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Intellectual Property Rights- Market Failure?


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Creative and cultural industries aided by the copyright regulations engage in overenthusiastic enforcement of legislation and technological encryption. Amateur creativity, confronted with legal hassle, goes underground. A state of affairs results wherein economic activities and social welfare are held hostage to intellectual property regime thus distorting the functioning of the markets. Market failure, can however be avoided through the opportunities that exist - in both commercial and non commercial production and consumption models- to thrive in the digital and physical world.

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Intellectual Property Rights- Market Failure?

  1. 1. Towards Locating Market Failure as an Outcome of Intellectual Property Regime: Mapping the IPR-Market-Society Interfaces -Prof. Prashant Kulkarni Indus Business Academy Presented at Conference on Management of Intellectual Property and Strategy, SJ Mehta School of Management, IIT Bombay, Mumbai- Feb 2012
  2. 2. Background • Increasing focus on R&D (technology as answer to social complexities??) – Large R&D budgets; low commercialization • R&D intensity for Apple (3%) and for GE (2.5%) • Changing Dynamics of Intellectual Property Protection – Function of national sovereignty to an unified international regulation – Creativity vs Piracy
  3. 3. Knowledge Dynamics - Transforming a Public good to Private Good Free rider Public goods (non rival and non excludable) Conversion into private goods through assignment of property rights Underproduction of public goods eg. Knowledge Traditional solutions
  4. 4. IP rationale- Traditional Notions under threat? – Increasing cost of future innovation • Benkler (2006) and Janet Hope (2010) – Increasing digitization • Characteristics of digital goods (Quah, 2002) • Rise of peer production (Benkler, 2006) – Open Business Models (Chesbrough, 2007) – Tragedy of Anti commons (Heller)
  5. 5. Proposition • IP regime creates market failure • Challenges the notion that failure of IP protection causes market failure • Uses literature and case approach to support the proposition
  6. 6. Intellectual Property- Industry Analysis Does Cost Structure- Utility Structure Linkages explain IP differentials Utility structure Cost structure High fixed costs and low variable costs Low fixed costs and high variable costs Diminishes slowly Automobiles, high end luxury goods, pharmaceuticals Retail malls?? Diminishes faster Music, entertainment, publishing Clothing, apparel, shoes etc
  7. 7. Access Barriers, IP and the Consumer: Whose Choice should Prevail? Consumers Industry Focus on Aesthetics and creativity Focus on enhanced market power Freedom of choice Flourishing of creative culture, democratization of creativity Consumer industry conflicts; piracy; circumventing access barriers by consumers Imposed choices Centralized element of culture Choice dictatorship, rise of so-called cultural guardians Does an individual has the freedom to express creativity or develop a cultural adaptation without the fear of being sued?
  8. 8. Regulatory Capture, National Sovereignty and Citizen Rights Global Regulation – Depiction of Producer and Consumers Interests and Negotiations Attribute Producers Consumers Democratic process Low Low Unequal access to information and consequent outcomes : Producers Low High; results in coercion by producers Representation of all actors Possible; aided by convergence of interests; reconciliation of differences easier Several interests often conflicting and at cross work; difficult to organize; coherence low Non domination Greater access to financial resources; possibility of regulatory capture; campaign financing Difficult to negotiate from a position of strength; divergent interests unlikely to generate sufficient political pressure; high transaction costs Source: Developed by the author based on Drahos and Braithwaite, Information Feudalism, EarthScan, 2001 • TRIPS as representative of modern mercantilism; an anti-thesis of competition • Patents as public guarantee of private investment • Movement away from product differentiation or cost leadership to public security on private activities
  9. 9. Anti-Commons and Missing Goods Puzzle- Hold-Ups and Alzheimer's cure Source: Developed by the author Patent holders Firm develops new drug Pay royalties Doesn’t pay royalties Co- operate Development of new drugs; in the instant case drug for Alzheimer’s disease Open source discovery models Hold out Drug is developed; high costs may deter purchase of drugs Law suits force abandonment of drugs
  10. 10. Resolving Market Failure • Opening Braudel’s ‘Bell Jar’ – IPRs should respond to needs of society and not the other way round – Law follows social norms and conventions and NOT replace social contract • Liberalize points of control – IPRs choke the flow of information – Remove the choke • Focus on Uses of Copy than mere copy
  11. 11. • Brazil’s movement away from proprietary based models to non-proprietary models • IP development be treated as public good than as club good • Movement away from an outcome of benefits for concentrated interests against deep losses by a diffused set of consumers • Patent Pooling
  12. 12. • Recognizing a trade off between producer rights retaining access control as against the consumer rights of trading in cultural expression priced in experiential and social values Concluding Remarks
  13. 13. Questions????