self-evident to antitrust enforcers. In the field of intellectual property, for example, "the history of the Department of Justice enforcement has been one of almost unbroken hostility towards patents."

Although the property-antitrust dichotomy arises most frequently in areas of intellectual property such as patents, it is perhaps best illustrated in the context of more traditional property rights. Take the standard economic example, the fishery. Typically, fish are found in "open access," owned by no one until they are actually caught. Because access to a lake, stream, or ocean is open, over-fishing is a well-recognized problem. The equally well-recognized solution to this so-called "tragedy of the commons" is some form of ownership, either communal or completely private. With private ownership, over-fishing ends.

But in an antitrust world where low prices and high quantities are the goal, establishment of property rights is an objectionable solution. Property rights mean the exclusion of some fishers and ending the exploitation of an open-access resource. As quantities taken diminish, prices naturally rise, a result striking at the core values of modern antitrust. To antitrusters, the result is particularly objectionable when, as is often the case, the solution to over-exploitation of resources available in open access requires a collective agreement among competing fishermen to reduce their catch. Then, it is a "contract, combination, or conspiracy" employed "in restraint of trade," with restricted quantities and higher prices. In the static antitrust world, Sherman Act liability would follow.

And so it has when private agreements have attempted to solve the tragedy of the commons. The Gulf Coast Shrimpers & Oystermans Association (GCSOA) was a private organization that regulated shrimp harvests along the Mississippi coast of the Gulf of Mexico. Its members agreed also to sell only to certain packers, who would pay GCSOA packers a minimum price. The Justice Department ended the GCSOA's private definition of property rights in a criminal action brought under section 1 of the Sherman Act.

And so, an attempt to define private property, thus avoiding the economic waste created by open access, resulted in a criminal conviction.

Just as it has been hostile to private creation of property--intellectual or marine--so has antitrust enforcement been hostile to private enforcement of property rights. To cite some of the better known cases, the government has attacked manufacturers' collective attempts to safeguard their contract rights against fraud, to protect their original fabric designs from being copied by pirates, or to prevent reverse engineering of machinery protected by a web of patents and unpatented trade secrets.

Analyses that would reconcile property (including intellectual property) law with antitrust, though voluminous, thus far have not succeeded in resolving the essential puzzles. Although complex reasons are often offered for the incompatibility of the two systems, simple ones suffice. Both intellectual property and antitrust law (as they are considered today) supposedly seek to maximize social welfare, net of costs. But one system (antitrust) maximizes welfare in a short-run static sense. The other (property) is based on the claim that short-run losses from higher prices are necessary for the long-run existence of the good, and so benefits will ultimately exceed costs. Thus, comparison of welfare benefits net of costs under the two models must by definition be an empirical exercise, comparing streams of benefits and costs over time, appropriately discounted for the time-value of money and for the risks of attaining the supposed net benefits. What is best in any particular situation require empirical data that cannot be expected to emerge, at least not in the context of antitrust litigation.

Judge Easterbrook has proposed two basic tests for determining whether an antitrust case makes sense:

Is there market power? Are consumers harmed?
But in situations where property rights are poorly defined or enforced these tests are not helpful. The imposition of property rights in settings in which none exist will increase prices and "hurt" consumers in the short run.
The foregoing is not a criticism of Judge Easterbrook's filters. They have exerted an important influence in antitrust thinking since their appearance some 20 years ago, and deservedly so. The point, rather, is that they are effective in the standard antitrust paradigm in which property rights are already well defined and enforced. When antitrust cases arise outside that paradigm, standard antitrust thinking risks diminishing social welfare by applying the tools of maintaining competition when the standard assumptions do not apply.

A longer version of the article, included some expansion of the above-quoted material and citations, appeared in the Emory Law Journal, Summer 2004, and is available on Lexis.

I have commented on the static efficiency fallacy before, and it is a point of increasing importance. Fundamentally, the very idea of "static efficiency" is a silly one, the world being an ineluctably dynamic place. Last May, PFF assisted the Competitive Enterprise Institute in sponsoring a conference on Declining Marginal Cost Industries in the Information Age, an affair that drew such bigfeet as Greg Mankiw, Chairman of the Council of Economic Advisors, and Vernon Smith, Nobel Prize winning economist from George Mason University.

McChesney also hits another dimension of the problem -- the need for IP-dependent companies of all kinds to cooperate on issues such as property protection and interoperability, and the mismatch between these needs and antitrust doctrine. This is going to cause endless trouble in the future.

posted by James DeLong @ 11:13 AM | General

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Bureaucracy

Having recently moved from DC to Virginia, I just had my initial encounter with the Virginia Department of Motor Vehicles, which turned out to be the equal of the DC DMV in arrogant obfuscationalism. Since DC DMV is legendary, I was impressed.

Those who think the solution to IP problems is to have the government collect a tax on Internet hardware and connectivity and dole the money out to creators should spend some time hanging out at a DMV.

posted by James DeLong @ 9:23 AM | General

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10.25.2004

More Reading

Tyler Cowen, econ prof at George Mason, has an article on the website of the Social Affairs Unit, designed to explain to citizens of the UK "Why the music industry is suing you, your neighbor, or your child."

Sample:

Two years ago most downloaders did not know that their activities were illegal. Few uploaders felt guilty about making large numbers of songs available for free on the Internet. It was viewed as akin to lending your CDs out to your friends, except that the "friends" here were both anonymous and large in number. "Art should be free," right?

Since the United States lawsuits, there has been a subtle shift of opinion. Many people, especially those beyond their teenage years, are now proud of not being downloaders. They brandish their Apple iPods with pride. The cultural climate has shifted to the point where people, even if they download, are embarrassed to admit as such. Only in the under-twenty crowd is illegal downloading still a badge of honor. And many of these children now face (admittedly imperfect) regulation from their parents.

The music industry knows that the long run will bring a network of free music. It knows that free music may have illegal status, a "grey" status, white status (recorded from the radio), or perhaps be pirate (from abroad) but not illegal in the actionable sense. But there will be two networks, a pay network and a free network.

The pay network stands a good chance of competing against the free network. Perhaps the pay network can offer better sound quality, tie-ins (concert tickets, T-shirts, etc.), upgrades and maintenance service, better information such as album liner notes, song selection services, easier interface, and other benefits. The future course of technology is difficult to predict. Nonetheless it is easy to see why a pay network will have a greater ability to finance these goodies than will a free network.

The music companies - present and future suppliers of the pay network - do not wish to face a ten year period where everyone is used to getting music for free. They do not want an entire generation to grow up thinking of music as a free commodity. They do not want hackers and illegal downloaders to become established as folk heroes.

It is an excellent piece, like all of Cowen's work. (He is the author of In Praise of Commercial Culture and Creative Destruction: How Globalization is Changing the World's Cultures.) Read the whole thing.

posted by James DeLong @ 1:48 PM | General

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10.25.2004

Posner on Law Reviews

posted by James DeLong @ 1:17 PM | General

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