Man Without Qualities

Sunday, April 14, 2002

Update: That “Notorious” Amazon Used Book Resale Service

Mickey Kaus correctly points out that nobody has a monopoly on books and the linked articles talk about monopolists. Is this a problem?

The purpose of copyright is to confer on the author (and therefore a licensed publisher) a bit of "market power" like a monopolist's - which is supposed to up the returns on book sales. No one has a monopoly on books, but the author has a monopoly on the author's book, which competes with other books which are not perfect substitutes as to its contents. A re-sold book will be a perfect substitute as to its contents (it's the same book). That's why the authors are upset.

The payoff for giving authors what is called the "copyright monopoly" to society is supposed to be the incentive for the author to produce the book in the first place. Congress makes each author a little monopolist with a little market power in exchange for the author writing a book that would not otherwise exist - or so the increasingly controversial theory goes. The more a copyrighted book is distinctive and original, the less perfect the competition to it will be from other substitute books, and the greater the author's market power will be. For such reasons it is sometimes said that the "copyright monopoly" is supposed to allow the author to gather the fruits of his or her own originality. Since most authors and their works are not very original, the market power conferred by copyright is low - and so are their sales. Patent and trademark laws works in a similar - but not identical - ways.

One will sometimes read that the "copyright monopoly" is a "misnomer" and that the right to exclude conferred by the copyright laws is no different from the right one has to exclude others from one's car - a bare property right. But as one better commentator puts it:

"Not only does the Copyright Act create economic incentives for innovators by allowing them to establish a market niche from which they may derive monopoly profits; but by making it unlawful to infringe the copyright holder's exclusive rights, the Act deters free-riding. The remedies accorded copyright holders against infringers under the Act create a disincentive to infringe for those wanting free access to the copyrighted good. As an alternative to the unlawful appropriation of the copyrighted good for personal consumption or to compete in the marketplace, a potential infringer has an incentive to create a substitute."

So Mickey is right to suggest that without the argument connecting the linked articles to the copyright monopoly, this post is hard to follow!

That “Notorious” Amazon Used Book Resale Service

The ongoing expansion of on-line resales of books, and its potential adverse effect on authors and publishers, has generated a fair amount of controversy recently This controversy – at least as reported in the mainstream media - has approached the topic in a kind of vacuum, as if the question of the effect of Internet resales of durable goods on the original seller’s profits was something quite new.

There is a tendency on many people’s parts to think that because the Internet is involved in, or even a necessary part of, a commercial development, then the development is without relevant antecedents. This tendency drove much of the dotcom retail silliness, in which what were nothing more than on-line catalogues services, for example, presented themselves as somehow fundamentally new.

There is an old saying: "A goose wakes up to a new world every day." The tendency was deeply and explicitly wrong in the dotcom arena, and it is just as deeply, if implicitly, wrong in regard to on-line resales of books and other durable goods.

The effect of the existence of a resale market on profits from resales of a durable good came up in a big way in the 1940’s in a monopoly case in which the government charged the country's main supplier of aluminum with "illegal monopoly" under the Sherman Act. The supplier argued that it was not a true monopolist because its supplies of “virgin” aluminum ingots competed with supplies of “recycled” aluminum ingots. The 1940’s courts didn’t agree with the supplier, but later economic learning (most importantly by Ronald Coase) showed that much of what the supplier was saying was true: the existence of a good resale market for a durable good strongly tends to drive its price down to the competitive level. To the extent an author hopes to extract extra high (“supracompetitive”) prices from book sales, Mr. Coase brought bad news.

But, fortunately for authors, books are not made of aluminum. In fact, unlike aluminum, books are not really very durable at all. This leads to some curious results. In fact, recent research indicates that if the durability of the book is determined by the publisher (which it largely is), the existence of a good resale market will lead to an overabundance of books with low durability. Put another way, if there is a good market for resale of books, publishers will print more physically crummy, non-durable books than is efficient. Moreover, the same research indicates that in such a market authors and publishers will retain almost all of their profitability. [If book durability is not determined by the publisher, book economics and aluminum economics look more alike.]

The mathematics gets daunting, but the concept is pretty clear: If publishers know that a resale market allows resold durable books to compete with new books and publishers can choose to publish durable or non-durable books, then the publisher will choose to make a lot fewer durable books if the resale market exists than if it doesn't. In fact, publishers will produce fewer durable books than is economically optimal for the society as a whole. And, of course, there won't be much for the re-sale market to re-sell.

In sum, if Amazon provides a good book resale market, then the public will suffer from an inefficient oversupply of nondurable books, but the profits of authors and publishers may not suffer. Authors and publishers looking for an argument against on-line book resale services which is both not self-serving and advances the public welfare might take note.

The economics and mathematics of the more recent research cited above are already complex, and the reader may wish to just review the first few pages for conclusions. The rise and fall of Napster has led to even more complex economic analyses which depend on the characteristics of the durable good in question. [Predictably, a software file and a hard-copy textbook lead to rather different game results.]

...please where can I buy a unicorn?
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