The Knockoff Economy (42 page)

43
. Ibid., § 4.2.1

44
. See ibid., Figure 7.

45
.
http://projects.latimes.com/value-added/faq/#database_grades
.

1
. See Dennis Dutton,
The Art Instinct: Beauty, Pleasure and Human Evolution
(Bloomsbury Press, 2009).

2
. Douglas G. Lichtman, “The Economics of Innovation: Protecting Unpatentable Goods,”
Minnesota Law Review
81.3 (1997): 693.

3
. The nature of that monopoly varies; under copyright law, for instance, if someone else independently creates the same work, they have not “copied” the first work and therefore have broken no laws. Patent has a stricter standard. A second inventor who unwittingly (and without copying) invents the same device or method cannot use it commercially without violating the first inventor’s patent.

4
. E.g., Robert Levine,
Free Ride: How Digital Parasites Are Destroying the Culture Business, and How the Culture Business Can Fight Back
(Doubleday, 2011).

5
. This is not to say that there are not serious criticisms of our IP laws. For some of the best work in this vein see, e.g., Jamie Boyle,
The Public Domain: Enclosing the Commons of the Mind
(Yale, 2008); Neil Netanel,
Copyright’s Paradox
(Oxford, 2008); and Larry Lessig,
Free Culture: The Nature and Future of Creativity
(Penguin, 2004)

6
. Present in this hypothetical are also what economists call positive and negative externalities.
The New Palgrave Dictionary of Economics
(Palgrave Macmillan, 2008) defines externalities as “indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system.” The interaction between copying and externalities is interesting. The second café might enjoy positive externalities from the first, especially if the first has more business than it can handle at certain times and hence
customers “spill over” into Café #2. And the later followers of both cafés enjoy the positive externalities of the first two as the street transforms into a destination spot. But the owner of Café # 1 also experiences negative externalities as the second owner outcompetes him for some customers. Customers, of course, are the overall winners as they experience more choice and, eventually, better quality and lower prices induced by competition.

7
.
The Sopranos,
“46 Long” (1999).

8
. While Paulie’s views on who owns the cappuccino may seem extreme, this is actually a live issue in intellectual property thinking today. It usually falls under the banner of “traditional knowledge” or “cultural property.” See generally Steven Munzer and Kal Raustiala, “The Uneasy Case for Intellectual Property Rights in Traditional Knowledge,”
Cardozo Arts and Entertainment Law Journal
27.1 (2009): 37; Kristen A. Carpenter, Sonia K. Katyal, and Angela R. Riley, “In Defense of Property,”
Yale Law Journal
118.6 (2009): 1022; Susan Scafidi,
Who Owns Culture: Authenticity and Appropriation in American Law
(Rutgers, 2005); Michael Brown,
Who Owns Native Culture?
(Harvard, 2004).

9
.
In re Morton-Norwich Products, Inc.,
671 F.2d 1332 (C.C.P.A. 1982).

10
. Congressional Budget Office,
Research and Development in the Pharmaceutical Industry
(October 2006), 2.

11
. Brooks Barnes, “‘Avatar’ Is No. 1 but without a Record,”
New York Times,
December 20, 2009.

12
. Hearings before the Subcommittee on Courts, Civil Liberties, and the Administration of Justice on Home Recording of Copyrighted Works, April 12, 1982.

13
. For some notable exceptions, see Paul Nystrom,
Economics of Fashion
(Ronald Press, 1928); Paul M. Gregory, “An Economic Interpretation of Women’s Fashions,”
Southern Economic Journal
14.2 (1947): 148; Wolfgang Pesendorfer, “Design Innovation and Fashion Cycles,”
American Economic Review
85.4 (1995): 771; Jonathan Barnett, “Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property and the Incentive Thesis,”
Virginia Law Review
91.6 (2005): 1381; Kal Raustiala and Christopher Sprigman, “The Piracy Paradox: Innovation and Intellectual Property in Fashion Design,”
Virginia Law Review
92.8 (2006): 1687; and C. Scott Hemphill and Jeannie Suk, “The Law, Culture, and Economics of Fashion,”
Stanford Law Review
61.5 (2009): 1147.

14
. Hemphill and Suk coined these useful terms in their
Stanford Law Review
article. They treat the two as simply different types, though of course there is a social class dimension to this, and in the past this was far more apparent. The great French historian Fernand Braudel quotes a story of a Sicilian nobleman in Paris in the early 18th century who noted that “nothing makes noble persons despise the gilded costume so much as to see it on the bodies of the lowest men in the world… so the upper class had to invent new ‘gilded costumes.’” See Pesendorfer, “Design Innovation and Fashion Cycles,” 771-72.

15
. Identifying the tipping point is a task for Malcolm Gladwell,
The Tipping Point: How Little Things Can Make a Big Difference
(Back Bay Books, 2002).

16
. Emmanuelle Fauchart and Eric von Hippel, “Norms-based Intellectual Property Systems: The Case of French Chefs,”
Organization Science
19.2 (2008): 187.

17
. Robert Ellickson,
Order without Law: How Neighbors Settle Disputes
(Harvard, 1994); Eric Posner,
Law and Social Norms
(Harvard, 2002); Lisa Bernstein, “Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry,”
Journal of Legal Studies
21.1 (1992): 115.

18
. Oral Argument,
Two Pesos, Inc.,
505 U.S. 763, 1992 WL 687823 *16 (Scalia, J. speaking; emphasis added).

19
. “Having a Ball: What’s Working in Music,”
The Economist,
October 7, 2010.

20
. Zoe Heller, “Mick without Moss,”
New York Times,
December 3, 2010.

21
. Quoted in ibid.

22
. Marie Connolly and Alan B. Krueger, “Rockonomics: The Economics of Popular Music,” in
Handbook of the Economics of Art and Culture,
Victor Ginsburg and David Throsby, eds. (Elsevier, 2006), 670; “Music Industry Decides that All the World’s a Stage,”
The Independent,
January 3, 2009.

23
. Connolly and Krueger, “Rockonomics,” 673.

24
. Jon Pareles, “David Bowie, 21st Century Entrepreneur,”
New York Times,
June 9, 2002.

25
. Sasha Frere Jones, “Critic’s Notebook: Pay Scale,”
The New Yorker,
March 23, 2009, 9.

26
. Daniel H. Pink,
Drive: The Surprising Truth about What Motivates Us
(Penguin, 2009), 15-16.

27
. To learn more about open source, see Yochai Benkler,
The Penguin and the Leviathan: How Cooperation Triumphs over Self-Interest
(Random House, 2011); Steven Weber,
The Success of Open Source
(Harvard, 2005); Eric S. Raymond,
The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary
(O’Reilly Media, 2001).

28
. Richard Rothwell, “Creating Wealth with Free Software,”
Free Software Magazine
(August 2008),
www.freesoftwaremagazine.com/community_posts/creating_wealth_free_software
#. See also the discussion in Chris Anderson,
Free
(Hyperion, 2009), chapter 7.

29
. Nicholas Dawidoff, “Rex Ryan: Bringing it Big,”
New York Times,
September 8, 2010.

30
. Ferran Adria et al., “Statement on the ‘New Cookery,’”
The Guardian,
December 9, 2006.

31
. Eric Wilson, “Before Models Can Turn Around, Knockoffs Fly,”
New York Times,
September 4, 2007; see also Paul Nystrom,
Economics of Fashion
(Ronald Press, 1928) for an early version of this claim.

32
. Hemphill and Suk, “The Law,” 24.

33
. Congress responded to the Trade-Mark Cases by enacting the Trade Mark Act of 1881. It did so based on its power under the Constitution’s Commerce Clause to regulate interstate commerce. That enactment later passed constitutional muster.

34
. Levine,
Free Ride.

35
. Michele Boldrin and David K. Levine,
Against Intellectual Monopoly
(Cambridge, 2008).

36
. There are scores if not hundreds of studies demonstrating the existence of optimism bias. Russell Korobkin and Thomas Ulen, “Law and Behavioral Science:
Removing the Rationality Assumption from Law and Economics,”
California Law Review
88.4 (2000): 1091; Neil Weinstein, “Unrealistic Optimism about Future Life Events,”
Journal of Personality and Social Psychology
39.5 (1980): 806.

37
. Christopher J. Buccafusco and Christopher J. Sprigman, “Valuing Intellectual Property: An Experiment,”
Cornell Law Review
96.1 (2010): 1.

38
. The participants were told that they would be selling only the chance to win the prize, not the poem itself—in adopting this structure, the experiment modeled an IP transaction, in which the author of something like a poem, which is what economists call “nonrival” property, sells some opportunity to use the poem (for example, to publish it), but does not divest himself of the poem completely. Contrast this with a transaction involving “rival” property, like a coffee mug. In the latter, the seller loses all access to the good he has transferred—you don’t drink out of a mug once you have sold it to someone else.

39
. These experiments do not empirically demonstrate increased effort, but instead increased ex ante valuations of goods. But the same is largely true for the incentive basis of copyright or patent: both rest on the belief that larger expected rewards will result in more output of innovation. A potentially more important caveat is that firms may be institutionally structured to reduce optimism bias and have more rational and reasonable valuations in mind when engaging in innovation. How individuals differ from firms in this regard is an interesting question not addressed by these experiments.

40
. Sherwin Rosen, “The Economics of Superstars,” 71.5
American Economic Review
(1981): 845; Robert H. Frank and Philip J. Cook,
The Winner Take All Society
(Free Press, 1995).

41
. Doug Lichtman et al., “Strategic Disclosure in the Patent System,”
Vanderbilt Law Review
53.6 (2000): 2200. Whether the second and third place finishers truly wasted their efforts is a hard question, since there may be useful spillovers from these efforts. But the central point remains.

42
. Jonathan Barnett et al., “The Fashion Lottery: Cooperative Innovation in Stochastic Markets,”
Journal of Legal Studies
39.1 (2010): 159.

43
. Buccafusco and Sprigman, “Valuing Intellectual Property,” 7. Loss aversion may also play a role here, as a counter-countervailing force against the countervailing force of optimism bias and tournament effects. We are not claiming that the overall effect of various psychological biases is clear; rather, we simply want to point out that there is good reason to think that there are some, possibly significant, forces that lead creators to overestimate their incentives to create.

44
. These have slightly different connotations but share a reliance on an open innovative system in which many actors, often formally unconnected, participate. On crowd-sourcing, see James Suroweicki,
The Wisdom of Crowds
(Anchor, 2005).

45
.
https://buy.louisck.net/statement
(accessed December 16, 2011).

1
. Greg Kot,
Ripped: How the Wireless Generation Revolutionized Music
(Scribner, 2009); Steve Knopper,
Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age
(Free Press, 2009); Donald Passman,
All You Need
to Know about the Music Business
(7th ed., Free Press, 2009); M. William Krasilovsky et al.,
This Business of Music: Definitive Guide to the Music Industry
(10th ed., Billboard Books, 2007).

2
. Recording Industry of America,
www.riaa.com
(accessed July 8, 2011).

3
. “Napster: A Cool Billion,”
The Economist,
February 22, 2001.

4
. Indeed, the record label’s anti-piracy campaign appears to have provoked innovation in the technology of filesharing that made future anti-piracy campaigns less effective. Had the industry made its peace with Napster, these developments would likely still have happened, but they may have happened less rapidly and been less salient to ordinary users.

5
. Statistics drawn from domestic release figures at Box Office Mojo;
http://boxofficemojo.com/yearly/?view2=domestic&view=releasedate&p=.htm
.

6
. Zoe Heller, “Mick without Moss,”
New York Times,
December 3, 2010. On albums as ads, see Frere Jones, in Conclusion. On Madonna, see Sean Michaels, “Madonna Records Biggest Second-week Sales Drop in US Chart History,”
The Guardian,
www.guardian.co.uk/music/2012/apr/11/madonna-second-week-sales-drop
.

7
. Jon Caramanica, “For Some, Free Music Is an Investment that Pays Off,”
New York Times,
November 18, 2011.

8
. Josh Tyrangiel, “Radiohead Says: Pay What You Want,”
Time
Magazine, October 1, 2007,
www.time.com/time/arts/article/0,8599,1666973,00.html
.