Is monopoly theory all wrong?

Possibly so, according to a controversial paper by economists Michele Boldrin and David K. Levin — “Perfectly Competitive Innovation”. The record industry — and software industry and movie industry and pretty much anyone who does brain-work these days — have been arguing that online swapping kills creativity. The only reason you’d want to create a song or book or whatever is to get a short-term monopoly on it, via copyright, so you can make money off it. Right?

Wrong, say these guys — in a paper so heretical that it’s causing riots wherever they present it. There’s a good redaction of their argument in a recent issue of Reason:

Increasing rates of reproduction will drop marginal production costs and, therefore, prices. If demand for the good is elastic — that is, if demand rises disproportionately when prices drop — then total revenue will increase.

And since creators with strong rights of first sale are paid the current value of future revenue, their pay will climb. “The point we’re making is the invention of things like Napster or electronic publishing and so on are actually creating more opportunities for writers, musicians, for people in general to produce intellectual value, to sell their stuff and actually make money,” says Boldrin. “The costs I suffer to write down one of my books or songs have not changed, so overall we actually have a bigger incentive, not smaller incentive.”

Conventional wisdom admits that monopoly rights impose short-term costs on an economy. They give an undue share of the economic pie to those who own copyrights and patents; they misallocate resources by allowing innovators to command too high a price; they allow innovators to produce less than the socially optimal level of the new invention. But these costs are all considered reasonable because innovation creates economic growth: The static costs are eclipsed by dynamic development.

Boldrin and Levine say this is a false dilemma. Monopoly rights are not only unnecessary for innovation but may stifle it, particularly when an innovation reduces the cost of expanding production. “Monopolists as a rule do not like to produce much output,” they write. “Insofar as the benefit of an innovation is that it reduces the cost of producing additional units of output but not the cost of producing at the current level, it is not of great use to a monopolist.” Monopolists, after all, can set prices and quantities to maximize their profits; they may have no incentive to find faster reproduction technologies.

(Thanks to Arts and Letters Daily for pointing this one out!)

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I'm Clive Thompson, the author of Smarter Than You Think: How Technology is Changing Our Minds for the Better (Penguin Press). You can order the book now at Amazon, Barnes and Noble, Powells, Indiebound, or through your local bookstore! I'm also a contributing writer for the New York Times Magazine and a columnist for Wired magazine. Email is here or ping me via the antiquated form of AOL IM (pomeranian99).

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