1.1 Intellectual Property Rights (IPR) Infringement and Economic Development
Before the housing bubble in the USA burst in 2008ā2009, economists believed that the BRICs countries would play a great role in the world economy in this century. As the share of BRICs and other emerging and developing countries in the world economy rose, IPR infringement in these countries received increasing attention, since demand in their domestic markets could no longer be neglected by developed countries. Counterfeit exports from China to other countries increased, with about 80% of counterfeits in ASEAN produced in China, according to the Japan External Trade Organization (JETRO) .1 Even though economic growth in the BRICs and other emerging and developing countries is now weak, and the economistsā forecast seems proven wrong, their domestic markets still have influence on the world economy.
Intellectual property rights collectively play a strategically important role in international competition in both developed and developing countries, a role increasing in importance after the economies of the BRICs began to develop. In recent decades, the USA has repeatedly pressed China to protect IPRs , often through the activities2 of the United States Trade Representative (USTR) , and rights holders in developed countries have had many complaints about IPR infringement in emerging and developing countries. While such pressure is necessary to fair competition, infringing countries also strategically make decisions about law enforcement that may seem contradictory to membership in the World Trade Organization (WTO) . If a country sees greater benefit from lax or no enforcement than potential damage stemming from political pressure, there is little incentive for strict enforcement of international laws. This is a case that arises with some regularity in emerging and developing countries. Their interests are best served by protecting IPRs only if domestic consumers and producers benefit as a whole from the protection.
In order for developed countries to consider effective methods of protecting their IPRs from infringement in emerging and developing countries, they first must understand what is happening on the ground. Mere emotional and political insistence on the necessity of protection cannot effectively protect IPRs. In this monograph, we will examine real markets in which producers and consumers conduct trade. Behind the trade, various incentives well adapted to market situations without IPR enforcement exist. We must reconsider the idea that a market does not āwork wellā in such situations.
1.2 Law and Economics and Industrial Organization
In 1968, G. S. Beckerās article āCrime and Punishment: An Economic Approachā introduced economics into the field of law, presenting a comprehensive consideration of crime within an economic model. His considerations included almost all the factors affecting a crime, focusing on the incentives affecting criminals, and contributed to the creation of a new field, Law and Economics (LE) . Prior to Becker , Coase (1960) had presented an economic consideration of social cost, which has become one of the seminal works in LE . A much earlier Coase article (1937), which presented a treatment of the economics of transaction cost , seems to have had a greater impact than the 1960 article, as it has many applications beyond the legal. For instance, this article relates to discussions about IPR infringement in the Internet era. The new field of Industrial Organization (IO) also emerged in the 1960s. Two scholars, Bain (1959) and Stigler (1968), published books on IO, helping to popularize the field. In these books, simple data and concrete examples were used as the bases for a theory, similar to the development of LE .
When we consider IPRs , protection of creators from competitors or free riders must be taken into account, and infringement of IPRs is a source of profit in the marketplace. Unlike crimes such as murder and theft, IPR infringement takes place as part of market competition. Therefore, in order to address IPRs fully, LE needs to incorporate IO into its analyses. However, economics researchers are likely to be interested in a unique result, whether it is important for actual policymaking or not, while legal analyses need to be more realistic and to cope with concrete cases. Researchers in LE must position themselves between the two fields, taking into account various factors which economics assumes as given in its model analyses. In the 1980s, theories of IO were rewritten by game theory, as seen in Tirole (1988), and discussions of IPRs in LE have been also influenced by this trend.3 Key papers concerning copyright and credence products referenced in Chapters 2 and 4 of this monograph make use of game theory; focusing on competition and pricing, these look like discussions in IO. While they are theoretically interesting, they are too abstract for LE to use when considering concrete cases.
This monograph is based on IO , taking into account actual situations in local markets on which I have performed field research , beginning in 2005. In theoretical analysis, the realistic nature of oneās assumptions is important. Assumptions that simplify but are unconvincing are of little value, and it can be difficult to make oneās assumptions convincing. Nonetheless, theorists may make assumptions based on analogy to their prior experience, relying on vague impressions in the absence of empirical data. In such situations, a range of discussions, each biased by its assumptions, may emerge; the degree to which our understanding of real situations is clarified and the degree to which it is obscured by these assumptions may be unclear. For example, when we can see that a factor influences a certain phenomenon, a proposition may be obtained under ceteris paribus, but the factorās real impact on the phenomenon may remain vague. We often see such discussions in theoretical IO . Although we cannot take into account all factors affecting phenomena, it is not constructive to emphasize minor factors, satisfied that they lead to interesting propositions, if we seek to analyse and understand actual markets.
1.3 Methodology of Field Research
Systems and methods for gathering official statistics concerning market data in developing countries are often immature. In particular, few data concerning IPR infringement can be found because of lax enforcement. Associations such as the Recording Industry Association of America (RIAA) watch for infringement and collect data, but their data are likely to be overestimated and do little to illuminate the situations creating infringersā incentives to break laws. Furthermore, the logic derived from situations in developed countries is often not applicable to developing countries, as Banerjee and Duflo (2011) have described, using many examples, since researchers in developed countries have rarely experienced and seen actual market trade under conditions of lax enforcement. Our imaginations are very limited.
With a dearth of official data and experience in the marketplace, what researchers can do in order to strengthen understanding of IPR infringement under such conditions is to undertake field research . Although there is no standard method for such research, researchers in development economics have created a method for performing field research that targets developing countries. I naturally and unintentionally used the method when I was eager to understand real markets for illegal products . My activity was limited by research funds, but I found interesting phenomena from interviewing and providing questionnaires to persons participating at various levels in markets characterized by a large amount of illegal behaviour.
My usual method was as follows. First, I purchased illegal products as a customer, using local guides in several markets. In developing countries, illegal products are easily accessible to ordinary people, unlike in developed countries. From this experience, we can realize how consumers interact with illegal products . Without this experience, a simple assumption that only grasps one characteristic among many factors can greatly influence considerations and exaggerate their outcomes. For example, the assumption that consumers are either deceived or not is necessary, but the assumption is too simple to comprehend actual trade in real markets, as will be seen in subsequent chapters.
Second, I interviewed consumers, retailers, producers, wholesalers, and authorities. In order to understand the incentives of each agent, experiencing one position within a market is not enough. It is a useful first step but is likely to cause a bias of considerations if not augmented. A series of interviews is useful to remedy such a bia...