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date: 07 July 2020

Economics of Intellectual Property Law

Abstract and Keywords

This chapter analyzes the second wave of the economic study of intellectual property (IP) law. This second wave is characterized by two primary features: increasing methodological diversity and sophistication and an emphasis on contextualization—understanding how IP law is embedded in larger social and economic systems, and how IP interacts with other aspects of those systems to foster innovative ideas and economic growth. The chapter first discuss the many ways that second-wave scholarship seeks to show how IP rights are embedded in broader economic contexts, and thus diverges from first-wave research, which tended to focus exclusively on IP rights as the central determinants of economic activity. Next, it considers the many different methodologies being deployed to study issues in the economics of IP rights—from large-scale empirical work to surveys to interviews to experimental research.

Keywords: economic analysis, intellectual property law, intellectual property protection, IP rights, contextualization

The economic study of intellectual property law is now well into its second wave.1 It first emerged in a series of ad hoc writings by pure economists stretching from the nineteenth century to the early 1960s. The first wave culminated in a series of classic articles done in the emerging methodology of Chicago school law and economics. But beginning in the 1980s, there began a new and muscular wave of research. This second wave is characterized by two primary features: (1) increasing methodological diversity and sophistication; and (2) an emphasis on contextualization—understanding how intellectual property (IP) law is embedded in larger social and economic systems, and how IP interacts with other aspects of those systems to foster innovative ideas and economic growth.

This chapter assesses the state of this second wave. It outlines some chief points of contention in the literature, and points to some frontier issues just now appearing on the horizon. It also strives, in the conclusion, to push scholars to spend less time trying to answer the Big Question in the field—whether IP law can be justified on economic grounds—and more time understanding specific features and individual rules in the IP system. The Big Question has proven to be an elusive quarry. Much of the payoff in the field has come from asking a series of discrete Little Questions, so this enterprise should naturally attract most of the effort in the field.

8.1. Introduction

It is useful, once in a while, to look at a complex thing in whole cloth, instead of thread by slender thread. When I do that with IP, here is what I see. I see that IP is beginning (p. 201) to live up to the aspirations of an earlier generation, which yearned to make law a much more expansive field of study, one that integrated the insights of sociology, history, psychology, and economics. All these threads are in place in the IP field now. Gone are the days when virtually every article on the subject began and ended with a discussion of case law and statutes. Now, though straight doctrinal work is far from dead, the pages of academic journals are alive with studies of all facets of IP law, informed and influenced by a wide range of academic disciplines. These disciplines supply a cornucopia of tools, which scholars put to work on all sorts of issues and problems. Scholars no longer stick to the close knitting of IP statutes and cases. What we have now is a very lively tapestry.

Take for instance the outlines of a typical article from IP’s “classical” period. Starting from well-accepted background assumptions—that IP law is about incentives, for example; or that education is an important value and ought to be fostered by IP law—a scholar would approach a recent line of cases, or an important decision by the Supreme Court.2 Such facts as entered into the discussion would be drawn from the legal record in the case. The influence of older cases would be plumbed and dissected. Implications of a legal holding would be fleshed out—incentives are reduced, for example, by tightening patent standards; or educational values will be undermined, by constricting fair use. Based on these observations, the author would advise doctrinal course corrections to set things right.

Contemporary work is very different. A book or article might be addressed to foundational assumptions. How does IP work in the overall context of creativity in an industry? What kind of growth has the industry undergone, and what if any role has IP been shown to play in that?3 Do firms and people in the industry rely on informal norms or other techniques—apart from formal IP rights—to protect investments in creative works?4 And, within the province of IP doctrine, how do courts actually apply the doctrines found in IP law?5 From a completely different perspective, a scholar might address the cost side of IP protection: what happens in the market when IP rights expire—for a patented pharmaceutical, for instance, or a copyrighted book?6 To be sure, the literature continues to address topics of interest to first-wave scholars. Does IP really operate as a viable incentive? In a particular industry or field of creativity? How does IP compare with other motivations and incentives that drive creativity, generally and in specific industries? Did a change in the law actually lead to greater or lesser investment or activity?7

(p. 202) These examples highlight two major differences between early or “first-wave” scholarship and the work of more contemporary “second-wave” researchers: (1) increased attention to IP rights in a broader economic context (contextualization); and (2) greater methodological diversity. This chapter is organized around these two themes. I first discuss the many ways that second-wave scholarship seeks to show how IP rights are embedded in broader economic contexts, and thus diverges from first-wave research, which tended to focus exclusively on IP rights as the central determinants of economic activity. Next, I consider the many different methodologies now being deployed to study issues in the economics of IP rights—from large-scale empirical work to surveys to interviews to experimental research.

8.2. Contextualization

As a fine poet once wrote, “I have had to learn the simplest things last.”8 This seems true of IP economics. While the earliest forays into the field tended to see the legal rules concerning IP protection as part of a broader set of issues relating to investment in creative works (e.g., Levin et al. 1987), much of first-wave scholarship conceived of formal IP rights as the sole determinant of various types of economic activity.9 (This is of course a feature of comparative statics, with its famous—in some quarters, infamous—assumption of ceteris paribus.) As applied to IP in its early days, law and economics were concerned with the net welfare effects of tweaking specific rules and doctrines. A crucial contribution of the second wave of IP economics has been to widen the field of view within which economic activity is studied.10 In this new approach, legal rules are but one determinant of activity in the creative sectors of the economy. Other aspects are just as important: industry norms; technological protections; structural factors such as lead time (i.e., degree of difficulty to copy new products), the effectiveness of trade secrecy, and the ability to bundle innovative products with other products (p. 203) or services over which a firm has pricing power so as to recoup investments in innovation.11 Even alternative policy mechanisms such as R&D tax credits or firm relocation credits come into play.

In second-wave thinking, IP is just one of many ways firms make money by creating new things. Formal IP rules are seen as embedded in a larger economic context. This scholarship argues that only by understanding this larger context can we understand the true impact of formal legal rules on “the rate and direction of technological growth.” As mentioned, second-wave thinking is in one sense simply a return to the roots of the field. One of the earliest survey-based studies of IP rights asked R&D managers to compare patents with other, non-legal “appropriability mechanisms”—techniques for recouping investments in creative works. Perhaps not surprisingly, many respondents listed lead-time advantage and trade secrecy as more important than formal IP rights such as patents and copyrights.12

Second-wave research has now returned to this basic theme. In this new line of scholarship, contextualization is explored along a number of dimensions. In this chapter, I want to emphasize just three examples.13 Taken together, these give some idea of the richness that follows from understanding IP as but one aspect of a much broader innovative ecosystem in which creative firms and people operate.

First, I will discuss what are known as IP’s “negative spaces”: trades and pursuits in which participants rely on informal norms instead of formal legal protection. These illustrate how IP rights are embedded in a larger system of social norms, which some scholars say render formal IP redundant. Second, I will turn to the function of IP rights in “platform technologies,” for example, cell phone standards and computer operating systems. Firms that own or dominate platforms often use IP selectively to control access to their platforms. For these firms, IP is embedded in a complex strategic game in which they seek profits through some combination of technology platform and complementary products. IP can be used in a number of ways in this game: to erect a toll for access to the platform; to selectively exclude competitors from the platform while sharing access with allies; or to enforce an open or nonproprietary platform model with other industry participants. Third, I will discuss the growing literature that links IP rights to economic organization. Scholars have come to see that IP plays an important role in the setting of firm boundaries, subtly affecting issues such as whether small, R&D-intensive (p. 204) firms can survive independently or instead are fated to be absorbed into large, vertically integrated companies. IP policy, from this perspective, helps determine not only aggregate investments in creativity, but also the locus of innovative activity: individuals, small firms, or large firms. It is a new and exciting aspect of the overall trend toward greater contextualization in the economic study of IP rights.

8.2.1. Case Study in Contextualization: Fields where IP Is “Unnecessary,” or “IP’s Negative Spaces”

In recent years, IP scholars have described a number of fascinating trades and pursuits where people get along quite well without the protection of formal, enforceable IP rights. From French chefs (Fauchert and von Hippel 2008) to stand-up comics (Sprigman and Oliar 2008), and from fashion designers (Sprigman and Raustiala 2006) to tattoo artists (Perzanowski 2013) and magicians (Loshin 2010), creative people working in various industries develop norms and practices that provide an adequate, and perhaps often superior, alternative to formal IP protection.

Some have taken to calling these areas, collectively, IP’s “negative spaces” (Rosenblatt 2011). From these studies, a consensus theory has begun to emerge, which holds that IP law is far less necessary than many have traditionally supposed. From a descriptive or positive beginning, in other words, negative space theory often moves to a more normative point: the essential wrongheadedness of the traditional story that IP rights are always and everywhere necessary to call forth creative works. In terms of contextualization, then, negative space theory says at times that IP policy needs to be sensitive to one important aspect of context: the presence of norms that can act as “IP substitutes.”

8.2.1.1. How Big Is the Negative Space?

One important point about negative space studies is that they tend to concentrate on “niche” fields, industries, and pursuits that are, in the aggregate, relatively small when compared with the “IP economy” as a whole, Merges (2013). So, for example, French restaurants, stand-up comedy, and tattoo parlors are relatively modest economic enterprises.14 Compared with the estimated size of the overall IP-based economy, they represent only a small percentage of activity. The International Intellectual Property Protection Alliance (IIPPA), for example, estimates that the “copyright industries” alone add $1 trillion to the US economy each year.15 It is very difficult to arrive at similar estimates for the “patent industries” because companies in so many industries obtain large numbers of patents every year. But we can say that the pharmaceutical industry is (p. 205) worth $ 340 billion per year alone,16 and that the chemical industry totals roughly $450 billion.17

Most of the fields that negative space theorists explore are, in reality, fairly small scale. They fit the description of property theorist Robert Ellickson (1993), who some time ago noted that in “close-knit” groups, formal property rules were often less efficient than an effective set of social norms.18 But, as Ellickson also noted, once groups grow beyond a certain size, and the economic value of their activities passes some threshold, informal norms cease to work. I believe this is as true for IP as for conventional tangible property. So, while we may have some interesting things to learn about context from IP’s negative spaces, the most important lesson in the end may be that most industries, as they grow, end up recapitulating the history of IP protection generally. As the larger context changes, the negative spaces are filled in.

8.2.1.2. Changing Fashions?

But there is one industry studied by negative space theorists that is not small scale: fashion. A conservative estimate is that this is a $200 billion per year field (Hemphill and Suk 2009).19 Clearly, the magnitude of this industry is much closer to the “copyright industries” plus pharma/chemicals. So where does fashion fit into discussions of the “negative space”? Perhaps the most important point to note in this respect is that the fashion industry itself seems quite motivated to escape the negative space. According to Scott Hemphill and Jeanie Suk (2009):

The adverse effects of copying explain why many [fashion] designers oppose copying, just as they oppose counterfeiting of handbags. ([The negative space] argument, if correct, ought to apply to fashion trade-marks and copyrights as well.) [Raustiala and Sprigman] pitch their paradox as an explanation for the otherwise puzzling equanimity with which designers greet copyists. But that premise is faulty. In fact, many designers are vocal advocates against copying, and … make use of the currently limited legal tools available to curb copyists.20

In addition to enforcement using the established (though flawed) legal tools available, fashion designers have been active in lobbying for various new forms of design protection.21 This lobbying effort is perhaps the best indicator that innovative firms are indeed not satisfied with the current copying-centric equilibrium in the fashion industry. As a number of scholars have noted, in fact, the speed and ease of copying have created a (p. 206) significant threat to the livelihoods of creative fashion designers, making future lobbying more likely.22

Viewed from the perspective of the evolution of IP protection, the fashion industry begins to look less like an instructive outlier and more like a very conventional industry.23 As with many other industries, as the value of the creative products increases, the calls for strengthened IP protection increase as well. It may not be long until fashion crosses the great divide from negative to positive IP space.

8.2.1.3. Learning about Context from Negative Spaces

From all this, I think there are two things we can learn. First, there is indeed room for IP-free zones—negative spaces in the fabric of IP protection. IP need not permeate every crease and corner of the economy. Negative space theorists have shown real creativity and resourcefulness in searching out and documenting examples of fields that survive and even thrive outside the shadow of IP protection. As with all empirical research, each case study adds to our understanding of how our economy and society actually function, and the role of IP rights in different economic contexts.

Yet, the other lesson from exploring negative spaces has to do with their limits. Careful attention to context reveals that, in most cases, norms are effective substitutes for IP rights primarily in niche industries where participants are relatively close-knit socially. Out in the larger, more anonymous economy, it remains to be seen whether norms can effectively replace the formal protection provided by IP rights.

8.2.2. IP and Platform Technologies

When scholars study IP in context, IP becomes not the sole fulcrum determining economic outcomes but instead one of many interconnected facets of economic activity. On one hand, this diminishes the significance of IP rights in the analysis; they are not the exclusive determinant of investment, innovation, or whatever dependent variable is affected by the existence or strength of IP protection. On the other hand, this more contextualized understanding helps to isolate the unique role that IP rights can play in a large, complex economic system.

An example from the world of platform technologies will show what I mean. Platform technologies are technical systems such as computer hardware (e.g., the Apple iPhone or Samsung Android cell phone handsets) or software (the Microsoft Windows or LINUX operating systems). They provide a common starting point for further technological development: the creation of special chipsets for the iPhone: for instance, or a cell phone application designed for use with the Google Android operating system software. For some time, scholars have understood the economic/technological forces (p. 207) at work in these “platform markets” (e.g., Shapiro and Varian 1998). What is of interest to IP scholars is how firms in platform markets use IP rights as strategic instruments. Some firms profit from proprietary platforms, which are covered by various IP rights. For them, exclusive IP rights exclude direct competitors, obviously. But in the case of “allies,” companies that develop complementary technologies or content that increase the overall value of the platform “ecosystem,” IP rights are often purposely waived (see Simcoe 2008; Merges 2008, 2011; Barnett 2011b). So IP law permits a pattern of selective enforcement and selective waiver that is used by sophisticated platform players to advance their interests in this complex area.

Some platforms are “open,” rather than proprietary. IP plays a role in this context too. Access to an open platform can be made conditional on agreement to perpetuate the open access policy. This is achieved through licensing contracts granting open-source participants access to a platform. Licensees agree that in exchange for obtaining access to an open-source platform, their contributions will in turn be subject to an open licensing policy. Thus—somewhat paradoxically—IP rights are the foundation upon which open access is built. The IP rights that cover an open platform are the basis for the legal threat that maintains open access.

The literature on IP and platforms treats platform access as a strategic variable that can be manipulated by for-profit firms, those usually associated with the strong IP rights/proprietary innovation model side of the IP debate. So open innovation and profit maximization are no longer opposite ends of an ideological spectrum; the former becomes a strategy pursued by private firms when conditions warrant. This is true of for-profit companies permitting access to their platforms, but in the case of private investment in open-source projects. In each case, firms decide strategically to waive their property rights in the service of firm advantage.

We see here an illustration of the growing contextualization of IP rights in the economic literature. Scholars have shown that they understand why the ability to waive IP rights selectively is an essential dimension of their usefulness in the context of platform competition. This is a far cry from a simple, unidimensional “incentive” story where an increase in IP protection is tested for its effect on total R&D investment. The effectiveness of IP rights in the platform environment depends not only on the attributes of the IP rights when granted but also on the various licensing and enforcement strategies employed by the holders of IP rights. By studying this very special setting, economists have learned some new important lessons about the effects of IP rights on firm strategy and overall welfare.

8.2.3. IP Rights, Firm Boundaries, and Economic Organization

Traditional first-wave scholarship followed the conventions of classical microeconomics in paying little attention to the organization of economic production. IP rights (p. 208) influenced the overall production level in society, but it was never mentioned which types of organizations did the producing (e.g., Nordhaus 1969). In these early models, IP rights stimulate creative output (while raising consumer prices), but the precise locus of that output is never mentioned: individuals, small firms, large firms, etc.—this body of theory abstracts away from these issues. But as with economics generally, IP economics has in later years discovered the fascinating set of issues surrounding firm boundaries.24 This is one of the clearest and most rewarding aspects of the general trend toward the contextualization of IP rights.

The basic insight from this literature is that IP rights can actually affect the location of firm boundaries (Teece 1986b). The key to this new understanding of IP is to see it not primarily as something that affects overall incentive levels, but instead as an instrument that affects transactions—and hence the organization of production (Merges 2005; Arora and Merges 2004; Burk and McDonnell 2007; Barnett 2011a). Advocates of this view see IP as a way for small, specialized firms to protect against opportunism when contracting with larger firms. IP makes it easier for specialized firms to sell technology and know-how via arm’s-length contracts, which permits specialized producers to exist as independent firms. IP rights can then be said to affect industry structure; without these rights, specialized knowledge subject to opportunistic copying would have to be produced within large, vertically integrated firms. This in turn would mean a loss of the “high powered incentives” (to use Williamson’s term) available to independent firms who sell their output via contracts (Merges 2005). The upshot is that IP at the margin may enable more small and independent firms to remain viable even in industries where multicomponent products are assembled and sold by large, vertically integrated firms. This literature on IP and the boundaries of the firm thus shows in very clear relief the importance of studying IP rights in context. Context here is everything: IP rights and the nature of the firms that use them are inextricably interlinked.

Another insight is that, by affecting the location of firm boundaries, IP may exert an indirect incentive effect that has not been appreciated in the past. As Barnett (2011a, 787) puts it, in the case of patents: “Organizational effects proxy for innovation effects: where patents alter organizational behavior, they alter innovation behavior.” This is because the smaller firms enabled by stronger IP rights may be more innovative, as compared to their large, vertically integrated counterparts. Barnett (2004) and others make an additional point, which in some sense brings this literature back around to one of the pioneer studies in the contextualization of IP rights (Levin et al. 1987): because large firms have at their disposal numerous ways to recoup expensive R&D investments (e.g., by bundling technology-intensive products with other products over which the firm has pricing power), while small companies do not (owing to the (p. 209) absence of complementary assets), IP rights are particularly important for small firms. The strength of IP rights, as a policy variable, affects small firms disproportionately.25

8.3. Methodological Diversity

The basic methodology of the first wave was comparative statics of one variety or another. The classic version was a formal comparative model, showing overall welfare with and without whichever feature of the IP system was being modeled (see, e.g., Nordhaus 1969). Even the early contributions, from what might be called the primordial era of the first wave, employed this approach. (They used analytic descriptions, or “word models,” instead of “formal” or mathematical models; see, e.g., Plant [1934].)

8.3.1. The Growth of Empirical Studies

The second wave is far more diverse. IP scholars now use all sorts of methods. Chief among them in recent years has been the use of empirical data. Beginning with some path-breaking work in the late 1980s (e.g., Levin et al. 1987) and 1990s (e.g., Allison and Lemley 1998), and accelerating especially in recent years, empirical research has burgeoned so much that it now has its own specialty abstracting service.26 Rarely does a week go by without some new and interesting contribution looking at music sales, patent prosecution, or trademark searches. Scholars are beginning to specialize; familiarity with large datasets is now almost required in certain subfields of IP economics, especially patent law.27 Some studies rely on traditional data sources, such as patent citation studies. Others are based on novel, labor-intensive datasets the researchers put together themselves. And more sophisticated statistical methods are brought to bear, compared with the relatively simple early work (see, e.g., Ziedonis 2004; Hall, Jaffe, and Trajtenberg 2005; Galasso and Schankerman 2010). Each study adds to the growing integration of IP empirics into the main body of contemporary social science.

A heightened sense of context is evident in the newer generation of empirical work, following the general theme of recent IP scholarship. Early empirical studies were highly aggregated, comparing for example GDP growth with patent grant rates. Recent studies pursue a number of more sophisticated strategies, including a comparison of (p. 210) how related patents for a single invention fare at three of the major international patent offices, in Japan, Europe, and the US (see Webster, Palangkaraya, and Jensen 2007). Another set of studies identifies variation in patent-examiner behavior, and the impact this has on patent outcomes such as validity determinations in litigation. See, e.g., Cockburn, Kortum, and Stern (2003).

But empirical studies are just one of the methods second-wave scholars put to use. Structured interviews, experimental methods, and comparative institutional approaches have also become popular in the past ten years or so (see Merges 2000; Vertinsky 2012). These, together with the continued deployment of economic modeling and analysis, represent important elements of the diversity of methods that now characterize the field. And beyond economics, all manner of alternative methodologies are in play as well (see, e.g., Merges 2011; Dinwoodie 2013).

In the sections that follow, I describe what I see as the main thrust of several of the most important methodologies being used in the IP field today. As with everything in this chapter, though I try to be comprehensive, the result is no doubt a personal and idiosyncratic survey of the literature.

8.3.2. Models and Analytics

Even while a host of newer methods has been brought to bear on IP-related issues, scholars continue to use traditional approaches as well. For example, economic modeling still plays an important part in the discussion of IP-related issues. One rich source of modeling-based studies is the classic article, which a contemporary scholar will explore anew with updated insights. In this genre, consider for example Duffy (2004)—a thorough reexamination of Edmund Kitch’s classic “prospect theory” of patents (1977). Other recent work considers different types of models, such as Yoo (2004), which describes a product differentiation view of copyright law. Still other work pushes classic insights a step further: for example, Lunney (1996), who argues that allocative efficiency, and not the classic “incentive-access tradeoff,” ought to drive copyright policy. And an excellent unified synthesis of the economics of IP and innovation is Scotchmer (2006).

At the same time, IP has caught the attention of scholars whose interests lie with theorizing about property rights generally. So, for example, several important articles by Henry Smith have pushed his highly analytic synthesis of property theory into the domain of IP law. See Smith (2007, 2009). So too with work by scholars like Fennell (2004, 2009), and Merrill (2009). In each case, IP provides examples for an analytic approach to important issues in property law. The authors integrate IP into the general fabric of property, using it for examples of a new way to conceive or categorize some longstanding bodies of property theory. Merrill, for example, argues that certain patent doctrines embody the property principle of “accession,” or extension of ownership to natural outgrowths of previously owned works. And Fennell (2009) points to interesting twists in IP inalienability rules in support of her argument for a more flexible conception of alienability generally. Still another area where general property theory (p. 211) overlaps with treatment of IP issues is in the study of IP access regimes as a case study in governance of a common resource. See Samuelson (2003).

8.3.3. Experimental Studies

A series of articles by Sprigman and Buccafusco describe experimental work on IP rights. One demonstrates that a special version of the well-known endowment effect28 exists with respect to works covered by IP rights. The article reports that cognitive biases cause creators and owners of IP to set the price for IP considerably higher than what buyers, on average, are willing to pay (Sprigman and Buccafusco 2010). The research therefore suggests that IP transactions may occur at suboptimal levels. They report that cognitive and affective biases are likely to be more serious for transactions in works of relatively low commercial value, or for which no well-established custom or pattern helps to inform valuation. The article explores the implications their findings have for the structuring of IP rights, IP formalities, IP licensing, and fair use.

In a related article, Sprigman and Buccafusco (2011) try to move beyond the simple endowment effect story, to explore valuation issues when the seller of a work covered by IP rights is also the original creator of that work. Not surprisingly perhaps, they find an even stronger version of the endowment effect. They dub this “the creativity effect.” In a cleverly structured series of experiments, they not only confirm the existence of the endowment effect, they also show that when someone creates a work he or she sets an even higher valuation on it than when an owner/possessor considers selling it. That is, they separate creators from mere owners. This is important in the IP field because IP rights are often justified by the fact that they permit original creators to market their works, which supports creative autonomy and can enhance creators’ incomes. Their conclusion is that markets for IP are systematically distorted by subjective bias.

The authors make some interesting points regarding policy implications. An oft-discussed feature of IP law centers on the fact that large companies own the rights to the creative works of their employees. In the usual discussion, this is seen as a problem, in that incentives to create are diluted by corporate ownership. Sprigman’s results suggest that corporate ownership in fact may not be such a bad thing. By removing the rights over IP-protected works from the hands of individual creators, aggregating ownership in the hands of large companies may in fact facilitate more efficiency in IP markets.

The final paper tests the value of attribution (having one’s name attached to one’s creative works) and publication (reaching an actual audience) in IP markets. The findings here are based again on experiments involving subjects and carefully constructed scenarios. The authors show that artists (in this case, photographers, and painters) place a very high value on having their names attached to their works. This is established by a series of experimental trials in which some artists are given the option of retaining (p. 212) attribution; the value of this right is determined by looking at the price demanded by artists when they retain attribution and the price when they do not. In other words, the authors of the study have a methodology that allows them to infer the value artists attach to attribution. The same is true of the value they place on publication, which again is determined by looking at the price differential under two conditions.

Despite its sophistication, this body of work remains somewhat ambiguous as regards its policy implications. The most important issue here is implicit baselines concerning the optimal rate of transactions. On the “creativity effect,” Sprigman and Buccafusco (2011) argue that the valuations placed on creative works by potential buyers and by noncreator “owners” (those who were simply given a work created by someone else) are more reliable guides to the actual market value of those creative works. This sets up the policy conclusion that markets for IP-protected works are often inefficient because creators themselves overvalue their works. But if intrinsic value is treated neutrally, then a different conclusion might follow: many artists choose to retain sole ownership of their works because, having created them, they are the highest-value owners on the scene. From this perspective the issue is not “failed transactions” but instead the importance of intrinsic valuation when it comes to creative works. In a related vein, it might be that the studies here show aggregate tendencies. But this does not drive a strong policy conclusion, because all it takes is for some outliers—some “creative professionals” whose subjective valuation is closer to that of buyers—to make a market. Under this interpretation, high-valuation creators will remain outside the market, but low-valuing creators will enter it. This could in turn drive a sort of “reverse market for lemons” dynamic. “High valuers” will be driven out of the market, because they can’t sell their works at market-clearing prices. And “low valuers” will come to predominate. If this became a trend, it would undermine the notion that disparate valuation makes IP markets too “thin.”

Another line of research, conducted primarily by experimental psychologists, eschews large-bore policy prescriptions while testing what might be called the development of intuitions regarding IP rights. The chief characteristic of these studies is that they take insights from cognitive psychology and test their relevance to IP-specific scenarios. Some study the development of children’s intuitions about ownership (Fasig 2000; Friedman and Neary 2008; Neary and Friedman 2013). Others show that children have an intuitive appreciation for the value of labor in justifying ownership (Kangiesser and Hood 2013).

A fascinating branch of this field with special relevance to IP studies developmental cognition, testing whether children have any sense of idea ownership, and if so, at what age. So, for example, cognitive scientists have shown that children as young as 6 years old “apply simple rules of ownership to ideas as well physical objects (Shaw, Li, and Olson 2012, 1389). Further, they also note that young children sense that some ideas are inherently common property, and they will not apply ownership concepts and rules to a common word, for example: “[C]‌hildren and adults used first possession for determining ownership of ideas, but not words” (2012, 1398). It is also worth noting that, according to another set of studies, children begin to recognize and censure plagiarism between the ages of 4 and 6. See Olson and Shaw (2011).

(p. 213) There is room here for much more nuance. A critical issue, for example, is whether children’s intuitions about idea ownership are, as some researchers suggest, culture-specific. If so, the studies are noteworthy in showing cultural influences over moral intuitions at a very early age. If not, they support a more universalistic claim: that IP rights are rooted in moral intuitions that develop early in the human mind. In any event, it is safe to say that there are a good number of fascinating questions left to explore in this area, and experimental studies of IP law may continue to enlighten the field for some time to come.

8.4. Conclusion

I have emphasized two major trends in the economics of IP rights: An increased sense of IP in context, and the growth of methodological diversity. Taken together, they have the field poised for deeper insights and greater policy relevance than ever before.

By studying how IP works in various contexts, scholars have progressed significantly from the stylized, simplistic models of the past. Each study is distinct, taking as its starting point a specific economic setting. But taken together, they reveal the many diverse ways IP rights exert an influence on economic behavior. The contrast with older scholarship is striking: contextual studies begin not with simple models but with real-world industries and practices, and ask how IP rights play into various features of the setting under study. The payoff is a much better understanding of the distinct contribution IP rights make to economic life. Though a unified view of these rights (e.g., as simple incentives or as economic monopolies) is of course sacrificed, a multifaceted reality is revealed that is infinitely more varied and interesting than the simple worldview of the old models.

In one sense, the benefits of methodological diversity are even more self-evident. Each approach, indeed each individual study, has something to teach us about IP rights. An empirical study of variability among patent examiners, for example, might lead to a call for better Patent Office quality control or it might simply push private actors to diversify their patent filings among different examining groups. Better ways of grouping and organizing doctrines might stimulate new thoughts on core features of IP systems. The advantages are as diverse as the methods and studies themselves.

But a more significant payoff comes when multiple methodologies reach the same conclusion. Convergence of this sort sends a powerful message. We can more confidently argue for policy prescriptions when multiple scholars, using different tools, arrive at the same conclusion. So, for example, when economic modeling, ethnographic interviews, and large-scale event studies all indicate that extending the term of copyright protection adds nothing to creators’ incentives, we can be confident in advocating against further increases in the length of copyright. At the very least, consensus on this scale can help reveal the naked power of lobbying groups; a policy proposal that is (p. 214) opposed by all serious scholars, but which gains political traction nonetheless, teaches just how completely legislative muscle can trump objective policy analysis.

Methodological diversity is actually essential if we are to have real confidence in our policy positions. As with the natural sciences, a successful strategy for understanding complex issues such as the place of IP rights requires two distinct phases. The first is highly reductionist: a small feature of the complex system is isolated and studied in great depth. Then, when many such reductionist studies are available, the disparate results are sifted and collected into a new synthesis. In this second phase, the disparate pieces are reassembled into a comprehensive new understanding. This new synthesis can be robust precisely because it is built on many solid, discrete studies. Real confidence comes when we can see the overall pattern that emerges from this diversity of building block studies. To reach this point in the study of IP rights, we will need many more diversified studies of discrete phenomena. But as these pile up, we will arrive at new syntheses that provide a firmer foundation for policy than the field has ever known.

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Notes:

(1) Robert P. Merges, is Wilson Sonsini Goodrich & Rosati Professor of Law and Technology, UC Berkeley Law School.

(2) See, e.g., Kitch (1966); see, also, Adelman (1977).

(3) See, e.g., Allison, Dunn, and Mann (2007) (patents and the software industry); Mann and Sager (2007) (patents and startup firms in the software industry).

(5) See, e.g., Beebe (2008) (empirical study of copyright’s fair use factors); Sag (2012) (analyzing copyright cases so as to predict the outcome of fair use disputes).

(6) See Buccafusco and Heald (2013). See also Bechtold and Tucker (2013) (court ruling relaxing trademark enforcement against Google “keyword” ad sales in Europe had little effect on user visits to trademark owners’ websites).

(7) Another type of study tests assumptions behind doctrine or doctrinal change. See, e.g., McKenna (2009) (testing trademark law’s assumption that consumers may be confused when a trademark owner’s mark is used in markets unrelated or ancillary to the owner’s primary markets).

(8) Charles Olson. Maximus, to Himself (1983). The full lines are “I have had to learn the simplest things/last. Which made for difficulties.”

(9) See, e.g., Pigou (1924); Clark (1927); and Plant (1934). For an excellent overview of this and other early work, see Menell and Scotchmer (2007) in A. Mitchell Polinsky and Steven Shavell (2007).

(10) A body of work by the noted economist of technological change, Richard Nelson, stands either as a glaring exception to the standing assumptions of the first and second wave, or as the vanguard of the third wave; and perhaps both. See, e.g., Nelson and Rosenberg (1993, 3–5) (“[T]‌he concept [of a system] is that of a set of institutional actors that, together, plays the major role in influencing innovative performance.”). Indeed, the highly influential original “Yale survey” on innovation embodied in 1987 the assumption that formal IP rights were but one among a series of “appropriability mechanisms” through which private firms sought to recoup the costs of their R&D investments. See Levin et al. (1987). Nelson deserves far more credit than he usually gets for thoroughly understanding and forcefully arguing for the “contextual” view of IP at what now seems a very early date. He is truly “Il miglior fabbro,” as T. S. Eliot said of Ezra Pound. For an appreciation, see Dosi (2006). Other early work by Edwin Mansfield also deserves to be mentioned here. See Mansfield (1985, 1986, 1986); Mansfield et al. (1977).

(11) This particular topic is very well presented in Teece (1986). Other survey-based studies back this theory with empirical findings. See Cohen, Nelson, and Walsh (2000); Graham et al. (2010).

(13) Three of what could have been main examples, I should add. So for instance, I could have added an entire section on contemporary trademark scholarship, which has shown that simplistic models of trademarks as a way to reduce consumer search costs are incomplete because they ignore the sophisticated techniques of branding experts and marketers. Thus, Jeremy Sheff shows that investments in branding can actually bias consumer’s perceptions about what they need or about the characteristics of a relevant product. See Sheff (2011); Lemley and McKenna (2012) (deploying marketing literature to explore the complexities of brand loyalty, and its impact on the actual economic effects of trademark law); and Lee, DeRosia, and Christensen (2009).

(14) An exception might be Schultz (2006), who studies norms surrounding the copying of recorded music concerts by fans of “jam bands” such as the Grateful Dead. It is not clear how large this genre is as a percentage of all popular music, but it is clearly substantial.

(15) Figures such as these should always be taken with a grain of salt because they are based on large aggregate data sources and prepared by interest groups with a string agenda. See L.A. Times (2013).

(16) Wikipedia, Pharmaceutical Industry.

(18) See Ellickson (1993, 1520).

(19) See Hemphill and Suk (2009, 1148). US apparel sales reached $196 billion in 2007 (NPD Group 2008). Among fashion accessories, considering just one category, handbags, adds another $5 billion in sales. Krim (2007) reports US sales exceeding $5 billion in 2005.

(20) See Hemphill and Suk (2009, 1183).

(21) See, e.g., Eguchi (2011, 145): “A design protection bill [from 2010] garnered support from several well-known designers and the Council of Fashion Designers of America (CFDA)—the creative core of the fashion industry….”

(22) See, e.g., Scafidi (2008).

(24) Good syntheses of the literature include Burk and McDonnell (2007); Barnett (2011b). See also Heald (2005); Bar-Gill and Parchomovsky (2009). Perhaps the earliest reference to this theme in the legal literature is Merges (1996), arguing that weak formal IP rights forced the Japanese software industry into a vertically integrated production model that disfavored small, independent firms; however, see Mashima (1996), offering corrections to this thesis.

(25) While in general a society interested in maximizing social welfare would be indifferent to whether large or small firms did most of the innovating, it has been suggested that the enhanced autonomy which accompanies smaller firms provides an independent social good (Merges, 2011a). Hence, in some cases at least slightly higher transaction costs ought to be tolerated for the sake of this independent social good.

(26) See SSRN.com.

(27) See, e.g., Alcacer and Gittelman (2006) on the use of patent-examiner data to study patent examination patterns; Abrams, Akcigit, and Popadak (2013), on sophisticated study of patents through citation data.

(28) See “Endowment Effect,” Wikipedia, http://en.wikipedia.org/wiki/Endowment_effect.