This guest post has been authored by Sherry Shukla, a 2nd year B.A.LL.B. (Hons.) student at National Law University, Nagpur and Arpit Lahoti, 3rd year B.A.LL.B. (Hons.) student at National Law University, Nagpur.
Any new product created, i.e., the information in its pure form, is a form of a public good, making it both non-excludable and non-rivalrous. Copyright allows the producer to internalize more of the benefits incurred of the formation of the work, i.e., and it makes internalization of work’s positive externalities and limits the free-riding of the product. Positive externalities are those where others enjoy the fruits of a given work without them being involved directly in that particular work. A beekeeper providing pollination to the neighbouring garden is an example of positive externalities. (See Figure below).
The graph gives us an essential illustration regarding the theory mentioned above of the internalization of work’s positive externalities. Here, Private marginal cost is less than Social marginal cost, and the benefit, on the other hand, is more. When we provide copyright protection, the dead-weight loss (area CBA in the graph) is lessened. It also leads to internalization of all the externalities and socially efficient allocation is achieved.
So, the rights vested to the producer of original work are not inherent or natural rights but are given by utilizing copyright, i.e., they are the means to an end. Now, we will address the issue of the non-excludable and non-rivalrous nature of the information created by the producer. Various IPR’s regime solves the issue of information being non-excludable by making certain classes of information exclusive-in-law, but this cannot make into exclusive-in-fact. On the other hand, it does not solve the problem of the non-rivalrous nature of the information. Non-rivalrous goods are the ones whose use by one consumer does not hinder or bring changes to the use of another consumer. This form of information has different implications for IPR. There is a trade-off between the producer’s incentive to produce work and the public’s interest in using that work.
The rights under copyright law provide a sudden increase in the price competition to the producer. Copyright Protection will help the producer charge price higher than earlier, which would have an impact on his/her creation. So, the following can be inferred.
- The first effect, being consumers willing to pay any price for a particular product. Hence keeping in mind the welfare of consumers and producers, this particular transaction will be welfare-neutral and socially efficient.
- Second, consumers who are not willing to pay high prices will create a dead-weight loss in society, i.e. will lead to loss to the producers. So, the market allocation of that particular product on the second type of consumers will not be socially efficient.
Hence, taking both the nature of information, there is an inevitable trade-off between efficiency in consumption and production.
An important aspect of intellectual property is that cost involved in the creation of work related to copyright is often high. On the other hand, the cost of reproducing the work by the producers itself or the consumer is quite low. The copies of the original work once created allow easy creation of the additional copies without much involvement of the cost. The only solution towards this is to make the cost of the copies equal or close to the marginal cost. Still, the only difficulty in this solution is that the producer’s revenue may not be sufficient to cover the cost incurred. Copyright protection is the right provided to the producer to prevent others from making copies. It trades off the cost of limiting access to work against the benefits of providing incentives to create a work in the first place. The only way to maximize the economic efficiency of copyright law is, the maximisation of, benefits of creating new work minus both the losses incurred, i.e., one from limiting the access of the work and the other being the administrative cost incurred in the protection of copyright.
The cost of creating any work has two essential components first, the cost of creation of the work, which does not change with the number of copies sold. This includes the producer’s efforts and time in addition to the cost incurred for making it into a new product. The second component is when the cost of the work changes with the copies of the product sold.
When a product is created, it is expected that the cost incurred in the making of the product should not exceed the cost or profit received with the sale of that particular product. Also, we assume that the demand curve for the copies of given work is negatively sloped because they are not a perfect substitute for the original work.
The producer will make copies until the marginal cost of one or more copies equals its expected marginal revenue. The resulting difference between the two, i.e., marginal cost and the marginal revenue of the total copies, should generate the revenues to meet the first component of cost, i.e., cost incurred when it does not get affected by the number of copies sold. The new product will only be created when the difference between expected revenue and the cost of making these copies equals or exceeds the component as mentioned above of cost.
Now, from the above analysis, two essential things emerge out. First is Price discrimination, which means that an individual cannot produce a perfect substitute for a product. Second, demand for the substituted or plagiarized content depends upon other competing works in the market. Let us take the first case, i.e., Price discrimination. For instance, the charge for a ticket of a new and first-run movie is quite high and which gradually decreases with the course of the week that it passes through. Hence, such Price discrimination increases revenue as well as the number of new works but not necessary, the number of its copies. The second case gives us an important conclusion: if there are already many works available in the market for a given product, its demand will decrease automatically. Take, for example, a book on fundamental contract law may not be sold much as there are already many works done by eminent lawyers on this area of law. Hence, the number of copies created in the market depends upon the already created work.
So, we see that number of works created, and the copies in the market automatically escort us towards the subsistence of copyright protection. If copyright is not provided to a product, then the creation of its copies will be much easier, and consumers will not have to spend much on purchasing that product. This will eventually lead to lowering down the product price to the marginal cost of copying. Which means the product will not be available and produced in the market because the producer will not be able to recover the cost of the creation of that product. Another problem faced by the absence of Copyright Protection is, prices and costs of production of that product is created much before the demand for that product is made, or its entry into the market has been done. This becomes more serious when it comes to artistic work or any work of intrinsic value or books that are valuable. Here, the sales may be insufficient to cover the actual cost of the work. Thus, as per the reasoning stated above regarding the cost incurred to manufacture a product and the profit received after the sale of that particular product, it can very well be concluded that the aggregate difference between the profit received by the flourishing product and the price of manufacturing of that product should be more to cover the overall expenditure and also to reduce the risk of failure when it comes to artistic work.
 Some copiers offer somewhat similar work to the consumers but cannot provide the exact quality of work without the producer’s permission. So, the copyright monopoly is not the same as an economic monopoly because there may be close substitutes of the original that may not be infringing on his rights.
Authored by: Sherry Shukla (2nd year B.A.LL.B. (Hons.) student of National Law University, Nagpur)
Co-Authored by: Arpit Lahoti (3rd year B.A.LL.B. (Hons.) student of National Law University, Nagpur)
Disclaimer: Any views expressed herein are the views of the author alone and do not reflect any views of Intellepedia or BananaIP.