A Guide for Students and Teachers
Edited by Richard Watt
Chapter 2: What limits indirect appropriability?
When a consumer makes an illegal copy of an original work such as a recording or a book, the result is typically one less potential sale of a legal copy. In the traditional argument as found, for example, in Novos and Waldman (1984), the result is less potential revenue for the producers of the original work and thus less investment in the production of original works. The subsequent reduction in the quality and variety of original works is referred to in the literature as the underproduction loss. This idea of an underproduction loss due to illegal copying, in turn, serves as a foundation for copyright protection which makes copying harder and thus in the standard argument reduces the underproduction loss. Starting with the work of Liebowitz (1985), an alternative argument referred to as indirect appropriability has been put forth that challenges the standard argument. This alternative argument draws an analogy with the market for durable goods. As argued, for example, in Swan (1980), the original price that a durable good sells for will reflect future prices this good will trade for on the second-hand market.
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