price discrimination in copyright law

Copyright advocates often suggest price discrimination as an efficient solution to deadweight losses. Deadweight losses occur when prices are artificially inflated, meaning that a section of the population who are willing to pay more than the marginal cost, but less than the monopoly price, are unable to access the good. Whereas free market competition would drive prices down to marginal costs, a monopoly with perfect price discrimination could sell each item at exactly the price that each person is willing and able to pay. This would have the effect of allocating all the consumer surplus to the publisher, ensuring that each customer could afford to buy the product, and providing the greatest possible revenue to publishers. The drawbacks to this proposition are significant:

• Firstly, the entirety of the consumer surplus is appropriated by the manufacturers, with the result that each individual is only able to afford access to a smaller range of information than under competition.¹⁾

• Secondly, the process of near-perfect price discrimination would require the near-perfect eradication of individual privacy, as publishers would necessarily need to accurately ascertain each person's demand for each product.

• Thirdly, people would only be exposed to information for which they are willing to pay - the opportunity for accidental discovery is lost, as is the ability to engage in any free content-level dealings with the information.²⁾

• Fourthly, implementing price-discrimination is costly, and the producer is not likely to expend the money needed to correctlyascertain which users value the product at a price between zero and the cost of implementing price-discrimination, and is much more likely to simply bar access to the work from this segment of the market.³⁾

• Finally, since perfect price discrimination is not feasible, producers must engage in imperfect price discrimination, for which there is no guarantee that efficiency will be maximised.⁴⁾

Michael Meurer argues further that the fundamental argument for price discrimination is flawed, firstly because optimal incentive to create copyright works is somewhat less than the full social value of the works. As consumer attention is a limited common resource, high rewards encourage production races to capture that attention, which are duplicative and wasteful.⁵⁾ Secondly, “the private incentive created by expected profit can easily exceed the expected social value of a work”, particularly where there are close substitutes for a work, and the new work displaces users of existing works without attracting any new consumers.⁶⁾

Glynn Lunney argues that allowing the producers of information goods to recoup the entirety of the consumer surplus distorts the market, because producers of physical goods are only entitled to the marginal cost, leading to over-investment in the creation of information goods.⁷⁾ Lunney also notes that copyright owners should not appropriate the whole of consumer surplus because they are not solely responsible for the value of their works. The amount of money a consumer has to spend on a work of authorship is dependent on the price extracted for all other goods and services that consumer values more than the work - noting for example that if “the state had established a lawful monopoly in the provision of food that permitted food suppliers to charge each consumer her reservation price for her food, a consumer would have far less, if any, money left to spend on works of authorship”.⁸⁾

These points significantly undermine the argument put forward that firms will only make the socially optimal investment if they can appropriate all of the social value from their investment.