Think about the oldest and most familiar principles of American law, property and proportional liability, in a new and surprising way, and learn to apply economic reasoning to an especially important and interesting aspect of life.
The Competition of Technologies
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Из курса от партнера Wesleyan University
Property and Liability: An Introduction to Law and Economics
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Property, Utility and Technology
The concept of property is developed in two new directions. One concerns the problem of eminent domain and evokes the ancient conflict between individual rights and collective needs – in what circumstances, and to what extent, should private property be protected against uncompensated taking by government? How do the different theories of property considered earlier each answer this question? The other asks how voluntary exchange can be organized when technology makes it easy for people to take others' property rights without compensation. If existing rights are insufficient to prevent these takings from occurring on a large enough scale to make voluntary exchange impossible, new kinds of property rights are needed to encourage efficient levels of production and exchange. This is illustrated by the problem of intellectual goods and the new forms of property that have evolved over centuries to make exchange in ideas possible.
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Richard AdelsteinProfessor
Department of Economics
Hi everybody, welcome back. In the next few lectures, I'd like to
talk about Intellectual Property, which is a subject that's much in the news.
We read stories about piracy of inventions, we read stories about file
sharing, and we read stories about lawsuits that all of these activities
generate. So, it would seem that intellectual
property is a very current problem and that it is indeed a problem that arises
at the technological forefront. And in fact, that's the case, but the
problem of intellectual property is indeed very old.
And while it does lie at the interface of property and technology the context of
the problem changes as technology changes with time, but the nature of the problem
created by intellectual property always remains the same.
So the problem of intellectual property is old wine in continually new body
bottles. It's the same problem posed and reposed
time and again over history by changes or advances in reproductive technology.
So let me talk about the problem of intellectual property, not by focusing
initially on intellectual property alone, but by talking about a problem that faces
the seller of any good. Whether it is an intellectual good or any
other kind of good. Every potential seller of any good must
solve two problems before he or she can sell goods successfully in exchange.
First, the seller must open what I'll call a channel of exchange with willing
buyers. This is the problem of transactions cost
that we've been dealing with in earlier lectures in the course.
The seller can open the channel of exchange with willing buyers, by lowering
the transaction costs that frustrates transactions between sellers and willing
buyers. So, for example, the seller can make it
easier for buyers to find out who the sellers are, to find out what the terms
of trade that the sellers are offering are, and the sellers can find new and
better ways to move good from one person to another.
So, sellers are continually trying to lower the transaction costs that separate
them from wiling buyers, and thus to make as many willing buyers into actual buyers
as possible. But at the same time that the seller is
trying to open the channel to willing buyers.
The seller must also try to close the same channel to thieves or people we'll
call free riders, who would if they could reach into the channel of exchange and
extract the value of the goods that are being moved from seller to buyer.
In the channel of exchange, and take that value without paying the seller for the
goods. So, in order to fend off the free riders,
our seller must cultivate in the case of the free riders or the thief.
The same sort of transactions cost that the seller is trying to reduce in the
case of willing buyers. So, if free riders find it easy to reach
into the channel of exchange and to take the value of the good being traded
without compensating the seller. Then the seller won't be able to earn
money from that sort of, of theft and if the theft becomes widespread, the seller
won't be able to sell to anyone. The problem arises frequently, that
opening the channel of exchange to willing buyers, also opens it to free
riders. And closing the channel to free riders
also has the effect of closing it to willing buyers.
So, sellers must solve both of these problems in order to be successful
sellers of of goods. Let's talk a little bit about opening the
channel to buyers, although this is a problem that we've seen before.
Sellers try to lower the transactions costs that separate them from willing
buyers, below the gains from trade. And if they succeed in doing this, and
buyers discover that the transactions costs of buying that they bear are
smaller than the benefits of the purchase that they will make, they will purchase
the good. And that means success for the seller,
lowering these transaction costs means more sales and success for the seller.
An example of this, happens in every grocery store in the United States, its
possible to sell apples without having people touch them but its not easy to do
so. Most people, when they're in a store,
want to find out whether the apple they're going to buy is crisp, whether it
has any bruises in it or whether alternatively it's sort or mealy so that
they'll purchase the crisp unbruised one. In order to determine what apple is
bruised or not bruised customers typically have to pick up the apple and
inspect it by hand, by squeezing it. And if they do so, in the nature of
things, let's say 5% of the apples that they squeeze will then become unsalable
because the customers have squeezed the value out.
Perhaps, the customer squeezes the apple so hard that the skin breaks.
Perhaps, she drops the apple onto the floor.
In any case, the act of attempting to find out the quality of the apple has led
to the destruction or unsaleability of the apple.
And the lost revenue of those apples that have been, that have been destroyed by
the attempt of, of customers to discover the quality of the apple.
That value is a transactions cost to the seller.
I have a friend here in Middleton who runs a small fruit and vegetable shop
with a very, very strong reputation for very high quality.
And he will not allow customers to touch, any of the fruits or vegetables in his
store. So, that he can avoid the transactions
cost that I've just described. But then how do people discover whether
the fruit is good or not? My friend, Ted, tells them whether it's
good or not. And his reputation is such, that his
customers trust him implicitly. And thus, by building a strong reputation
for extremely high quality over many, many years, my friend Ted's been able to
reduce the transactions cost of the squeezing the fruit, and thereby make
more sales, than his counterparts in the larger supermarkets are able to make.
At the same time, that the seller must open the channel of exchange to willing
buyers, the seller must close the channel of exchange to free riders who, as I've
said, are attempting to reach into the channel of exchange and steal the value
of the good being traded. You'll notice that in the case of apples,
stealing the apple typically means stealing the object.
In order to steal the value of an apple that is being traded in commerce, one
pretty much is required to steal the apple itself.
You can't take the value out of the apple without being in possession of the apple
itself. But as we'll see in the case of
intellectual property, it's possible for free riders to reach into the channel of
exchange, extract the valuable good that is being transferred in the channel of
exchange without taking physical possession of the article of commerce
that is passing back and forth between sellers and buyers.
So, generally speaking, in the attempt to discriminate supply.
So, as to encourage supply to willing buyers and discourage supply to free
riders. [COUGH] Sellers are trying to cultivate
transactions costs between them and free riders.
And they're trying to lower transactions cost between them and the willing buyers.
And so, as a student of mine once said, wonderfully about this, the same sand,
that is, the same transactions cost, that make sandbars, and thus, closes the
channel of exchange. Also makes riverbanks and prevents the
land, as it were, from spilling over into the river.
Where the seller succeeds in solving both of these problems of discriminating
supply the good is private, as we'll call it and exchange is possible.
Exchange is possible because the seller is able to communicate economically
speaking with willing buyers and is able to isolate or exclude people who want the
value of the good but don't want to pay for it.
And when the seller was able to do these things, exchange is possible, and
economist call the good a private good. But, if the seller fails at either of the
two tasks I have just outlined, then there will be no exchange If the seller
fails to open a channel of exchange to willing buyers, then buyers can't be
serviced and there won't be a market. But, if he can succeed in opening the
channel to willing buyers, but also opens the channel to free riders.
Then, in fact, anybody can reach into the channel of exchange, seize the value of
the good that is being exchanged without comes to terms with the seller and
compensating him for what he's lost. Since anybody can do this, and the seller
has no way to exclude free riders when that exclusionary barrier is to low the
good become becomes public, as the economists call it, and exchange fails
precisely because non buyers can't be excluded from consuming the value of the
good, and thus there's no incentive for anybody to purchase the good.
There are two ways to address the problems of discriminating supply.
One of them I'll call brute force, and this amounts to changing the underlying
values that motivate people to take an exchange relative to the transactions
costs that they have to endure in order to complete the exchange.
People conduct an exchange because they get more benefits from the trade than
they lose. And those are the underlying values the
benefit minus the cost is the benefit of the trade and if that is greater than the
transactions costs then the trade will take place.
So, brute force would tend to change those underlying values in the exchange
while keeping the transactions costs constant.
The alternative way to address the problems of discriminating supply is what
I'll call technique, and this does just the opposite.
It assumes that the underlying values that motivate buyer and seller to make
the exchange are constant and stay the same, but that it's possible to change
the transaction's costs both between the seller and buyers, and between sellers
and free riders, relative to the underlying values themselves.
Technique implies what I'll call a competition of technologies between the
sellers and free riders over the means to secure or breech the channel of exchange.
Sellers are always trying to open the channel to willing buyers and close the
channel to free riders. And free riders are always trying to
breech the channel of exchange so that they can reach into the channel, extract
the value of the good that's being traded without paying compensation to the seller
of the good. Where sellers prevail in the competition
of technologies, exchange can proceed because willing buyers can be serviced
and free riders can be excluded. But where exclusionary technologies fail
and thus free riders prevail in the competition of technologies, then sellers
must either fine a better technology to exclude those free riders or look for
help in excluding the free riders from either social norms or in the last
instance, from the law itself to protect against theft in the channel of exchange.
So, where exclusionary technologies fail. Where the seller cannot overcome the free
riders technical ability to reach into the channel of exchange and seize the
value of the good without compensation. The seller must turn to social norms or
the law, what we'll call ancillary technology in order to change the balance
in competition. Back over to favor the seller again and
enable free exchange to proceed in the goods that the seller is selling.
Let me illustrate all of these concepts with an example suppose at a university,
the faculty would like to have a faculty club.
But they'd like the faculty club to have certain characteristics that would
distinguish it from an ordinary restaurant.
Suppose the faculty wants no outsiders, that is no one who is not a member of the
university's faculty to be able to enter into the faculty club.
So they'd like to reserve the room of the club solely for members of the family.
At the same time, they'd like to eliminate a commercial atmosphere from
their faculty club and so they don't want to have to pay for their food at the
faculty club each time they use it. They want to see, they want the club to
seem like a private club more like a home than a restaurant.
And so they don't want, as it were, commercial dealings of any sort in the
club. And so, to meet these two objectives,
that is no outsiders and no commercial atmosphere in the club.
The faculty is given a room by the university, and they adopt the technology
of an unguarded food buffet in a locked room.
So, the unguarded buffet provides food without commercial atmosphere, and the
lock on the door keeps the outsiders away.
These barriers against free riding by Townspeople can be breached in two
different ways, one of them is brute force.
In normal times, it may well be that the people in the town are well fed, and they
have no particular need to eat at the faculty club, and thus it's just not
worth very much to them to break into the club and steal the food.
On the other hand, suppose there were a famine in the town, and as a result of
the famine people in the town had nothing to eat.
This of course would raise the value of the food at the unguarded buffet to a
much higher level than it was without the famine.
And as a result, the costs to the townspeople of breaking into the club,
which were high enough to deter this kind of free riding in normal times, may now
be worth bearing. People who would not of taken the trouble
to breech the channel of exchange in normal times, will in the emergency
created by the famine bear whatever costs they need to, to breach or, or leap over
the seller's, as it were in this case, the faculty's barrier to keep the free
riders out. But in normal times, the townspeople may
be able to get to the food in the unguarded buffet simply by an advance in
technique. That is, they may simply find or make a
cheap key that opens the door to the faculty club, and this substantially
lowers the costs of free riding, as opposed to the earlier benefits of free
riding. This new technique, this advance in the
competition of technologies. This acquisition of an effective
breaching technology by the townspeople shifts the onus in the competition of
technologies to the faculty. Its now up to them to device an effective
new exclusionary technology, a new way to keep the towns people out of the faculty
club or they can't do this, they need to seek the laws help in raising the costs
of free riding. Notice, however, that if the towns people
are not starving, and no cheap key exists to unlock the door, then the faculty can
get what they want out of the club without the need for a norm or a law to
guard them against free riding. Because the people are not starving, they
don't value free riding enough to bare the costs of it.
And because there is no cheap key they have no technique that allows them into
the club at very very low cost. In other words, they can't steal or don't
want to steal and thus there doesn't need to be a law or a norm against their theft
of the food from the unguarded buffet. Only if brute force or technique changes
the state of the competition of technologies.
Must the seller resort to a legal solution, a legal technology to the
problem of keeping free riders out of the channel of exchange?
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