OPTIMAL COPYRIGHT TERM

SONGS, COMPOSITIONS, RECORDINGS

BASICS

Copyrights create little monopolies over the term of the right

• Profits are higher and a “productive” deadweight loss (DWL) is generated

• Economic surplus increases, since it is 0 if the work is not created, despite the DWL

When copyrights expire, the work enters the public domain

• Monopoly profits disappear• Economic surplus increases

How to create an incentive for the creation of new works while maximizing economic surplus?

COPYRIGHT INCENTIVES

To create a new work, the creator must anticipate Economic Profit ≥ 0

• Typically, there is a fixed cost, FC, to create the work• FC is often an opportunity cost

• When the work is utilized, it generates revenue and variable costs

• (P – MC)Q

Copyright protected works will be produced as long as

• (P – MC)Q – F ≥ 0

FLOWS OVER TIME

Fixed costs are incurred at the beginning, but revenues and marginal cost are realized over time

The time value of money must be taken into account

• A dollar today is worth more than a dollar a year from now

To compare net revenues to fixed cost, the net revenues must be discounted by finding the present value

PV = Σ[{(Pi – MCi)Qi}/(1 + r)i ]

EXAMPLES OF PRESENT VALUE CALCULATIONS

PV = Σ[{(Pi – MCi)Qi}/(1 + r)i ]

• PV = [$10,000/(1.12)] + [$20,000/(1.12)2] + [$50,000/(1.12)3] + [$75,000/(1.12)4] + [$50,000/(1.12)5] = $136,496.62

The discount rate, r, is 12% in this example

The discount rate and the time period affect the present value

• $1,000 in 50 years at r = 5% has a PV = $87.20• In 70 years, the PV = $32.87

• $1,000 in 50 years at r = 10% has a PV = $8.52• In 70 years, PV = $1.27

IMPLICATIONS FOR COPYRIGHT

A new work is created if

• PVT(PS) – F ≥ 0

• Where PS is producer surplus = (P – MC)Q• T is the copyright term

Economic Surplus

• ES = PVT(ESM) + PVT+1(ESC)

• ESM = ESC – DWL is monopoly economic surplus

• ESC is competitive (P = MC) economic surplus

Choose T to maximize Economic Surplus

• Minimum T consistent with creation since ESM < ESC

• Choose T for which PVT(PS) = FC (see graph)

MYOPIC VIEW OF INCREASING T

As T increases

• PV(PS) increases, PV(PS) > F• More works are created

• ES declines as periods of ESC are traded for ESM

Both PS and ES changes may be so far in the future as to have little effect

• $1,000 in 100 years at r = 5% is worth $7.60• $1,000 in 100 years at r = 10% is worth $0.73

OTHER FACTORS

If more works are created NOW because T increases, then

• PS and ES increase immediately (graph)• Entry of new works may reduce PS and ES of existing works

through competition• Net effect is unclear

Increasing T for existing works seems to raise PS and reduce ES, soon for some works

• Unless this prompts investment in these works that extends their value

• Efficient management of existing works• Would producers be more likely to produce a film about a

popular character if they could buy exclusive film rights to it?

EVIDENCE FOR COMPOSITIONS AND RECORDINGS

Most works are uneconomic and do not benefit from copyright extension

No apparent shortage of people striving to become songwriters and entertainers

Technology has reduced FC for music and increased creation of new works anyway

Benefit of term extension seems to go to those owning large catalogs of older “hits” and/or expecting to own hits in the future