The Economics of IPR Protection Policies: Comment. Abstract

Transcription

1 Review of Network Economics Vol6, Issue 4 December 007 The Economics of IPR Protection Policies: Comment FRANCISCO MARTÍNEZ-SÁNCHEZ * Deto de Fundamentos del Análisis Económico, Universidad de Alicante Abstract We rovide a theoretical result on the effect of iracy on the sales of legal roduct using the same framework as Gil (006) We obtain that when the illegal sector is erfectly cometitive and the marginal cost of the legal firm and the quantity tax are small enough, iracy does not lead to lower sales of the legal roduct Introduction In a aer ublished in this journal, Gil (006) offers a model in which a legal firm cometes with illegal firms that illegally coy the roduct of the legal firm Gil (006, 99) makes the following assertion, the continuous violation of international Intellectual Proerty Rights (IPR hereafter) laws in develoing countries scares away investment from multinational firms resulting in lower growth and consumtion aths He also offers data on the effect of iracy on the music industry In articular, he says, the music industry has also suffered the effect of iracy: according to the International Federation of the Photograhic Industry (IFPI) global sales increased in the 90 s from US$4 billion to US$386 billion Nevertheless, global sales fell 5% in 000, 88% in 00 and 7% in 00, reaching a low of US$309 billion (Zentner, 006) Finally, he also says, SGAE (Sanish entity that looks after the interest of authors) reorts that Sanish music sales went down by 7 million CDs due to illegal street sales Gil thus imlicitly claims that iracy leads to lower sales of the roduct of legal firms, though he does not offer a theoretical result on this Here, we rovide a theoretical result on the effect of iracy on the sales of legal roduct using the same framework as Gil We obtain that when the marginal cost of the legal firm and the quantity tax are small enough, iracy does not lead to lower sales of the legal roduct * Contact Author Mailing Address: Det de Fundamentos del Análisis Económico, Universidad de Alicante, San Vicente del Raseig (Alicante), Sain acom@merlinfaeuaes I thank Julian Wright (Editor) for his suggestions Any remaining errors are mine alone 55

2 Review of Network Economics Vol6, Issue 4 December 007 This result is due to the effect of iracy on the incumbent's ricing behavior, the fact that the illegal coy is lower in quality than the legal roduct and the fact that the market (in the model) is uncovered (that is, there is always at least one consumer who does not buy at all) The rest of the aer is organized as follows Section considers the case of a monooly Section 3 reviews the decisions of the rivate sector when there is an illegal sector and comares the legal firm's demands in both settings Section 4 concludes Monooly The demand faced by the legal firm when it is a monoolist is D m ( ) = k () where is a consumer indifferent between buying from the legal firm and not buying at all, is the quality of the legal roduct and = t, where is the rice set by the legal roducer and t is the quantity tax on the legal roduct The rofit function of the legal firm is )( c ), () = D m ( t F where c and F are the marginal and fixed costs incurred by the legal firm in creating innovation, resectively The rice that maximizes the legal firm s rofit is * t m k c = Taking into account this rice and the legal firm s demand (), we obtain the monooly demand at equilibrium, which is * D m k c t = (3) 3 The decisions of the rivate sector when there is an illegal sector Following Gil, the rice of the illegal roduct is c =, (4) 56

3 Review of Network Economics Vol6, Issue 4 December 007 where c is the marginal cost of firms in the illegal sector, G is the government s sending on rosecuting roducers of illegal roducts and h () is the robability of catching those roducers, where h ( 0) = 0, h ( ) =, h'> 0 and h '' 0 In this case, the legal roduct faces the following demand function D = k, (5) where ( ) ( ) is a consumer who is indifferent between buying the legal and illegal roducts By maximizing the legal firm s rofit, we obtain its reaction function Unfortunately, the exression of this reaction function by Gil contains a sign mistake The correct exression is as follows ( ) = ) t c (6) As we can see, taxes bring down the rice charged by the legal roducer This is because the legal roducer wants to ensure that the final rice that consumers must ay to urchase the legal roduct ( ) does not become too high By substituting the rice of the illegal roduct (exression (4)) in the legal firm s reaction function (6), we obtain the rice charged by the legal roducer at equilibrium, which is c ) t c * = Taking into account the rices of the legal and illegal roducts, and the legal firm s demand (5), we obtain the demand of the legal firm at equilibrium, which is c ) t c * D = (7) ( ) By comaring the equilibrium demands of the legal firm in the two settings (equations (3) and (7)), we find that the legal firm s demand is greater when there is iracy if and only if > c t c (8) As can be seen, when the marginal cost of the legal firm and the quantity tax are small enough, iracy does not lead to lower sales of the legal roduct In articular, when the 57

4 Review of Network Economics Vol6, Issue 4 December 007 marginal cost is equal for all firms ( c = c ) and the quantity tax is zero ( t = 0), iracy leads to higher sales of the legal roduct 4 Conclusions We rovide a theoretical result on the effect of iracy on the sales of legal roduct using the same framework as Gil (006) We obtain that when the illegal sector is erfectly cometitive and the marginal cost of the legal firm and the quantity tax are small enough, iracy does not lead to lower sales of the legal roduct In that case, according to the model develoed by Gil, if the urchase of an illegal coy were not available, this would not imly the urchase of a legal roduct In others words, if the illegal coy were not available, a consumer would not buy all the legal roducts of which he has an illegal coy The conditions that suort this result, that is, the marginal cost of the legal firm and the quantity tax being small enough, are not unrealistic or unlikely For instance, the Sanish Minister for Culture has recently reduced the rice tax on CD s to 4% and on books to % (El Mundo, 004) and from Peitz and Waelbroeck (005) we observe that a CD can be seen as a good with large fixed costs and low variable costs This result has reviously been obtained from a theoretical viewoint for both the case of coies made by end consumers (Shy and Thisse, 999 and Bae and Choi, 006) and the case of coies made by a single firm that sells them on the market (Martínez-Sánchez, 007) The result is also comatible with the results in Johnson (985), where it is obtained that coying reduces sales of the legal roduct in site of the incumbent s ricing behavior This is because Johnson (985) assumes that the quality of the illegal coy is the same as that of the legal roduct and the market is covered (that is, all consumers buy either the legal or the illegal roduct) This result is artially suorted by the emirical study by Oberholzer and Strumf (007), which finds a negligible effect of file sharing on music sales However, this result contrasts with most studies of iracy and some court rulings, which assume that the coies sold by the irate are equivalent to units of roducts that the legal firm does not sell In articular, the 005 Global Software Piracy Study defines industry losses as the value of irated software at the rice of the legal roduct Moreover, there are contradictory verdicts from different courts in this regard For instance, one of the reasons why the courts ruled that Naster harmed the music industry was the loss of sales of CDs (see Peitz and Waelbroeck, 005) However, a judge in Alicante (Sain) ruled that commercial iracy harmed neither intellectual roerty nor the record comany s sales of CDs and DVDs (see ruling JUR 005\40478) As can be seen, the theoretical and emirical results are different This may be because two facts are not taken into account in either emirical or theoretical literature: (i) legal firms are committed to maintaining their rices or are reluctant to cut rices because they bear high costs, in articular for marketing and romotion (according to information comiled by the Record Industry Association of America (RIAA)), so when there are illegal roducers the sales of legal roduct can decrease; (ii) the life cycle of the music format, which means that MP3 format is relacing CD, just as CD relaced cassette (Bourreau, 005) Notice that > 58

5 Review of Network Economics Vol6, Issue 4 December 007 Finally, we stress that the result obtained in this comment imlies that the decrease in the sales of CDs is erhas not a result of iracy In that case, industry losses from iracy are lower than claimed by the industry itself, by most studies and by some court rulings 5 References Bae, S-H and J P Choi (006) A Model of Piracy, Information Economics and Policy, 8: Bourreau, M (005) A Comment on Peitz and Waelbroeck, CESifo Economic Studies, 5: El Mundo(004) Cultura quiere rebajar el IVA de los discos del 6% al 4% y el de los libros, del 4% al %, available at htt://wwwelmundoes/ael/004/04/30/cultura/630090html Gil, R (006) The Economics of IPR Protection Policies, Review of Network Economics, 5: Johnson, W R (985) The Economics of Coying, Journal of Political Economy, 93: Martínez-Sánchez, F (007) Why Does The Pirate Decide To Be The Leader In Prices? IVIE WP-AD Oberholzer, F and K Strumf (007) The Effect of File Sharing on Record Sales: An Emirical Analysis, Journal of Political Economy, 5: -4 Peitz, M and P Waelbroeck (005) An Economist s Guide to Digital Music, CESifo Economic Studies, 5: Shy, O and J Thisse (999) A Strategic Aroach to Software Protection, Journal of Economic and Management Strategic, 8: Zentner, A (006) Measuring the Effect of Online Music Piracy on Music Sales, Journal of Law and Economics, 49: