Arsilla Chairunissa

2006606832
FH UI KKI 2020
Assignment: Summary of Analysis Economics of Law

Summary of Intellectual Property: The Law and Economics Approach

With the rise of the law and economics movement, the focus of economic analysis of intellectual
property has begun to shift to more concrete and manageable issues concerning the structure and
texture of the complicated pattern of common law and statutory doctrines, legal institutions and
business practices relating to intellectual property. Among the issues discussed in this paper are the
length of protection for intellectual property, the rules that allow considerable copying of intellectual
property without permission of the originator, the rules governing derivative works, and alternative
methods of providing incentives for the creation of intellectual property. The emphasis is on copyright
law, which, perhaps because of its complex legal structure and the relative neglect by economists of
the arts and entertainment, has tended to be slighted in the conventional economic analysis of
intellectual property, relative to patent law, where economic analysis can draw on an extensive
literature concerning the economics of innovation.

I. The Optimal Term

Expenditures cannot be changed based on output. A price equal to the marginal cost is
unlikely to pay total expenses when fixed costs represent a significant portion of total costs, unless the
marginal cost is rapidly increasing. However, a price over marginal cost, while required to allow the
manufacturer of the intellectual property to recoup fixed costs, would not only steer some potential
customers away from products that, when quality-adjusted, cost society more to make, but it will also
encourage inefficient entry.

II. Economics Approach

At the level of abstract analysis, both this query and the more general problem of balancing
incentive and access considerations have proven unsolvable. The focus of economic analysis of
intellectual property has started to shift with the growth of the law and economics movement to more
tangible and approachable issues relating to the structure and texture of the complex pattern of
common law and statutory doctrines, legal institutions, and business practices relating to intellectual
property. The length of intellectual property protection, the laws that permit extensive copying of
intellectual property without the creator's consent, the laws governing derivative works, and
alternative strategies for encouraging the creation of intellectual property are some of the topics
covered in this essay.

III. The Optimal Term

The large ratio of fixed to variable costs of such property is what causes the tension between
incentives and access that dominates the usual economic study of intellectual property. Although it is
frequently quite expensive to create intellectual property, once incurred
 Calculating the optimal reward is difficult, however. It can in principle be calculated after the
fact on the basis of the commercial success of the intellectual property, but the resulting delay in
reimbursement of the originator will increase the difficulty of financing intellectual-property projects.
A greater danger is that the reward system will be politicized. The property rights approach
proportions the creator’s return on investment to the commercial success of the invention or
expressive work automatically. A trademark is a method of economizing on consumer search costs by
providing a compact identifier of a particular producer’s brand. So long as the producer continues to
sell the brand, maintaining a more or less consistent quality so that consumers are not deceived, the
trademark serves its identifying function. Trade secrets have no fixed term, because the only legal
protection that trade secrecy confers is protection against the unlawful appropriation of confidential
information, as by theft or a breach of contract.

IV. Transactions Costs, Fair Use and Piracy

In this instance, the law would be allowing copying that had not been expressly permitted by
the intellectual property's originator. The cost of the copying to the publisher of the original work will
be minimal, consisting only of the loss of a small license fee, as long as the quotation is only a small
portion of the quoted work and does not serve as a substitute for the quoted work and does not reduce
demand for it. Although transaction costs in such a case are likely to be low in absolute terms, they
are likely to be high relative to the value of the quotation to the copier. An example of an intellectual
property doctrine is fair use. the law that the law of non-intellectual property does not have a
counterpart to. The disparity can be explained economically and is connected to the prior discussion
of the intellectual public domain.

Typically, a specific item of physical property can only be used by one individual at a time.
The law shouldn't make it possible to borrow someone else's property without first agreeing on the
terms with the owner because doing so costs the owner money because they are no longer able to use
it, and in that situation, transaction costs are usually not too high. The "theft" of intellectual property
does not deprive its owner of use, unlike the "theft" of physical property. In fact, piracy could raise the
income for the original owner if some of the pirates' clients buy the owner's application programs or if
growing the owner's user base gives them a network edge over rival software developers. Insofar as
the law is driven by efficiency concerns, the public good nature of the intellectual property and the
greater transaction costs of exploitation of such property lead to the prediction that property rights in
intellectual property will be less extensive than in the case of physical property. The fair use doctrine
is proof that the forecast is correct.

V. Derivative Works and Improvement Patents

Interestingly, the treatment of derivative works varies by copyright law. Treating their
equivalents in patent law - improvements -.translation or Any alternative arrangement or version of
the Expressive Work is a"Derivative Work". Copyrighted by someone other than the original owner
without the owner’s copyright Permit license. However, the owner may only copyright derivative
works where they differ. Similar to translations, excerpts, or films, markedly different from the
original A version of a book, but not an identical copy in another medium request. Derivative works
must have some degree of originality in order to be copyrighted. The following chart illustrates the
sensitivity of intellectual property law to operating costs Legal system (Lichtman, 2003). When the
work is indistinguishable from the original. Being copyrighted, it is very difficult to prove
infringement. Suppose there is a work A by X whose copyright expires in 1928. A work B that is
substantially indistinguishable from A. Y created in 1930 The patent rule results in "blocking patents,"
meaning that neither the original patent holder nor the patent holder of the enhanced version may sell
or otherwise make use of the invention. Without obtaining a license from the other, that version. The
same system may apply to works protected by copyright, but it does not. Technology improvement is
typically a continuous, collaborative process, and allowing unauthorized improvers to patent their
improvements encourages maximum participation in efforts to improve the originally patented process
or product. This may be an economic justification for the law's different treatment. The arts have had
far less development; we don't believe that when Shakespeare created each of his plays, other writers
would have been well served to strive to enhance them. This discrepancy may also be the reason why
joint ownership is handled differently in copyright and patent law. The rule that allows a joint owner
to use or license a jointly owned work without the consent of the other owner or owners decreases
transaction costs by doing away with a bilateral monopoly in both domains. However, a joint owner of
a patent is not required to account to the other owners for the profits of the use and share them with
them, unlike a joint owner of a copyright who uses or licenses the copyright. The latter norm, which is
consistent with technology but not the arts, constantly growing quality, encourages inventors to
continue trying to enhance their innovations.
The influential "Darwinian" idea of technological progress, which views it as a process in
which the market chooses from among various approaches whose relative promise cannot be
appraised in advance, supports the patentability of unlawful improvement patents (Nelson and Winter,
1982). Although a company has an incentive to license independent inventors who make advances
covered by its patents, it is likely that its knowledge, experiences, and corporate culture will restrict its
ability to pinpoint the most promising outsiders. Since the law allows for the patenting of
enhancements made by those firms without the consent of the dominant firm, there is value in
encouraging firms to conduct research and development on technologies that are dominated by patents
or patents held by another firm.

The distinction in legal standing between derivative works and improvement patents is further
explained by an institutional gap between copyright and patent law. There is a claim of copyright, but
no preliminary administrative examination to ascertain the originality of the work is conducted.
Contrarily, the Patent and Trademark Office's screening of patent applications has the effect of making
it unlikely for a patent to be issued if an improvement patent does not actually represent an
improvement. Therefore, there is a risk of proliferation of independently owned derivative works,
which would significantly raise the transaction costs of producers of follow-up derivative works, if
derivative works are not under the legal control of the owner of the original copyright. It mentioned
before that it was debatable whether copyright was necessary for distinctive works of art, like
paintings, given that copies are subpar replacements. However, copyright does allow the creator to
make additional money from derivative works.
Thus, allowing copyright protection for paintings boosts artists' pay and, presumably, the
supply of art. If it were considered that works of art conferred external benefits—which there is no
evidence they do—then policy might boost economic welfare. The larger argument is that, unless the
supply of copyrighted works is regarded to be suboptimal, allowing the copyright owner control over
derivative works cannot be justified on the grounds that it enhances the income of copyright owners.

VI. The Ongoing Expansion of Intellectual Property Rights

In recent decades, the scope of intellectual property rights protection has increased.
One factor for this is the sharp decline in the quality-adjusted cost of (and delay in) As a result
of digitization, copying has increased; the most well-known example is computer file sharing
of music with a copyright. The more affordable copying is, the harder it is for the to cover
fixed costs in the amount the owner charges for the original work copies, unless the owner can
stop rivals from offering copies for sale. The social value of a work that requires a large
upfront investment, which is the defining characteristic of intellectual property, increases
because the incremental cost of providing the work to more customers is reduced as a result of
the expanding number and growing wealth of consumers worldwide as well as the fact that
declining costs of disseminating intellectual property have brought more and more of the
global market within reach of producers of such property. The social cost of violating
intellectual property rights is larger if there are less incentives for people to produce these
works, leading to a reduction in the quantity and quality of such works due to inexpensive
copies and a lack of intellectual property protection.

However, by lowering their marginal costs, the owners of works protected by

copyright benefit as well as suffer from lower copying costs. Less expensive means of
distribution increase intellectual property owners' access to a worldwide market. Additionally,
technological advancements that enable the direct sale of intellectual property to the final
consumer—such as when a software producer sells and ships directly to consumers over the
Internet, cutting out all middlemen—allow the owners of intellectual property to circumvent
intellectual property law by relying on contracts, encryption, or both to stop consumer
copying, even copying that copyright law would have permitted under the guise of fair use or
when the license has expired. The larger issue is that there are alternatives to legislation and
technology for both limiting and expanding access to intellectual property. Technology
advancements that make it easier to access previously created works, like music file sharing,
naturally worry copyright owners the most. Access to the intellectual property of other
industries (other than the music industry, for example) may be further restricted by other such
advancements, though, such as encryption.
The asymmetry of interests between holders of such rights and would-be copyists is
perhaps most significant from a public choice standpoint in understanding the extension of
intellectual property rights. The owners have a very substantial stake in extending their rights
because practically all of the money from the sale of copies goes directly to their bottom line
after principal expenditures have already been incurred. As opposed to this, potential copiers
can only anticipate a competitive return if work is placed in the public domain, so they have
less incentive to dispute intellectual property rights in the legislature than their owners do to
defend them. Despite the fact that such extensions provide essentially a little incentive for the
creation of further intellectual property, this disparity of interests is likely the driving force
behind the practice of retroactively extending copyright and patent periods.