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Robin Hanson and Bryan Caplan have noted recently that when it comes to regulation people are biased against large producers, and that this doesn’t make any sense. In most markets this is certainly the case. For instance, there is no reason why a locally owned mom-and-pop grocery store should be less regulated than Walmart, and yet Walmart faces much greater opposition when they want to build in a community. However, when it comes to music and other entertainment laws and regulations favoring small producers can be efficient.

The optimal copyright policy would ensure that any possible products for which total benefits (social plus private) are greater than total costs are created. For large producers, e.g. the most popular artists, the profits they receive are more likely to exceed the minimum amount needed to incentivize them to create. For small artists this constraint is much more likely to be binding, and products with positive net value are unlikely to be created due to suboptimal copyrights.

Imagine, for instance, how much additional music would be created if small artists could perfectly price discriminate, meaning they could charge the maximum that each individual consumer would be willing to pay. Now consider how much more superstars would be willing to create if they could do the same. The latter will be much less marginal creation due to wealth effects -meaning the richer artists are the more they’ll want leisure over work- and because they are more likely to be producing closer to a quality adjusted full capacity.

This suggests that if it increases profitability of small producers at the expense of large ones, illegal downloading may be welfare enhancing. A new NBER paper in fact supports this notion. The authors argue that music piracy decreases the demand for recorded music from all artists, but increases the demand for live performances for small artists but not large, well-known artists. Here is the abstract:

Changes in technologies for reproducing and redistributing digital goods (e.g., music, movies, software, books) have dramatically affected profitability of these goods, and raised concerns for future development of socially valuable digital products. However, broader illegitimate distribution of digital goods may have offsetting demand implications for legitimate sales of complementary non-digital products. We examine the negative impact of file-sharing on recorded music sales and offsetting implications for live concert performances. We find that file-sharing reduces album sales but increases live performance revenues for small artists, perhaps through increased awareness. The impact on live performance revenues for large, well-known artists is negligible.

Given the logic above, these results suggest that illegal downloading may be welfare enhancing.

At the simplest level, optimal intellectual property policy, like copyrights or patents, would ensure that any piece of art, invention, or intellectual property for which the total benefits exceed the total costs would be produced. But by their nature, these products also create monopoly power, and so the inefficient distortions that come along with that must also be weighed when designing optimal copyrights. One often ignored distortion is the wealth effect: if monopoly rents make a creator rich enough, they may create less and instead choose more leisure. If a musician makes enough money on their first few albums, they may choose not to endure the hard work of creating that 5th album.

This wealth effect distortion is not only true with respect to the intellectual property being created, but also complimentary products. For instance, if a band makes enough money on their album sales they may choose to tour less. This brings us to Pavement. In a recent issue of G.Q. Chuck Klosterman interviewed Stephen Malkmus, and it sheds some light on his decision to have Pavement reunite despite the costs and risks:

Why is Pavement reuniting now? Why is the band reuniting at all? I mention that this could actually hurt their legacy, since there’s a certain romantic cachet to never coming back. “Oh yeah, I know,” he says. I also mention, on the upside, that these massive sold-out concerts will allow Pavement to earn some of the money they never made when they were musically peaking. He says, “That’s a consideration.”…

“I think people really want to do it. I… I want to do it. I mean, I don’t want to be the person who only kind of wants to do it.” Malkmus laughs. He knows he is not being particularly convincing. “Our booking agent had a lot to do with it. He’s been pushing for it for a while. If we’re going to do it, everyone says this is a good time.

He is clear that the money is an important determinant, but it’s also clear there’s some hesitance. The rest of the band, in contrast, has been ready to reunite for years. This difference is easily attributable to the fact that the other members have had much less post-Pavement commercial success. For instance, the drummer, Bob Nastanovich, currently works at a racetrack. It is not hard to imagine less generous copyright laws which gives artists, say,  $0.50 for every $1.00 they now make, which would have made Malkmus willing to reunite years ago. Instead, his ability to earn sufficient wealth from his solo work has allowed him to postpone reuniting until now.

Now maybe the Pavement story is more about the marginal returns to Malkmus for creating and touring new solo work versus reuniting than it is about the impact of his wealth on his willingness to reunite. But even in this case, this is still a good illustration of  how copyrights can distortions in artist behavior and crowd out substitute goods that artists create. These distortions may be efficient  (isn’t the existence of Pig Lib clearly worth the delaying of Pavement reunion tour?) but they are considerations rarely given when copyrights are discussed.

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