Economics of intellectual property protection for software

Abstract

applications.Allowing the developer exclusive rights to those marketable applications allows the grantee to profit from prior work in excess of the grantee's actual contribution.Beyond any equity considerations, such overprotection is inefficient; it results in excessively high prices that in turn cause underutiliziation of information.4 Equally important, it can lead to wasteful competition over rights that dissipates much of the value of the underlying prior work.This occurs when potential grantees devote excessive resources to winning a "patent race."This article examines one particular kind of intellectual property protection: copyright protection for computer software.Our analysis does not attempt to determine the "optimal" level of such protection, 5 but instead seeks appropriate boundaries for that protection.Our criterion for overprotection is whether copyright protection of a piece of software leaves the rest of society worse off; i.e., whether the copyright holder receives more in monopoly rents than the copyrighted software has added to total welfare.6 Overprotection would be possible when, perhaps because of prior work, the discovery would have been made soon anyway without any protection whatsoever, or with much less protection, and thus at lower cost to the rest of society.Intellectual property protection would also be excessive if the grantee could raise the costs and reduce the opportunities available to suppliers of substitute products.Copyright law attempts to prevent such leveraging, however, by distinguishing between "idea" and "expression."An expression can operationally be defined as a discovery or work that would not otherwise have been made (e.g., no one besides Mary Shelley would have written Frankenstein), and protection which would not reduce the opportunities available to any other author.In contrast, granting exclusive rights to an idea (e.g., a novel about the creation of a humanoid monster) would significantly limit alternatives available to other authors and would allow the copyright holder to appropriate the value of something she did not create.5 5 5 5Our criterion for overprotection is whether [such protection] leaves the rest of society worse off 4 Unless, of course, the seller was able to perfectly price-discriminate among users, an impossible task given the asymmetry of information.5 Such an exercise would have to address the "public-good" nature of information.Specially, it would require some practical way of ensuring that producers of information recover an amount only slightly in excess of its cost, assuming that cost is less than the social value of the information.This rule has been proposed by Landes and Posner [1989] and Menell [1987, 1989].6 More precisely, the ex ante expected value of the reward to the winner of a copyright should be related to the ex ante expected value of the winner's incremental contribution over and above the surplus that would have been generated if the other contestants had competed in the absence of the actual winner.7 "Expected value" is the sum of the probability of each outcome multiplied by the value of that outcome.For example, the expected value of a 1/4 chance of $10 and a 3/4 chance of $20 is equal to $17.50.8 As discussed below, many elements of a software program embodying a de facto standard will remain eligible for copyright protection, and the whole program may also receive protection.Our objection is to extending copyright to protect the elements of the program necessary to conform to or practice the standard. 546 Under this proposal, a firm could still attempt to exercise vertical control, but it would have to choose a more transparent method.

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