Prof. Stan Liebowitz, University of Texas at Dallas
February 2, 2010

Keeping a monopoly on yourself?

Economists are trained to examine individual markets in order to determine whether or not those markets are functioning in an “economically efficient” manner.  Economic efficiency, once achieved, requires that there be no way to increase the overall “surplus” – the difference between benefits and costs – available to members of society.

For example, a monopolistic price is thought to be inefficient because lowering the price will increase the surplus going to consumers by more than it will decrease the surplus going to producers, so that in principle the consumers could use their additional surplus to convince the producer to lower the price and everyone would be better off.  This is all basic ECON 101.

When this textbook principle was taken from the hypothetical and applied to the real world, as good textbooks will do, there was always difficulty in finding real monopolies charging monopoly prices.  Except for government-provided monopolies, there are almost always some competitors in any market you care to name, even if the competitors are just on the fringe, and whether the price being charged was actually monopolistic or not was almost always a matter of debate.  It is for that reason that antitrust prosecutions are so contentious and difficult.  For example, the evidence that Microsoft charged too high a price for Windows, or that Rockefeller charged too high a price for oil, is virtually nonexistent.  Oil prices rose after Standard Oil was broken up, and several analyses demonstrated that Windows, in the 1990s, was priced far below the profit-maximizing price.

But one set of monopoly examples was always available and frequently put forward in textbooks.  That was the individual superstar who was highly paid because he had a particular unique (monopoly) talent.  Take an actor like Brad Pitt.  He earns millions of dollars a year.  If making movies were not an option, his next best alternative would presumably pay him far less than he makes in movies.  He earns an economic rent in movies, where economic rent is another term for monopoly profit, except that it is for an individual’s talent and not the profit of a company.  When economists talk about efficient taxing, the claim is made that we could tax away rents without distorting the economy.

We could tax away most of Brad Pitt’s rents (in a lump sum fashion, of course), but as long as the rents stayed positive, he would continue to act since it would still be his most remunerative activity.  Or, as other examples, we could tax away much of the income of Tiger Woods or Shaquille O’Neal and not expect any loss of economic efficiency since they would still play golf or basketball, because no other activity would pay them anywhere near as much.

Why am I writing about monopoly and antitrust on an intellectual property blog?  The reason is that the legal/economic discussions about the proper length of copyright law are based on weighing the “monopoly” costs of copyright against the incentive impacts of copyright.  Economic analysis tells us that this is the proper thing to do.  Indeed, economic analysis indicates that if there were no incentive impact of copyright, if creators of copyrighted works would produce the same works with or without copyright, then the efficient solution would be to eliminate copyright altogether.  I have said this myself, in various writings discussing what makes for an economically efficient copyright law.

A similar argument could be made about the monopoly profits that go to those with outsized talent and incomes not due to copyright.  If the payments to top surgeons were lowered, more individuals could afford the surgery just as removing copyright would allow more individuals to consume the copyrighted good.  Perhaps even better, from an economic-efficiency perspective, might be to force the surgeon to decrease his vacations and provide more surgeries (the competitive amounts).  Nevertheless, promoting economic efficiency by taxing the rents of individuals with a very scarce skill is (fortunately) not an activity that is actually undertaken by government.  Nor is it even seriously promoted by anyone except perhaps for the Fabian Socialists of a long-gone era.

Even the clear existence of a monopoly, if it was fairly earned, is not considered grounds for antitrust prosecution.  It is anticompetitive behavior with the intent to gain or protect a monopoly that provides the grounds for antitrust, not the existence of monopoly power itself.  Therefore, general government policy does not remove the fruits of monopoly profits or rents earned fair and square.

But this is exactly what we propose to do when we discuss the efficient length of copyright.  Copyright allows a small number of creators with unusual talents to generate rents on their unique monopoly talents.  By contrast, most copyrighted works fail to earn a profit and most do not generate any economic rents for their creators.  A completely efficient copyright regime would provide creators with the minimum payments required to just cover their opportunity costs of creating the work.  A completely efficient copyright regime would, by definition, remove monopoly rents from creators.

In fact, some critics of copyright (e.g., William Fisher) justify their proposed shortening or elimination of copyright by pointing to the likelihood that fewer superstars would exist in these industries, and seem to believe that a world without entertainment superstars (entertainment is thought to be the industry most impacted by copyright) would be a better world.  But I have not seen these writers suggesting that all rents based on individual talent be removed from everyone.  Perhaps they would do so, but I am doubtful they would want to take positions so close to those advocated by political systems and dictatorships that caused so much human misery and suffering during the previous century.

If we could create an ideal or economically efficient copyright law, would we even want to do so?  Economists typically argue in favor of efficiency and I am probably more guilty than most.  But we generally assume that other markets function efficiently and we are not concerned with “fairness,” which we cannot even define.  But in this particular case we are talking about the payments to individuals.  Dropping my economics hat for a moment, I think we need to ask if it is fair to ask creators dependent on copyright to forego any rent on their talents when we do not ask any other types of talent in the economy to forego their rents.  We do not ask top surgeons to give back their rents.  Nor do we ask top lawyers, athletes, or academics to give up their rents.  (Bankers, in the current environment, might be a different story.)  Of course, these other professions do not rely on a particular law to provide them their rents and thus society is not in a position to easily reduce the rents in these occupations if it wanted to do so.  Nor is it generally understood that the justification for removing or limiting copyright is to remove rents due to monopoly talent.

The question of optimal copyright duration, from a theoretical perspective, is too easy to answer if we limit ourselves to textbook efficiency.