The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Thursday, April 05, 2007

Intellectual Property Law vs. Open Source Economics

Today's New York Times (April 5, 2007) had an 'Economic Scene' article by economist and technology expert Hal R. Varian: Why That Hoodie Your Son Wears Isn’t Trademarked. In his article, Prof. Varian makes a persuasive case for the idea that "not every industry necessarily benefits from strong intellectual property protection. In some cases, it appears that lack of protection can lead to a more vibrant and dynamic industry."

The example that Varian highlights in his article is a think-piece written by two law school professors published on-line at Public Knowledge. According to both of the law school profs as well as economist Hal Varian, what is normally deemed "piracy" of intellectual property (i.e., some sort of alleged infringment of copyright, trademark, patent, and/or other variants of intellectual property law) actually spurs innovation and makes both good economic and business sense. As Prof. Varian puts it:
Mr. Raustiala and Mr. Sprigman argue that the lack of intellectual property protection actually promotes the functioning of the industry. If the extension of copyright to fashion prevented clothes manufacturers from copying each other, the industry would be ceding a major role to the lawyers and become much less creative. We’d see the same thing year after year. In other words, women’s fashion would look much more like men’s fashions — boring, boring, boring.
This line of reasoning is very similar to the rationale for the open source movement in the computer software community. A thorough analysis of the legal, economic, and technological impacts of the open source idea is provided in Open Source Software Licensing, a research paper by Harvard Law School graduate, Steve Lee. A nice summary of the open source philosophy is provided by Andrew Leonard's article, License to Be Good.

The cliff-notes version of the economics involved in analyzing whether or not there should be stronger intellectual property protection or not boils down to the issue of fixed costs versus marginal costs. In economics, marginal cost is the rate of change of costs (in calculus terms, the first derivative of the cost function). Many technology-centric and other types of industries that are heavily tilted toward intellectual property (e.g., music downloads) have marginal costs that are extremely low and even approach zero -- especially in light of the internet's ability to distribute and reproduce materials at low costs.

On the other hand, these industries often do have substantial fixed costs (in economics, these are costs that must be incurred in order to produce the goods or services in question; these costs aren't usually adequately reflected in marginal costs). So an economist's take on a lawyer's question regarding intellectual property boils down to this: How do we balance the need to recoup fixed costs versus the benefits of having more relaxed intellectual property laws, in the context of the fact that the marginal costs of copying and redistributing material often approaches zero, in the internet age?

Hal Varian's opinions, as well as that of most of the others cited here, on this matter is, not that there is no need for intellectual property law, but that there is another side to the argument (the benefits with low costs of a more relaxed intellectual property regime). This is a debate that is central to the information age we live in and I'm glad that Varian, et al., have shown us that there truly is a debate.

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