# Society for Economic Research on Copyright Issues (SERCI) Annual Congress 2007

JULY 19, 2007

Last week I was at the 2007 Society for Economic Research on Copyright Issues (SERCI) Annual Congress (also acronymed under the label SERCIAC). The event was a nice size with a good mix of people, well organized (a big thank-you here to Christian Handke) and with many interesting presentations (some of which I was able to take notes on – see below). I also had the chance to present my paper on optimal copyright and get some useful feedback. I’ve already mentioned this in a previous post but for those interested you can find the slides from my talk here:

and the full paper here:

## Rough Notes on Some of the Presentations

### Professor Richard Lipsey: Technological Transformations, IPRs and Second Best Theory

#### Intro

• Real consumption 10x level 100 years ago
• Tech change the major component
• Frequently underestimated in growth accounting because capital growth also includes payment for innovations
• General purpose technologies
• Revolutionary
• Lots of unexpected applications
• Externalities too … [ed: though this is always true with innovation]
• ~20 examples of GPTs concluding with suggestions for future (Biotech and Nanotech)
• Why was it in the West that take-off occurred?
• Suggests due to scientific culture and pluralism
• Debated among economic historians …
• Why science better in Christian West rather than China and Europe?
• Variety of reasons, many ‘accidental’ e.g. pluralism of Roman state, discovery of Aristotle post reconquista in Spain …
• Can not ignore historical accident in understanding history of economic growth
• Institutions are crucial
• Though the universities: “the West took a decisive and probably irreversible step toward the inculcation of a scientific worldview that extolled the power of reason and painted the universe –human, animal, inanimate– as a rationally ordered system” (Huff 1993: 189)
• Universities are ‘institutional memory for science’ (plough, because embodies de facto persists in a way that pure knowledge does not)
• Differed from Islam because more unified and did not succumb to reaction later [ed: though this beg questions of direction of causation]; differed ).
• China also did not have good institutions to act as this memory
• Shared (science-based) world-views also important
• Stuff happens slowly and is hugely cumulative and incremental not ‘out of the blue’

#### Modelling

• Two approaches:
• Neoclassical (Arrow-Debreu DSGE)
• Evolutionary/Structuralist
• Neoclassical v. powerful but bad for modelling growth
• Evolutionary is better for growth
• Competition is ‘jostling’ not perfect
• Technology is endogenous
• Better able to incorporate externalities and non-convexity
• Bemoans fact that people focus on d/w loss too much and don’t see benefits of monopoly in terms of incentives for innovation
• Neoclassical advice: (static) remove anything that prevent optimum allocation in perfectly competitive market
• Evolutionary: like rents as induce more innovation
• [ed]: things are a little more complex. Most neoclassical growth models do allow for rents for innovation – usually via patents (e.g. Romer) and there are the mainstream schumpeterian models of Aghion and Howitt/Grossman and Helpman
• Lots of stuff that prevent first best
• Fixed costs
• Product differentiation
• Imperfect and asymmetric information
• Happiness (man is a social animal)
• … (endless list)
• [ed]: all of these are well-known to economists
• So look at second-best: ‘rules of thumb’ such as reduce the largest distortion
• Lipsey (2007) provides a whole bunch of objections to these approaches
• Standard 2x2 matrix of rivalrous vs. non-rivalrous, excludable vs. non-excludable types of goods
• Cumulative innovation: trade-off current and future (down-stream) innovation
• Formal models are not enough need judgement
• Knightian uncertainty …

#### Evidence

• How important were patents in history
• Does not seem intro (or increasing use) of patents led to higher rate of innovation
• Other examples of GPTs
• technology came first and then IP came along after
• Cites Watt/Boulton example of hold-up
• Government intervention (R&D subsidies and procurement) can be very useful
• See Ruttan (2001 and 2006)
• ‘Governments can pick winners’ (but also many failures)

### Patrick Waelbroeck: Music Variety and Retail Concentration

• Sales of music have declined in France and other countries since ~2000
• Also decline in variety of music
• Two reasons advanced for decline in sales
• Piracy (demand side)
• Less variety (supply side) – focus here
• Increase in retail concentration
• More large stores
• General purpose/food stores selling other goods (Wal-Mart etc)
• This reduces variety available => Drop in sales
• Retails reduce variety because:
• Cost to manage inventories
• Promotions
• Competition between products
• Model:
• vertical setup with 1 producer and 1/2 retailers
• competition b/w retailers reduces double marginalization (good for welfare)
• 3 options: vertical integration (VI), vertically separated monopolies (2M), monopoly in production and competition in retail (MC)
• Results
• VI more likely to have variety than 2M (some parameter values where VI has 2 products where 2M does not). Can solve with 2-part tariff.
• MC leads to more variety than 2M
• Lack of integration reduces incentive to launch new products
• Retail concentration hinders product variety and total quantities sold

### Marcel Boyer: The Value of Music to Commercial Radio Stations

• 1997 Canadian copyright act was amended to include equitable remuneration for performer’s and maker’s
• What is the correct level of equitable remuneration
• What would a commercial radio station be willing to pay for music
• Assume CR (commercial radio) allocate time between talk and music such that marginal value of each is equal
• Estimate share of program content that is music:
• Total over whole day (0600-0000): 76% unweighted and 75% weighted by number of listening
• Correct for advertising amount (as this varies greatly with time too)
• Value attributed to sound recordings by day part:
• 0600-0900: 25.9% of commercial value (12.95% sound recordings, 12.95% other)
• 0900-000: 74.1% (49.40%, 24.70%) respectively
• Comes out at 60% recordings, 40% talk for value generated
• Now observe payments to talk people (since in accounts)
• So get what payments for talk = total value x 0.4
• Hence recordings value = total value x 0.6 = talk/0.4 x 0.6
• Implies recordings are worth C$265 million gross • After taking into account music related expenses of radio stations (not payemnts for the work itself but technicians etc etc) reduces to$127 million
• Commercial radio sales are $1 billion • So copyright payments should be ~13% of sales • Current payments were$40 million and should be $127 million • Look at earnings of authors (of text) • Where do they get their money from • What is distribution of earnings • Gini coefficient: measures inequality in earnings • UK ALCS payments 2005 • all authors: 369 mean, 80 median, gini: 0.72 • author with more than 50% of income from writing: mean 28k, media: 12k, gini: 0.63 • Germany (note earnings are net of tax) • all authors: … • author with more than 50% of income from writing: mean 13k, median 8k, 0.56 • Professional authors): (UK) 40% earn all income from writing (germany similar) • Collecting society income distribution is less equal that general writing income (which is surprising given supposed ‘diversification’ role of collecting societies) • Compare prices of in and out of copyright books • Best-selling books for each year from 1895-1940 • Collected data on list price, sales price (Amazon), number of pages, binding type, isbn#, type of writing and so forth • 2445 observations based on 603 unique titles • 280 separate publishers. 188 publishers had less than 2 books in the sample • We limited sample to publishers with more than 10 books (23 such publishers) and who published both copyrighted and non-copyrighted books (12 publishers) (and had to have at least 80/20 ratio i.e. min of 20% in copyright, 20% out of copyright) • Leaving 872 observations, but many were thrown out because they were e-books or because some data was missing • 66% of total is out of copyright (this is higher than number of distinct titles because pd books have more editions) • Distributions by publisher: pretty even except for Kessinger which has ~10x everyone else (will turn out to be suspicious) • Simple OLS: copyright dummy has no effect (r-squared 0.285 • robustness: the same (remove outliers) • Publisher dummies: copyright dummy has impact of around 13% • robustness: back to no significant (remove outliers) • Standard royalty contract is 10-15% of price • So this looks very efficient because authors get no rents • Some of these publishers may be pirates (Amereon, Buccaneer and Kessinger have had complaints) • Exclude doubtful publishers and restrict to Simon/Schuster, Penguin and Dover • Number of observations are much smaller (72) • OLS regression: copyright effect is 22% increase in price • Robustness raises this to ~27% • Suggests 50/50 split for royalty rates (but might be too high depending on author power) • Deadweight losses: • 1-2 elasticity of demand with 20-25% copyright impact gives c/dw of 4-6.25 • at 3 elasticity is 6-9.38 • at 0.5: 1-3% • [ed: depending on how large costs are (and for books they seem large relative to copyright) then need to do some work to convert to ratio of d/w loss to welfare] [ed]: Really great to see this kind of empirical work being done and this is a nice approach to an important question. Some queries: • Looking at average prices rather than lowest price per title (and unweighted by sales) could be a problem • Imagine that have a book selling at$10 before going in PD. Goes into PD and now two versions: the official version produced by original publisher still at $10 and a new cheap edition at$5. Then average price has only dropped to $7.50 even though all the new served demand (which was d/w loss before) comes from$4 book. Thus impact of copyright estimated at $2.50/$10 = 25% but in fact was $5/$10 = 50%
• Heald data is useful on this. He finds that on average public domain books have on average 5.2 (6.2 including ebooks) editions while copyrighted books have an average of 3.2. Turning to a subset of especially durable (popular) works, Heald provides a price comparison, finding that ‘durable’ public domain books have an average lowest cost of $3.85 while copyrighted books have an average lowest cost of$8.05 (restricting to well-known major publishers gives $5.80 and$8.90 respectively). Unfortunately he does not give average price but indicates lowest price really quite different (and restricting to well-known publishers will bias results).
• Digital world: this focuses on books in hard-copy format
• But what about e.g. Project Gutenberg. I can get a digital version of PD stuff from there for zero.
• Furthermore books are the least ‘digitizable’ item (most of us still want the dead-tree version).
• So assume that for material such as music and film would likely see a bigger effect.