Private Copying, Appropriability, and Optimal Copying Royalties

Many owners of intellectual property have recently claimed substantial economic losses due to unauthorized copying made possible by new technologies. Most of these claims are based on inadequate data or erroneous assumptions. Most studies of the extent of the harm fail to compare the behavior of consumers and producers before and after copying is introduced and, in particular, to describe the likely effect of copying on the prices charged for originals. This report develops a general economic model of private copying. The analysis focuses on the nature of private copying costs and considers the extent to which consumers use copies as substitutes for originals, and it shows how some previous analyses are special cases of this general model. It then applies the model to the problem of determining the royalties to be charged for making copies. The analysis makes clear that the effects of private copying on producer and consumer welfare differ considerably depending on the assumptions made regarding the substitutability of copies for originals, and the relative costs of producing copies and originals.