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Harvard Journal of Law & Technology


According to the conventional wisdom, price discrimination offers two advantages compared to uniform or linear pricing in the production of copyrighted works. First, it can reduce the deadweight losses otherwise associated with the higher prices that copyright makes possible. Second, it can increase the producer surplus or rents associated with the production of any given copyrighted work and thus ensure the expected profitability of a wider range of works. This increase in profitability should, in turn, lead to the production of more copyrighted works. If the conventional wisdom is right, then the proper response would be not merely to tolerate, but to actively promote price discrimination schemes with respect to works of authorship. Accordingly, if changes to copyright's existing legal rules would enable more, or more perfect, price discrimination, then such changes should be adopted.

Of course, not everyone is so sanguine about price discrimination. Existing economic and legal critiques have focused on the first supposed advantage, and have shown that a shift to price discrimination will not always reduce, and may sometimes increase, deadweight losses. Yet, these critiques have not reduced the pervasive, almost absurdly utopian perception of price discrimination--perhaps because they do not address price discrimination's second supposed advantage. As a result, these critiques leave open the argument that even if a price discrimination scheme only converts consumer surplus into producer surplus, it still enhances social welfare by increasing the incentives to produce more and better works of authorship.

This Article reexamines the second supposed advantage and offers an alternative critique of price discrimination as a panacea for the monopoly costs copyright can impose. Both the traditional theoretical account of the desirability of price discrimination and the existing critiques rely on a partial equilibrium analysis. They examine the consequences of various price discrimination schemes only for the specific market at issue--the market for a specific copyrighted work or for copyrighted works more generally--and ignore or assume away any effects on the remainder of the economy.

This use of partial equilibrium analysis is troubling. If an increased ability to price discriminate, whether driven by technological changes or changes in copyright law, leads to the production of more works of authorship, the resources to produce those additional works must come from somewhere. Over the long run, we cannot assume that the necessary resources would otherwise have been left idle. Rather, to produce more works of authorship, the resources must be taken from some other productive sectors of the economy. This is not to say that the resource necessary to produce more works of authorship, namely creativity, is ultimately limited--a nonrenewable resource, as it were--but simply an acknowledgement that creativity, like any other resource, is scarce. At any point, the time and talent used to write a book, direct a movie, or compose a song cannot simultaneously be used for something else. This raises the question of whether encouraging people to devote additional time and talent to producing more works of authorship generates more value for society than the something else to which those resources would otherwise have been devoted.

Partial equilibrium analysis answers this question by assuming that the remainder of the economy consists of markets that are both complete and perfectly competitive. So long as the remainder of the economy satisfies these assumptions, every other market will, at equilibrium, reach a point where both the marginal social value and cost, and the marginal private value and cost, are equal and fully reflected in the price of the resources. Given these assumptions, if implementing a price discrimination scheme enables the producers of copyrighted works to offer a higher price for the resources necessary to produce additional works, then this ability to pay more establishes that producing more works is the most valuable use of those resources.

Moving away from the assumptions inherent in a partial equilibrium analysis leads to the world of the second-best. No longer are he effects on other markets assumed away by reciting the magic Latin incantation ceteris paribus--all else constant. Instead, one must expressly account for how changes in one imperfect market affect other imperfect markets. This Article presents a second-best model to examine the allocation of creativity in an economy. Instead of assuming perfect competition in all other markets, this model assumes that market power persists in all markets for creative goods. Using this assumption, it then examines the welfare consequences associated with a switch to perfect price discrimination in the market for one particular type of creative good. This model can be described as consisting of one market for copyrighted works and a second market for all other creative, non-copyrighted products. The model could also be described as having one market for a particular type of copyrighted work, such as films or books, or for a particular class of copyrighted works, such as digitally-distributed works, and a second market for all other copyrighted works. For either description, the key assumption is that to produce more of a given creative product, the necessary resources will come from another creative sector that is also imperfectly competitive or monopolistic, rather than from a non-creative sector that satisfies the assumptions of the perfect competition model.

This Article takes up these issues in turn. Part II briefly introduces perfect or first-degree price discrimination and its efficiency advantages in a partial equilibrium analysis. Part III considers a second-best equilibrium model and uses it to examine the supposed efficiency advantages of first-degree price discrimination. Given the second-best equilibrium conclusions, Part IV addresses the various price discrimination schemes routinely employed in the marketing of copyrighted works and evaluates their likely welfare consequences in the real world. Part V concludes.

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