COPYRIGHT LAW, PHOTOCOPYING, AND PRICE DISCRIMINATION

 

S. J. Liebowitz

ACKNOWLEDGMENTS

I would like to thank Fenton Hay, James Keon, John Palmer, and Steve Margolis for helpful comments. The work in this paper was a precursor to more recent work (1984b). Additionally, to improve the analysis I have borrowed some ideas (the analysis of copyright protection and fair use) from my more recent work on the Betamax case (1984a).

This paper examines the impact of price discrimination by journal publishers on the working of copyright law. Particular emphasis is placed on the economic rationale for copyright and fair use, the main exception to copyright. Within this economic framework the paper demonstrates that the debate over photocopying’s influence on copyright holders has neglected the important market adjustment of price discrimination. The emergence of price discrimination is documented and is shown to benefit copyright holders in ways previously unsuspected. The paper then examines the Copyright Clearance Center an institution set up in ignorance of the market adjustments already alluded to above. The future performance of this institution is shown to be at best redundant with the market adjustments and at worst a social loss and the very poor track record of the CCC to date is examined.

I. INTRODUCTION

It has become dramatically easier to make copies of printed materials since the advent of the Xerox 914 copier in 1959. The ramifications of the evolving

 

182 S. J. LIEBOWITZ

forms of behavior brought about by this revolution are not well understood by copyright holders or users of copyrighted materials. This is most unfortunate because publishers and authors are now pitted against librarians and other users in a poorly informed debate concerning changes in copyright law. The central thesis of this paper is that, contrary to popular belief, photocopying need not have a detrimental impact on the ability of copyright holders to appropriate revenues, particularly if photocopying enhances the copyright holder’s ability to price discriminate. Data is brought to bear on the question of price discrimination with the conclusion being that photocopying has enhanced such discrimination. Discriminatory pricing is shown to be capable of altering copyright law in rather subtle fashions such as distorting the impact of fair use, leading to a negation of the reasoning supporting fair use. Price discrimination also allows authors to capture revenues from those who borrow books from libraries, without the assistance of a public lending right. Unaware of these factors, the U.S. Congress indicated its desire to "protect" copyright owners from photocopying leading to the creation of a Copyright Clearance Center (CCC) dedicated to the collection of payments for photocopying of journal articles. This paper includes an analysis of its performance to date. The paper begins, however, with a discussion of copyright and appropriability and proceeds to the economics of fair use, before discussing these other topics.

 

 

- I. COPYRIGHT LAW

Copyright gives authors certain property rights over their intellectual creations. Most importantly, it gives copyright holders the sole right to reproduce or publish the work. This right has been extended in various ways so that it now covers public performance, translation, adaptation, and broadcasts of the copyrighted work in most Western countries. Various international agreements ensure minimum levels of protection in the: signatory countries. Copyright is a narrow form of protection which is concerned with the expression of intellectual ideas, not the ideas themselves and does not depend on the quality or purpose of the idea. Unlike patent law, copyright does not prevent several authors from independently creating and copyrighting an identical work. The usual term of copyright is the life of the author plus 50 years.

There are various exceptions to copyright protection, such as performance for charitable causes or use of short passages in. schools. The most important exception, which has been of great importance to academic and other researchers making photocopies (perhaps unbeknownst to them), is known as fair use. Fair use is a defense to a claim of infringement currently

Copyright Law, Photocopying, and Price Discrimination 183

provided in Anglo-American copyright law. It is stated in Section 107 of the U.S. law that:

The fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use, the factors to be considered shall include:

(1)the purpose and character of the work, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2)the nature of the copyrighted work;

(3)the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4)the effect of the use upon the potential market for or value of the copyrighted work.

The courts determine whether a particular action constitutes fair use; no hard or simple demarcation exists.

One right which is not granted under U.S. or Canadian law is a public lending right. Such a right would entitle authors to compensation whenever their copyrighted works are borrowed from libraries. West Germany, Sweden, Denmark, Australia, and Norway are among those countries already granting public lending rights(see Treece, 1977, p. 1025).

Copyright is only one of several possible methods whereby authors or publishers can appropriate revenues from those who use intellectual properties. Arnold Plant (1934) claimed that being first in the market allowed authors to capture a good deal of the potential revenue and there is no doubt that there is some truth in this belief although modern technology has reduced the time advantage of first publication. Another way by which revenues can be appropriated is that of discriminatory pricing, that is, charging different prices to different consumers. If those who plan to make competing editions of an intellectual property can be charged a very high price in their purchase of an original, the original producer can capture the value of the work from those consumers of the competing edition.

 

II. TECHNOLOGY AND THE NEED FOR COPYRIGHT

A necessary condition for markets to effectively produce goods is that it must be possible to exclude people from using the good. No one would pay for an automobile if he could use any ear he wanted without paying

184 S. j. LIEBOWITZ

for it. Property rights over private goods provide exclusion in most cases, since the law will prosecute those who use the good without transacting for it. The physical representations of intellectual property (e.g., the paper on which it is written) have private good characteristics such that my reading of a book generally precludes others from reading the same book at the same time. If one cannot control the creation of physical representations of an intellectual property, however, then others will produce physical representations of the intellectual property and the original creator would be unable to exclude people from using the intellectual property.

The role of technology in disembodying the intellectual property from its creator must not be underestimated. The printing press is so familiar that it becomes difficult to imagine authors not being disembodied from their work. However, prior to the printing of words on paper, authors had to tell their tales in person. Only someone with an exceptional memory would have been able to reproduce a story in all its nuances. Copyright was probably unnecessary at the time since it would not likely have led to an increase in the number of storytellers.

The issue boils down to one of property rights. Just as a farmer will not voluntarily cultivate land if any other person can come along and harvest the land, an author without copyright will not have sufficient pecuniary incentive to engage in the productive act of artistic creation. A copyright is merely a means by which the author is given a property right on his artistic creation.1 The copyright allows the author to gain financial rewards for his artistic endeavors.

The granting of a property right in artistic and intellectual works is not without its possible costs, however. Since each work is unique, the holder of the property right becomes a monopolist with respect to his work. The work will be published in a manner which maximizes the profits of the copyright holder. Profit-maximizing behavior implies that the output of the work will occur at a level of production below that which maximizes the value of the production to society causing a deadweight loss. This deadweight loss would disappear if there were free competition in the publishing of the work. The primary efficiency issue in the economics of intellectual property concerns balancing the incentives to encourage the production of artistic and intellectual works with the cost to society of creating deadweight loss. The optimal duration of copyright protection has been a matter. of considerable debate.

Intellectual property law, by providing the copyright holder ownership over the intellectual product, provides a degree of monopoly power to these individuals. The lack of competition in the reproduction or use of the intellectual product allows greater remuneration to the copyright holder than would otherwise be the case. A diagram can be used to illustrate this proposition. In Figure 1, the demand for physical embodiments of a par-

Copyright Law, Photocopying, and Price Discrimination 185

ticular intellectual product (copies of a given book title, say) is represented by the line D. The curve labeled MR is the marginal revenue associated with this demand. The horizontal line MC = AC is the average and marginal cost of producing the physical embodiments of the intellectual product (e.g., books). It is well known that a single producer, shielded from competition and able to charge only a single price, would produce QM and sell at price PM since this is the profit maximizing price-quantity combination. It is also well known that a competitive market in which free entry were allowed would produce output Qc at a price Pc. The area under the demand curve for physical embodiments minus the production costs (cost of both the embodiments and the creation of the intellectual product itself) is the social value of the intellectual product. Thus a single seller of physical embodiments creates a value equal to the sum of areas Q R, S, and T.2 The lost value (net of costs) of the output restricted by the single producer is often referred to as the deadweight loss caused by the monopoly and is equal to the area of triangle B.3

Two salient features emerge from this scenario. First, in a competitive

186 S. J. LIEBOWITZ

market, since Pc = AC, revenues equal production costs of the physical embodiments of the intellectual product and there is no additional revenue left over to cover the cost of creating the intellectual product. In a world with competitive production of physical embodiments of intellectual products, therefore, the only intellectual products which would be created are those not requiring the incentive impact of remuneration. Second, allowing restrictions in the production of physical embodiments (for example, through establishment of copyright) provides remuneration to creators of intellectual properties and is likely to increase the quantity of intellectual products created. This increase in the quantity of intellectual products is accompanied by a decrease in the quantity of physical embodiments produced of any particular intellectual product (QM instead of Qc). When judging intellectual property laws, the value to society brought about by the creation of additional intellectual products needs to be contrasted to the decreased output of embodiments of those products which would have been produced without any remuneration to the creator of the product.

Different perceptions of the various parameters affecting the creation and dissemination of intellectual products have led economists to various and often contrary opinions about the impacts of intellectual property laws. For example, a small group of economists (and economically trained lawyers) have argued that such laws are or may be harmful (Plant, 1934; Hurt and Schuchman, 1966; Breyer, 1970) because intellectual property laws draw too many resources into the creation of intellectual products. Plant argued that many intellectual products would be created without intellectual property protection. He argued first that many creators of intellectual products are not motivated by pecuniary incentives and would continue to produce their creations even if no financial remuneration were forthcoming. His second argument was that being first on the market provides a temporary monopoly since it takes time for imitators to copy the original product and market the imitations. This temporary monopoly was deemed by Plant to be of sufficiently long duration to provide remunerative incentives for efficient production of intellectual properties; patent and copyright laws, which provided lengthier protection, were deemed inefficient.

Plant’s arguments can be couched in terms of a more general framework. Figure 2 illustrates the costs and benefits brought about by changes in the duration of monopoly due, say, to changes in intellectual property protection. The curve labeled A represents the cumulative value of new intellectual products produced when the duration of monopoly increases. This value is defined as the sum of the areas under the demand curves (up to the quantity sold) for the embodiments of the new products less the cost of producing the physical embodiments less the cost of creating the intellectual products. When the duration of monopoly is zero, indicated by 0 on the horizontal axis, intellectual products are produced only by individ

Copyright LAW, Photocopying, and Price Discrimination 187

uals not requiring remuneration.4 In Figure 2, the value of these products not requiring remuneration is assumed relatively high, in order for the figure to be consistent with Plant’s reasoning. Curve A is drawn rather flat, indicating that as monopoly protection is increased in length, the new products created do not have a large social value.

With zero duration of monopoly power, there can be no restriction of. output by producers of embodiments of the intellectual product. As the duration of monopoly power is increased, all producers of intellectual products are assumed to take advantage of it.5 The sum of deadweight losses caused by the unnecessary restriction in output for those intellectual products not requiring such lengthy protection is represented by curve B. This curve slopes upward at an increasing rate, demonstrating the larger number of products for which the profits brought about by monopoly power are superfluous to the creation of the product.

Curve C is defined as the vertical difference between curves A and B. It represents the net social value of the intellectual product as the4uration of monopoly power varies. As the curves are drawn in Figure 2, X* (the highest point on C) is the optimal duration of monopoly power. If curve B had been steeper (or A flatter), the optimal duration might have been

188 S. J. LIEBOWITZ

zero. X* is drawn close enough to zero, however, to represent Plant’s perspective.

Let Y* represent the duration of monopoly brought about by being first on the market and Z* represent the length of intellectual property protection offered under law. Plant would have ordered those magnitudes in the following manner: X* < Y* < Z* In words, any intellectual property protection which lasts longer than the monopoly that comes from being first in the market leads to unnecessarily large deadweight losses which are greater than the value of the new intellectual products created by the lengthier protection. It is obvious that these curves can be assumed to have any shape, and that X*, Y* and Z* can be ordered in any way. If one believes that X* is greater than Y*, for example, the well-being of society can be improved by providing monopoly power for a duration Z* = X* perhaps through intellectual property legislation (Tyerman, 1971). This view is certainly the one prevalent in society.

Acceptance of the proposition that copyright is worthwhile in general does not mean that one need accept the proposition that all types of intellectual products require the same protection. For example, under a more "optimal" copyright law, those creators of intellectual products not requiring remuneration for their efforts would not be granted any statutory monopoly on the production of the physical embodiments of their work; no unnecessary deadweight loss would be created for these products. And when remuneration is required for the production of a product, the duration of the monopoly would be just sufficient to provide such remuneration. The next section demonstrates that the doctrine of fair use can be construed as an attempt to alter copyright along these lines.

 

III. THE ECONOMICS OF FAIR USE

In the jargon of economics, the fair use concept is easily accommodated as a judicial attempt to perform a rudimentary cost/benefit analysis for any infringing activity. Balancing the benefits of increased production of intellectual properties caused by the granting of monopoly power with the societal cost of diminished consumption of particular intelkctual properties should be the economic goal of an efficient copyright law. The fair use doctrine can be viewed as a method whereby the courts could circumvent the rigid rules of copyright law in instances when the benefits of increased consumption appeared to outweigh the harm from reduced production.

For example, some users of copyrighted works would be unwilling to purchase an embodiment of the work at a price which would cover the marginal production costs of the embodiment. These are presumably the

 

Copyright Law, Photocopying, and Price Discrimination 189

same individuals who would have laboriously hand-copied such works prior to the advent of cheap reprography. Nevertheless, these individuals derive value from their use of the work and would attempt to either borrow or copy the work in an attempt to attain this value. In principle, the authors of the work might charge a usage or copying fee, in order to appropriate some of the value generated by their work to these users. The transactions costs involved in such negotiations, including the monitoring of users, probably swamp the revenues likely to be generated and such transactions probably are not feasible. Forbidding these users from copying would not increase the revenues of authors and therefore would not increase the production of intellectual works. Allowing copying under these circumstances, therefore, would have the salutary effect of allowing additional consumption with no offsetting loss in production.

Similarly, some authors have incentives for producing intellectual works quite independent of pecuniary remuneration. For these authors and their works, allowing copying will not reduce the quantity of these works forthcoming although it will increase the value of those works to those making copies. Here too, strict enforcement of copyright would have a deleterious effect on society since some users would be excluded from purchase by the price PM. These two extreme cases illustrate instances whereby fair use exemptions can benefit society. As a general rule, fair use becomes a valuable alternative to strict enforcement of copyright when authors require small or no rewards or where authors would need to overcome great costs in order to appropriate small or no revenues from a class of users.6

The costs associated with copying have fallen dramatically with the advance of technology and may have caused individuals who would previously have bought physical embodiments to now make copies. This increase in the copying of copyrighted materials has in turn caused concern among authors that their revenues might be jeopardized. While this concern may be justified, only an empirical investigation can determine the actual impact of copying on copyright holders.

It is possible to examine if the fair use guidelines make economic sense. Not surprisingly, the present fair use statute calls for examination of empirical magnitudes which appear relevant to a cost/benefit calculation. Each of the four factors can be related to either the social benefit or harm from allowing copying. There is redundancy and imprecision, however, in these four factors.

The first two factors, the purpose and the character of the use, and the nature of the copyrighted material, have been interrelated in their interpretation by the courts. There is evidence that the courts generally consider scientific, educational, or "productive" work to be of greater value than entertainment, and are more likely to allow copying, for these reasons.7

190 S. J. LIEBOWITZ

This position makes little economic sense for two reasons: (1) scientific work does not have inherently greater economic value than entertainment; and (2) by freeing the copying of scientific work from copyright payments, the production of scientific work, which the courts (and legislature) seem to consider so invaluable, may in fact diminish for the same reason the courts believe that works of entertainment might diminish. There is little reason for the social value of the work, per se, to be considered in determining whether the copying constitutes fair use. The gain to society from increased access to this type of copyrighted materials must be compared to the harm brought about by the diminished production of these copyrighted materials when judging the impact of copyright. If, on the other hand, the production of scientific and educational works is much less responsive to the pecuniary rewards of copyright, society might benefit from a reduction in the length or scope of copyright protection for these works. Although the last statement, as an empirical proposition, may or may not be true, it does hold some intuitive appeal.

The first factor (nature of the use) is sometimes confined to the distinction between commercial and nonprofit use (as emphasized by the lower court). This distinction, per se, is also without merit. Although commercial use is much more likely to decrease the revenues of the copyright holders than private use since it tends to occur on a greater scale, such an implication is redundant with the fourth factor (economic harm to copyright holder). And for any given amount of harm to copyright owners, there is no reason to prefer the harm brought about by nonprofit institutions or individuals than by profitmaking ones.8

The third factor, the proportion of the copyrighted work copied, is also redundant with the fourth factor. When only small portions of the work are duplicated, the copies are not likely to be good substitutes for the complete work. Therefore the users of copies are not likely to use these copies as a replacement for purchase of the entire original work, implying little economic harm to copyright owners revenues.

The fourth factor, the economic impact of copying on the copyright holder, is of obvious importance in determining the impact of copying on the pecuniary incentives of authors. If photocopying changes the demand for the intellectual product, however, then revenues would change even if appropriability remained constant. Since constant or increasing copyright revenues can be consistent with decreased appropriability, the last fair use factor must be carefully examined if fair use is not to greatly alter the production of copyrighted works.

Because modem photocopying machines make it easy to copy an intellectual work, fair use is more likely to decrease the ability of the copyright holder to appropriate revenues. Reviewers and scholars can now copy parts of a work at relatively low costs. Some may copy the entire work instead

Copyright Law, Photocopying, and Price Discrimination 191

of buying it. This shall be referred to as the substitution effect and will have a negative influence on copyright owners. Although photocopying may incline some individuals not to buy an intellectual work, it is also likely that exposure to various works is increased by cheap photocopying. Individuals who may not have been aware of the properties of various intellectual works can sample them by using a copy made on a photocopying machine. This is particularly true among academic researchers using scholarly journals. For example, many library journals can only be read in the library so that, prior to photocopying, a researcher would read only journals which he considered most important since taking notes in libraries is a rather unpleasant task and less convenient than reading articles wherever and whenever one wishes. Modern reprographic methods increase the number of articles and journals a researcher is likely to read since the researcher can make copies of articles in any journal and read them at his leisure. Eventually, he may subscribe to some of these journals. This will be referred to as the exposure effect and will likely be beneficial for copyright owners.

Finally, it is likely that the price of the intellectual work will reflect the value placed on it not only by those who buy the work but also by those who use it to make copies. If the purchaser intends to let acquaintances copy parts of the work, he could either charge them in pecuniary terms for this privilege or indirectly by building up goodwill. -

Also, depositories of books and journals (i.e., libraries) will have their holdings more highly valued by users and should therefore be willing to pay more for the journals (and perhaps increase their total number of subscriptions). The ability of copyright holders to capture revenues from those making copies of their work is obviously of key importance and will tend to mitigate the negative impact of a reduction in sales caused by photocopying. This potential force will be labeled the multiple-use effect.

Thus the impact of reprography on revenue can be seen as the net impact of the substitution, exposure, and multiple-use effects. The substitution effect reduces appropriability, the multiple-use effect increases appropriability, and the exposure effect does not affect appropriability per se, but will influence the well-being of copyright holders.

Fair use can be evaluated in terms of these effects. Prior to cheap reprography, it is likely that fair use had only a very small negative substitution effect, and a positive exposure effect. If this is a proper assessment, then fair use had a beneficial impact on copyright holders. Even if fair use had a harmful impact on copyright holders it might still have been desirable for the public as a whole. This is because the rapid dissemination of knowledge and research is a valuable goal and such dissemination would be slowed down if students and researchers had to negotiate with the copyright holders before they could make copies.

192 S. J. LIEBOWITZ

 

IV. THE IMPACT OF PRICE DISCRIMINATION

In recent years there has been an increasing tendency toward price discrimination on the part of journal copyright holders (publishers). If reprography causes many journal subscriptions to be canceled, the copyright holder will lose revenues unless he can charge an offsetting higher price to the subscribers of the photocopied journals. Price discrimination, however, allows copyright holders to capture revenues from users of the journal whether they subscribe or not. If a publisher knows that former subscribers are going to libraries to make photocopies he can raise the subscription price to libraries and recapture some lost subscription revenue.

The fact of the matter is that journal publishers are price discriminating in that for many journals, libraries and institutions pay higher prices than do individuals. Fry and White (1976) report the average increase in prices charged by institutions and individuals by type of publisher. Their results are reproduced in Table 1. These results indicate that the spread between individual and institutional prices grew over the period with most of this growth accounted for by commercial publishers.

 

Table 1. Percentage Increase in Price
1969—1973

 

Commercial

Society

University

Other

Individual

Institutional

Individual

Institutional

Individual

Institutional

Individual

Institutional

34.8

70.6

42

40.4

25.1

32.5

42.8

45.6

Source: Fry and White (1976), Tables 9 and 10.

 

Additional and more detailed evidence can be found in my analysis (Liebowitz, 1981) of a sample of 54 leading academic journals. Institution prices were compared to individual prices in 1970 and 1978.9 These results are in Table 2. It is readily apparent from this table that the price charged to institutions has gone up relative to that charged to individuals. The t-value for rates (row 7) gives the statistical significance of this difference. The increase in the absolute difference between institutional and individual prices over this nine-year period has been statistically significant at the 99 percent level of confidence. Looking at the arithmetic difference between these prices may be somewhat misleading, however, due to the inflationary forces prevalent during this period. If inflation impacted on both individual and institution prices to the same extent, the nominal price spread would increase over time. To determine the change in relative price independent of inflation, the ratios of institution to individual prices were created. These are presented in rows 5 and 6. Observation reveals that these ratios have also increased during this period of time. With institution prices 66 percent

Copyright Law, Photocopying, and Price Discrimination 193

Table 2. Institution and Individual Prices

1970—1978

(1) 1970 individual price 13.20
(2) 1970 institution price 16.46

(3) 1978 individual price 25.17
(4) 1978 institution price 36.61

(5) 1970 ratio institution/individual 1.26
(6) 1978 ratio 1.66

(7) t-value 1970 price spread 4.43(99%)
versus 1978 price spread
(8) t-value 1970 ratio 3.21 (99%)
versus 1978 ratio

Notes: Number of journals = 54.

Significance level in parentheses.

higher than individual prices, and institutions making up roughly half the subscribers of many journals, price discrimination clearly has a large effect on revenues.

One cannot be certain as to the causes of this increasing price discrimination but its concurrence with increased photocopying would seem to be more than coincidence. In order to photocopy copyrighted materials one must have access to both a photocopying machine and copyrighted materials. The nexus of these two attributes is found mainly in libraries. As long as copyright holders can identify libraries and charge them higher prices (perhaps varying the price between libraries) they can appropriate revenues from users who switch from subscriptions to libraries.

To the extent that publishers can price discriminate, the category of fair use becomes meaningless. Technically, fair use allows some copying of copyrighted works, under given conditions, to occur with no direct payment made to the copyright owner by the copier. Under a regime of price discrimination, the copyright owner is being paid for copying in libraries even when that copying comes under the rubric of fair use. It must be concluded that for journals which price discriminate, fair use is not a meaningful concept. When libraries are charged discriminatorily high prices for use of copyrighted material, no distinction is made between libraries whose users copy under fair use guidelines and those who don’t.

It would be wrong, however, to conclude that price discrimination has perverted the intent of fair use. Action to resurrect fair use as a viable defense would indicate a lack of understanding of the economic function of the fair use doctrine. It is not important that fair users not have to pay copyright so much as it is important that they not be hindered in their research by negotiated copyright payments. Price discrimination is a collection method

194 S. J. LIEBOWITZ

between users and copyright holders. The fair user in a library which is paying a discriminatorily high price is probably completely unaware that he is paying for his copying activities. An arrangement where producers of intellectual property are reimbursed and consumers are not hindered in their use of such materials is one which should be encouraged.

Another impact of this price discrimination is that borrowers of copyrighted materials who do not make copies pay for their use of the materials just as copiers do (in the sense that libraries derive their revenues from their users, even if only indirectly). This payment can be considered a distortion of the decision not to grant a public lending right to authors. Discriminatory pricing makes such a lending right redundant.

 

V. COPYRIGHT CLEARANCE CENTER

An alternative to price discrimination would be strict adherence to the copyright law (perhaps with fair use removed as a defense) under unitary pricing. There are two major stumbling blocks to strict adherence, however. The first is the high negotiating costs relative to the value of making a copy. People making photocopies want them immediately and are not prepared to wait several weeks to get the copyright holder’s permission, even if the royalty payment itself is not objectionable. The second is the monitoring costs involved in trying to prevent people from copying the intellectual property- without any payment (theft).

In hearings prior to the 1976 copyright law, the U.S. Congress made clear that it wished to have an organization in place to simplify the copyright negotiations. In response to this wish a nonprofit Copyright Clearance Center was organized. From the "Summary" (see Waite, 1980, p. 10):

Organized principally by the efforts of nonprofit and professional society publishers with help from a few large photocopy user organizations, CCC was initially funded by gift monies received from publishing organizations of all types. Nearly half were nonprofit organizations seeking to strengthen the principles of copyright and to help establish a system to uphold their publication income.

Publishers register titles with the clearinghouse. Lists of these titles, along with copyright payment schedules, are ‘sent to user organizations (libraries, corporations, government agencies, and information services). User organizations voluntarily register with the CCC (Copyright Clearance Center) and report on their photocopying practices, making the appropriate payments. The CCC keeps 25 cents per reported photocopy as payment

Copyright Law, Photocopying, and Price Discrimination 195

for its collection services. The important aspects of this system are (1) voluntary payments and (2) payment fees determined by publishers.

The largest costs associated with strict liability are likely to be monitoring of users by copyright owners. The CCC, by abrogating this responsibility, avoids the high costs associated with effective policing of users. Such a policy engenders other problems, however, particularly the nonreporting of photocopying activity by users. Such a policy also rules out the single greatest advantage of a centralized agency, that is, the elimination of the need for duplication in monitoring costs which would be created if many publishers independently tried to monitor users.

The performance of the CCC, to date, has not proven the workability of the clearinghouse concept for increasing publisher profits or improving society’s welfare. Over 3,800 publishers were solicited to register their serial publications in 1977, yet after 21 months of operation only 335 publishers had enrolled in the system; 923 user organizations are currently registered. The CCC, at last report, received payment for an average of 14,750 copies per month. The latest "projected" break-even point was estimated to re-. quire 85,000 copies per month; in other words, almost a sixfold increase. The CCC has made up this deficit by generating contributions from various organizations and withholding some of the royalty payments to publishers (effectively charging them 50 cents per copy). The average fee paid by users per reported photocopy was $1.53. CCC’s paid staff totals three people.

The projected break-even-point reported by the CCC is somewhat suspect. In June 1979 the CCC claimed to be approaching 50 percent of the self-sustaining volume of photocopies. The November 1979 report claimed to be at the 17 percent level, invalidating the earlier projections. Even if the CCC manages some day to be able to cover its transactions costs, its worth to society will be unproven since the costs to users of filling in forms and monitoring their own usage is likely to be much larger than direct CCC costs and this cost is not included in the above calculations.

The CCC believes its poor performance to date is due to the fact that certain users are Dot accurately reporting their photocopy totals, hardly surprising given the nature of enforcement. Only 30 percent of the registered users reported any photocopy activity over the entire period. Seventy-. one percent of users reporting activity were in private industry. Academic libraries, on the other hand, only 15 percent of whom had even registered with the CCC, had only 7 percent of those registered reporting any photocopying activity.10

It should be pointed out that a centralized clearinghouse could be set up for a somewhat different and more nefarious purpose. It could be the case that a clearinghouse might not allow individual publishers to determine

196 S. J. LIEBOWITZ

the copying fees for their works but would instead take over this responsibility itself. Allowing such control would be tantamount to allowing the reduction or elimination of competition between copyright holders and could therefore cause a large increase in the monopoly power and deadweight losses due to the copyright system.11

Thus the CCC must be viewed as an economic failure since it appears unable even to pay for itself and thus must fail in its attempts to compensate copyright owners. Projected future viability of the CCC must be viewed with skepticism given the past performance of these projections and their underlying assumptions. This conclusion is enhanced for those countries, small relative to the United States, which are considering creation of their own clearinghouses.

The conclusion that the CCC, as set up in 1977, is doomed to failure also seems to have finally dawned upon the CCC. They have recently come up with a new plan which avoids much of the costs of the old one. Called the "Annualized Authorization Service," this new plan essentially grants a license to the user organization, allowing it to make all the copies it wants upon payment of a yearly lump sum of money, paid in advance. The amount of the license fee is to be determined in the following manner:

The user is required to participate in a measurement of photocopy usage, to be performed according to CCC instructions. Annual use-level projections are made for each publication as a result of the measure and multiplied by the per copy authorization fees established by publishers, determine the annualized authorizations license price.12

The CCC claims that for industrial users alone, $29 million per year is a conservative estimate of the potential market, although it does not explain how this figure was arrived at. Based on the 663 industrial organizations presently enrolled, this figure translates into an average payment per company of approximately $44,000. Based on those companies reporting more than 10 copies per month, this fee works out to almost $354,000 per company.

There are some serious potential problems with the system proposed by the CCC. First, one would expect companies to reduce their photocopying activities while they are being monitored by the CCC. Second, it is not clear why firms should sign up for this new payment system, particularly since the old CCC system will still be in place. Third, one would expect individual publishers to greatly increase the price charged for making photocopies of their journal articles since the impact on the total payment will be small. If all publishers acted in this way, the yearly fee would become prohibitively high. Finally, the journals photocopied during a brief monitoring period might bear little relationship to the journals

Copyright Law, Photocopying, and Price Discrimination 197

photocopied during the year and thus payments would go to the wrong copyright holders.

These objections notwithstanding, there is little doubt that the CCC is in a position to generate some positive revenues with the proper collection structure. An effective licensing system is, however, surprisingly similar to the discriminatory pricing system now being used. At present, libraries pay a certain quantity of money for the journals to which they subscribe. The differential between the institutional and individual subscription prices summed over the set of journals which a library subscribes to can be thought of as a lump sum payment which varies in size as the composition of the libraries’ subscriptions changes or as the prices of the journals change. Although this sum has properties similar to those associated with a license system, there are some interesting differences as well.

A licensing system is likely to discriminate across libraries much more finely than discriminatory pricing now does although there is no readily apparent reason for the lack of discrimination between types and sizes of libraries presently practiced by publishers. In principle, the two systems should be able to generate equivalent sums from libraries unless the license system restricts competition between publishers for library subscriptions (say, by not allowing individual publishers to’ pick the prices charged for photocopying their journals).

One important difference between these systems is that the present discriminatory pricing system collects revenues on current issues of journals based on their expected photocopying intensity, whereas the licensing system would collect revenues based on the photocopying of the entire stock of old journals which the library holds. The licensing system allows publishers to capture revenues for the photocopying of journals published prior to the era of photocopying. Such revenues need not bear any strong relationship to the values of future issues of a journal. If journals with high photocopying of past issues are not these journals which will have high photocopying of present and future issues, the license revenues will not have the proper incentive effect for the production of new intellectual properties unless present publishers can foresee the future revenues arising from even newer, still undeveloped technologies.

Finally, one important implication of this analysis needs to be pointed out. If the license system is a moderately close substitute for discriminatory pricing, then any increase in publisher revenues derived from the license will come about partly at the expense of the revenues generated by price discrimination since publishers will find that the quantity of the journals demanded by libraries had diminished because of the license system. If the licensing system is not capable of finer price discrimination, or reduced competition, it will, in the long run, not provide any increase in revenues to publishers or copyright holders.

198 S. J. LLEBOWITZ

VI. CONCLUSIONS

This paper has demonstrated that the debate over special copyright protection in the case of photocopying has neglected the important market adjustment of price discrimination. The emergence of price discrimination has benefited copyright holders and altered the impact of current copyright law. The justifications for enhancing copyright protection are weakened by price discrimination. The particular institutional attempt to enhance copyright protection in the United States was also examined.

It should be pointed out that recent technological advances threaten to alter the institutional arrangements analyzed in this paper. The use of computers and the future abundance of home terminals will alter the parameters affecting the production function of using intellectual properties and collecting revenues for this use. Journals may disappear as physical entities, to be replaced by computer information retrieval systems with, as seems likely, an editorial board serving functions similar to those performed today. Negotiations between users and copyright holders will still be costly and so one would expect a flat fee charged to all users of a given class. Billing will occur immediately and at very low cost. Fees for use as well as fees for making copies are quite likely possible. Concepts such as fair use or public lending rights would likely be unnecessary. However, until the future arrives we must use our present institutions.

  1. As is true for most commodities, property rights over intellectual property are limited. When, for example, the author sells copies of his book, a purchaser may lend it to a friend without needing the permission of the copyright holder. In addition, fair use enables an individual to copy parts of the book without being liable for copyright.
  2. There is a literature which assumes that the profits to the intellectual property creator, when positive, are dissipated through competition for the monopoly. Such competitive dissipation would reduce the social value of many intellectual properties below that assumed in the text.
  3. Figure 1 represents a static demand when in fact the intellectual product is a durable good lasting for many periods. Any intellectual product protected by intellectual property laws will generate a value in each period—that value fluctuating as demand and/or costs change, and also when the monopoly protection comes to an end. The present value of this stream of values would be the value of a given product.
  4. Other forms of remuneration such as prizes, government grants, patronage, etc., are excluded from this analysis.
  5. If producers do not take advantage of monopoly power when it is offered, then no unnecessary deadweight loss will be created by the grant of such monopoly power.
  6. Since the Conference on Economics of Intellectual Property I have read a paper by W. Gordon (1982) which contained some similar arguments.
  7. See, for example, Williams and Wilkens Co. v. United States, 487 F.2d 1345 (1973) affd by an equally divided court, 420 U.S. 376 (1975). In this case a government medical library made photocopies of copyrighted medical journals. The lower court ruling, upheld by the Supreme Court, was that this practice constituted fair use, in part because of the nature of the material at hand. The Supreme Court majority opinion stated: "We are convinced that medicine and medical research will be injured by holding these practices to be an infringement.., we should not place such a risk of harm upon science and medicine."
  8. I have seen some arguments since this paper was written which have caused me to alter my view on this subject; see Liebowitz (1984).
  9. Institution prices were taken from the Faxon’s Librarian Guides for each year and the individual prices were taken from the journal on Ulrich’s International Periodicals Di-rectory; list of journals available upon request. Since the conference, I have uncovered more detailed and convincing evidence on this point; see Liebowitz (1985).
  10. One reason for this very low degree of reported photocopying is that much of the photocopying activity is considered to be fair use by libraries in these institutions.
  11. This problem has been recognized in regard to performing rights societies such as ASCAP and BMI. See Broadcast Music Inc. vs. CBS, 441 U.S. 1(1979).
  12. P.3, Supplemental Information on the CCC Presented to the Copyright Office-.-December 10,1982. This discussion is new and not part of the original paper presented at the conference.

 

 

 

NOTES

 

Copyright Law, Photocopying, and Price Discrimination 199

 

REFERENCES

Breyer, Stephen. (1970) "The Uneasy Case for Copyright.- A Study of Copyright in Books, Photocopies and Computer Programs," Harvard Law Review, Vol. 84, p. 281.

Fry, Bernard, M., and Herbert S. White. (1976) Publishers and Libraries:A Study of Scholarly and Research Journals, Lexington, Mass., Lexington Books.

Gordon, W. (1982) "Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors," Columbia Law Review, Vol. 82, p. 1600.

Hurt, R. M., and R. M. Schuchman. (May 1966) "The Economic Rationale of Copyright," American Economic Review, Vol. 56, pp. 421-432.

Liebowitz, S. J. (1981) The impact of Reprography on the Copyright System, Consumer and Corporate Affairs Canada.

(1984) "The Betamax Case," unpublished paper, Graduate School of Management, University of Rochester, New York.

(October 1985) "Copying and Indirect Appropriability Photocopying of Journals," Journal of Political Economy, Vol.93 (forthcoming).

Plant, Arnold. (May 1934) "The Economic Aspects of Copyright in Books," Economica, Vol. 48, pp. 167—195.

Treece, James M. (1977) "Library Photocopying," UCLA Law Review, Vol. 24, p. 1025.

Tyerman, Barry W. (1971) "The Economic Rationale for Copyright," UCLA Law Review, Vol. 18, p. 1100.

Waite, David P. (1980) "A Summary of the Copyright Clearance Center’s First Years Operating Experience," Copyright Clearance Center Report.