The Economics of Intellectual Property and Openness

The Tragedy of Intangible Abundance

Bartłomiej Biga

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000381566
• Edition: 1
• Topic: Economics
• Subtopic: Microeconomics
• Index: Economics

This book focuses on the economic aspects of intellectual property (IP). It includes considerations of the wider category of intangible assets. However, the primary focus is devoted to patents which the author argues are the most vivid example of the Tragedy of Intangible Abundance (TIA).

TIA touches upon a key issue in the contemporary economy. On the one hand, there is an enormous supply of IP, yet, on the other hand, such an abundance does not necessarily solve existing issues but rather creates new ones as well. This book elaborates on the reasons for the emergence of TIA and its consequences. The author uses clear metaphors to explain very complex issues. The book provides a valuable and interdisciplinary analysis of the field and offers practical solutions. It is based on the data collected by the author during the qualitative research he conducted among a group of start-ups. It presents guidance on determining which instrument is the most efficient for a particular situation. It also provides arguments for decision-makers and their advisors as to why a more open approach towards intellectual property would be more beneficial under many circumstances in the contemporary economy. While universal issues are addressed, the author distinguishes the European perspective too.

The book is written in a clear and concise style and covers all of the crucial aspects of IP management. It will find an audience among scholars of economics and business.

1 Tragedies in economics

1.1 Economics of scarcity

Economics is said to be the science of managing the attempt to make optimum use of scarce resources to satisfy numerous and unlimited needs. Within this context, the association ‘scarce good equals a high value good’ seems to be fully legitimate. This approach may even be useful when trying to explain the Aristotelian water and diamond paradox. The latter, being much scarcer, is much more valuable although, unlike water, it is not necessary for life. Economists are accustomed to the strong correlation between scarcity and price. However, problems arose with the growing importance of intellectual property, in the case of which any scarcity is obviously out of the question. Furthermore, thanks to the networking effect, the abundance (as an antonym of scarcity) of any construct is positively correlated with value. There are also no physical restrictions on how many people can take advantage of one construct at the same time. Therefore, without strong regulatory interference, the natural state here is the lack of competitiveness in consumption and the inability to exclude from consumption. Thus, we are here dealing with something that fits the definition of public goods.

This circumstance raises concerns among many entrepreneurs and creators. In their simplified reasoning, this prevents effective monetisation of the invention, design or artistic work, often referred to as ‘intellectual goods’. Since – in the traditional sense – value is positively correlated with scarcity, attempts are made to artificially create this scarcity using legal monopolies. Such a decision is usually not preceded by an analysis of alternative methods of managing intellectual property, which – as the subject of this study – are in many cases much more effective. Especially in the digital economy, attempts to counteract the ease of copying intellectual property are doomed to failure, being associated with the need to incur significant costs, and yet will still lead to unsatisfactory results.

This phenomenon is the root cause of the Tragedy of Intangible Abundance. A number of other factors are obviously necessary for it to occur, which are discussed in the next section. However, without mindlessly reaching (or even abusing) legal monopolies in the management of intellectual property, the problem addressed in this book would not have reached such a large scale (Lemley, 2019).

Economists are not the only ones who have found it difficult to find their place in the world dominated by intangible assets. In addition, Accountants have not yet developed satisfactory methods of valuing what cannot be touched or – often – even sold. The problem with intangible resources is that although they play a key role in enterprises, they are not fully controlled (owned) by them, which is particularly evident in the example of human capital. In addition, a large part of reporting is not subordinated to the desire to learn about the actual state of the company, but tax optimisation (Černíková, 2018).

The third professional group, which plays an important role in the context of intellectual property – lawyers – also contributes to the Tragedy of Intangible Abundance. Transferring too much power to legal departments – especially in the face of shortcomings in the strategic management of intellectual property – almost always means excessive patenting and protection of works in the traditional formula of ‘All Rights Reserved’. The area of legal monopolies is a natural environment for representatives of this profession, while abandonment of such tools carries the risk of reducing the demand for legal services. Moreover, in organisations unaware of modern methods of managing intellectual property, it is much easier to attribute responsibility (guilt) for failure in a situation where some intellectual property was not subjected to any protection, rather than when a patent has been granted but did not assure satisfactory settlement in court.

As a result, as J. Low and P. C. Kalafut (2006, p. 37) wrote, investors must flounder in the dark. The aforementioned habits and brachylogy have led to the construction of such a system of stimuli in organisations that the most rational behaviour of its individual units is to stick to the existing paths of intellectual property management in the form of legal monopolies. Therefore, scarcity is created in an artificial way, which goes against the nature of intellectual property. Thousands of such individual decisions summarily construct the Tragedy of Intangible Abundance.

When moving the analysis to a higher level, of respective sectors of the economy, it is plausible to state that the game resembles the situation of evolutionary enlargement of the peacock’s tail described by R. Frank (2012). It is to bring a relative advantage over competitors but the monstrous size of the tails (patents) make the entire species (sector) more and more dysfunctional. As a result, even if there is a perception of attractiveness of alternative methods of intellectual property management in a company, due to the competitors’ comprehensive patent portfolios, it is not easy to make a decision about taking a different path. This is because it may entail exposure to lawsuits, since competitors are encouraged to do so due to low risk of a possible counterclaim, and will therefore effectively deter, due to the unpredictability of court decisions. Thus, companies are trapped: they patent not to maximise benefits but to minimise losses.

We now face a situation where, as a result of increasing the role of intellectual property in the economy, the possibility of addressing the basic tragedy of scarcity in economy has appeared, but key professional groups have undertaken a number of actions to limit the availability of intangible goods in order to maintain the state of scarcity, the basis for century-old business models. Therefore, those two tragedies – scarcity and abundance – although seemingly contradictory, cannot be considered separately. The above-mentioned activities cause scarcity to be promoted in key areas, while abundance (or even excess) appears in the areas of lesser value, which adversely affects the entire situation related to intellectual property management in the contemporary economy.

1.2 Tragedy of the Commons

The problem of the possible depletion of public goods was noticed in the economy in 1832 thanks to W. F. Lloyd. However, it entered public consciousness only after having been described by the biologist G. Hardin (1968). He pointed out that if there were too many cows grazing on common meadows, then the pasture could be destroyed – there was not enough time to let it grow back.

For a lot of people, this was a shocking observation. Common pastures were seen as public goods, which – without prejudice to others – may be used by all stakeholders. However, it is in the common interest of the entire community not to feed more cows than the restoration capacity of the meadow allows. The interests of individual farmers, on the other hand, lead them to increase the number of cows, as this allows them to increase their individual benefits. Thinking about the common good in this case is more difficult because without effective coordination mechanisms, a farmer who will stick to his limit has no guarantee that other users will not continue to sterilise the pasture in pursuit of their personal interests.

This, in turn, encourages not to define such pastures as ‘public goods’ (which in the broad sense of the category is not a mistake) but call them ‘commons’. It is admittedly not possible to ban their usage but there is certain competitiveness at stake because – as the example described by Hardin indicates – those goods may be depleted, which is out of question in the case of goods which are completely public (such as information). And such a statement should, in principle, end the discussion on the possibility of extrapolating the insights described in the Tragedy of the Commons onto intellectual property, which cannot be exhausted or worn out.

For this reason a free-rider problem that may arise in relation to intellectual property is not the same as in the case of joint pasture. Here, a person who intensively uses a given resource – ‘more than he or she deserves’ – does not directly restrict the benefits of others who adhere to the rules on the intensity of use. There will not be less information for others. The intensity of usage is not a problem here.

This does not mean, however, that a free rider will not gain indirectly a certain advantage. It might be exemplified by competition among photographers – the one who does not bear the cost of purchasing expensive, specialised image processing software and uses them without a licence can offer a better price for his or her services. This effect, however, will be rather small – licence fees represent only a small part of the costs, and the work on unauthorised software copies is increasingly less effective (lack of access to technical support or the producer’s cloud-based solutions). In the case of intellectual property, being a free rider can therefore give a certain individual advantage, which must also mean some harm to those entities that follow the rules.

Some authors (Lemley, 2004, p. 1033), however, indicate that no advantage is achieved, and in this case the rhetoric of a free-rider problem is a mistake. As a model, it focuses on counteracting negative externalities, the costs suffered by a third party. This is because in the case of material ownership, one often has a zero-sum game – ‘if I use a piece of land, you can’t use it. If I overgraze the commons, that overgrazing imposes costs on anyone else who might use the commons’ (Lemley, 2004, p. 1033). Therefore, the purpose of property rights is to counteract such negative externalities by internalising them.

On the other hand, in the case of intellectual property we should rather talk about positive externalities. Therefore there is no need for institutional activities to internalise them. The basic externality in relation to intellectual property has a network character: the more valuable the construct is for a given user, the more people use the same. In the example of photographic services cited above, using the same software (e.g. CorelDRAW or Photoshop) will mean lower transaction costs when establishing cooperation among photographers. For the manufacturer of such software, the fact of being a creator of a standard in a given industry is a huge competitive advantage, e.g. Microsoft Word, which, although commonly copied without authorisation, determines the market power of the manufacturer due to the overall number of its legal and illegal users.

M. Boldrin and D. Levine (Boldrin & Levine, 2008, p. 167) point out that only fully abstract things are beyond any competition and may be fully recognised as public goods. Implementations and specific applications are not entitled to be called by that name. They illustrate this with an example of coffee – the fact that I drink it does not essentially limit your ability to drink coffee – and here there is no need for legal intervention. However, if someone would like to drink my coffee from my cup, it will be just a theft.

Initially, it has been pointed out that the only implications of G. Hardin’s concept may be either the privatisation of public goods or the extension of full guardianship by the Leviathan State (Gross & De Dreu, 2019). It is noted that this has been the most suggestive economic metaphor since A. Smith’s ‘invisible hand’. They were read together because they were claimed to encompass two fundamental categories of situations – when individual choices lead to effective decisions (Smith) and when they lead to the opposite situation (Hardin). The works by E. Ostrom (Ostrom, 2015) provided the breakthrough as they showed that in such situations effective solutions may also appear as a result of bottom-up activities by the interested communities.

Today, however, Wikipedia is the most striking example of a collective institution for shared resource management. This is the story of the incredible success of grassroots knowledge generation and sharing. It is worth emphasising that its success was achieved not despite – but thanks to – the application of the principle of openness of resources (the content is made available under free Creative Commons licences). The possibility of copying them easily and legally is not a discouragement for authors to contribute, but for many it actually offers a fundamental incentive.

According to Ostrom, the existence of such situations requires the fulfilment of certain institutional conditions. First, it indicates the clarity of law (who is empowered to do what, who can impose what penalties). Furthermore, this law must be widely accepted by the community, which requires the creation of tools for joint, democratic decision-making by all those using the given resources. Second, conflict resolution mec...