From CSUNDT@OREGON.UOREGON.EDU Mon Nov 14 15:09:06 1994 Received: from oregon.uoregon.edu (oregon.uoregon.edu [128.223.32.18]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id PAA04078 for ; Mon, 14 Nov 1994 15:09:03 -0800 Received: from OREGON.UOREGON.EDU by OREGON.UOREGON.EDU (PMDF V4.3-9 #7713) id <01HJGVQ08C748WYCT7@OREGON.UOREGON.EDU>; Mon, 14 Nov 1994 12:01:08 -0800 (PST) Date: Mon, 14 Nov 1994 12:01:08 -0800 (PST) From: Christine Sundt Subject: Who owns culture? To: intellec@virtconf.ntia.doc.gov Message-id: <01HJGVQ0CQFM8WYCT7@OREGON.UOREGON.EDU> X-VMS-To: IN%"intellec@virtconf.ntia.doc.gov" MIME-version: 1.0 Content-transfer-encoding: 7BIT Questions for the NTIA Virtual Conference -- I would be pleased if anyone could address any of these issues. 1. Who owns popular culture vis-a-vis copyright? Who can prohibited artists from using or reusing in their own creative works icons of popular culture, such as the Mona Lisa, Warhol's Brillo Pads, or the Empire State Building? Whose copyright is being protected in these examples? Who benefits from either protection or prohibition? When do icons of popular culture enter the "commons" and thus the property of all members of the cuture? On what grounds can humanist teachers and scholars be required to pay permission fees to use or reproduce these same popular icons in their scholarly discourse (e.g., in the classroom, in their books or scholarly journal articles) from which their "financial return" may be only the assurance of a job for the next year or so? 2. What is a "fair use" of an *electronic* image of art or culture? 3. How can information consumers retain their current rights of access to information once the same information is presented in digital form? How can we be assured access comparable to what we currently enjoy once cyberspace is under the control of licenses and contracts where fair use has no legal equivalent? Christine Sundt csundt@oregon.uoregon.edu From freedman.richard@mail.ndhm.gtegsc.com Mon Nov 14 15:38:47 1994 Received: from eagle.ndhm.gtegsc.com (eagle.ndhm.gtegsc.com [155.95.155.166]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id PAA05166 for ; Mon, 14 Nov 1994 15:38:47 -0800 Received: from mail.ndhm.gtegsc.com by eagle.ndhm.gtegsc.com with SMTP; Mon, 14 Nov 1994 15:32:17 -0500 (EST) Message-ID: Date: 14 Nov 1994 15:27:51 -0500 From: "Freedman Richard" Subject: Transitivity of permissions To: "intellec" X-Mailer: Mail*Link SMTP/MS 3.0.0 A local group publishes a newsletter in traditional printed form, and mails it to a membership list of about two hundred. In the last couple of years it has included small copyrighted items for which the contributors had "granted permission". Now this local group wishes to contribute its past issues to an electronic archive for a "net" group. Does it have to seek permission again from each of the contributors, or is this merely the same publishing event for which permission was already granted? [For the curious, the actual example involved "The Trumpet Bray" published by the New England Gilbert and Sullivan Society, and shortly to be contributed to the archives of SavoyNet. As a matter of courtesy, permissions were requested - and granted - but was this necessary?] Richard Freedman, president, NEGASS (freedman.richard@mail.ndhm.gtegsc.com) From rbarry@hopper.itc.virginia.edu Mon Nov 14 15:41:08 1994 Received: from virginia.edu (uvaarpa.Virginia.EDU [128.143.2.7]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id PAA05346 for ; Mon, 14 Nov 1994 15:41:07 -0800 Received: from hopper.itc.virginia.edu by uvaarpa.virginia.edu id aa03438; 14 Nov 94 15:33 EST Received: (from rbarry@localhost) by Hopper.itc.Virginia.EDU (8.6.8/8.6.6) id PAA25621 for intellec@virtconf.ntia.doc.gov; Mon, 14 Nov 1994 15:33:13 -0500 From: Rey Barry Message-Id: <199411142033.PAA25621@Hopper.itc.Virginia.EDU> Subject: Definition To: intellec@virtconf.ntia.doc.gov Date: Mon, 14 Nov 1994 15:33:12 -0500 (EST) X-Mailer: ELM [version 2.4 PL24] MIME-Version: 1.0 Content-Type: text/plain; charset=US-ASCII Content-Transfer-Encoding: 7bit Content-Length: 423 Could someone post a legal definition of a "Section 108" library please. And perhaps an opinion if a free public access Bulletin Board owned and supported by a business or individual would qualify. Much appreciated. -- rbarry@hopper.itc.virginia.edu Freeware Hall of Fame BBS The only thing Americans have Hayes Optima 288 - 804-293-4710 in common is paranoia. Free BBS - 1st call downloads From rothman@clark.net Mon Nov 14 20:00:47 1994 Received: from clark.net (root@clark.net [168.143.0.7]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id UAA09351 for ; Mon, 14 Nov 1994 20:00:47 -0800 Received: from (rothman@clark.net [168.143.0.7]) by clark.net (8.6.9/8.6.5) with SMTP id TAA13031; Mon, 14 Nov 1994 19:52:33 -0500 Date: Mon, 14 Nov 1994 19:52:33 -0500 Message-Id: <199411150052.TAA13031@clark.net> X-Sender: rothman@clark.net Mime-Version: 1.0 Content-Type: text/plain; charset="us-ascii" To: intellec@virtconf.ntia.doc.gov, Multiple recipients of list From: rothman@clark.net (David H. Rothman) Subject: Re: [INTELLEC:6] Modifying existing Copyright law probably insufficient Cc: DMASSON@ucs.indiana.edu X-Mailer: At 02:49 PM 11/14/94 -0800, DOUG MASSON at the Indiana University School of Law wrote: >It is usually the habit of legislators to modify old law in order >to deal with new problems. The above is all too true, except you should lump Commerce bureaucrats in with legislators. I testified at an interagency NII hearing on intellectual property, in November 1993, and I suffered through the transcripts from this year's round. Depressing. Most of the witnesses were lobbyists for, say, publishers or the recording industry. Assistant Commece Secretary Bruce Lehman, Bill Clinton's intellectual property czar, made love to the IP interests with the notorious Green Paper--itself drafted by an aide with past ties to the latter industry. The Green Paper tried to digitize the present, obsolete laws, reflecting the prejudices of Lehman himself. His hearings, pre- and post-GP, were a conspiracy against the commonweal. I am a professional writer, and I'm especially ashamed of the group behavior of some of my peers. The most sickening dialogue took place when a representative of a writers' group talked joyfully about Americans having to go to the library to read electronic library books that bore copyrights. Lehman, rather than keeping an open mind about alternatives, encouraged the man to make his desire known to librarians. At one point he himself told the Washington Post that Americans might have to visit to the library to read copyrighted electronic library books. In the context of things, his statement across less as a prediction than as a wish. So much for Lehman's objectivity and for his concern for rural people and disabled citizens. A wit on the Internet said Lehmanesque e-books for libraries would be like theft-proof cars without wheels. The simile, alas, fits. All in all, the Administration's hearings belied the pieties that Vice President Gore had uttered about his little neighbor-girl in Tennessee being able to dial up the Library of Congress. I suppose, of course, that she could confine herself to public domain material such as the speeches of Al Gore. Almost surely the Administration will be as oblivious to logic as it was when I testified last year, but I now suggest, among other things: --A national library fund to help protect e-text, the most vulnerable medium and the one that most contributes to the literacy that Bill Clinton and Al Gore claim to be promoting through the NII. Writers and publishers could be paid according to such criteria as the number of accesses, to give one example. Members of the public could dial up the books directly or obtain them at local libraries. The fund could take advantage of super distribution, but not to bill readers. Instead they would be required to use convenient mechanisms to report past accesses--in order to enjoy future ones. Privacy protections could be in effect, such as the opportunity to use the equivalent of anonymous digital cash for future dial-up credits. Without read-o-meters, there would be less incentive to defeat technological protection. Thousands of public and university librarians could participate in the acquisitions process for the fund; in effect, we would be putting our library system online. We could even let CompuServe-style services use the material for little or nothing (all the better to spread it around); what's more, bookstores and print shops could make paper copies of books from the fund. And, yes, we could guard against Big Brotherism. I believe that by gambling enough money up front, publishers and writers should have the right to see their offerings treated as if the librarians had chosen them. We could also strengthen the Internet as an alternative to this system; in fact, the Web just might work out as a testbed of sorts, once the proper software was available. --Cost-justification of the above fund through a *focused* procurement program for schools and libraries to encourage the development of tablet-style computers for such applications as e-text, networking, and electronic forms. With private production ramped up, the program in effect would help slash hardware costs for anyone buying the machines. TeleReaders could eventually sell for as little as calculators, according to a calculator expert at a major vendor and my own judgment as author of a guide to portable computer technology. So how does the cost-justification enter the picture? We've got a $6-trillion-plus GDP. Reduce private and public paperwork just a fraction and we'll justify the national library. The cost of government is not just in taxes--it's in paperwork; think of all the time and money that Americans devote right now to pleasing the IRS and the like. Smart e-forms on tablet-style computers would be so much easier to work with than paper forms or control sticks on televisions. Needless to say, such forms could also encourage home shopping and other forms of commerce and bring new efficiencies to them. And along the way, writers and good publishers could come out far ahead compared to the present Lehmanesque plans. This more imaginative alternative could be phased in slowly, perhaps on a subject-by-subject basis in part, so that the new expenses didn't occur until cost jusfication was present. Of course, the above is a way to shift wealth from bureaucacy to knowledge in the most systematic of ways, and despite all the talk about Re-Inventing Government, isn't bureaucracy what Washington is all about? Too, lawyers such as Lehman tend to think of laws, not more comprehensive solutions. But perhaps the public sooner or later will catch on to the possibilities and tell Washington to think of the whole country, not just the lobbyists' clients. Yes, as shown by recent electon returns, Washington has disappointed millions of us Democrats. But that is nothing compared to what's ahead if special-interest advocates like Lehman keep conspiring with the copyright holders against schoolchildren and library patrons--and otherwise give American families the finger. >Of course, I don't have a comprehensive vision of what the new >regime should look like, I've just passed on the basics, which will appear as an essay in an information science collection from M.I.T. Press. Bill Buckley, not exactly a socialist, wrote a column last year endorsing the basic concept. I'm waiting for Bill Clinton to catch up. > but I suspect that, in order to preserve >the rights of both society and the copyright holder, the whole >of copyright law will end up looking like the fair use exception. And that's as it should be--as long as writers and publishers receive fair compensation for their labor. I myself am in favor of copyright holders' rights. In fact, I see the Green Paper as a threat to my prospersity because it is so much outside the laws of human behavior and cannot be properly enforced. Bruce Lehman doesn't want you even to share *one* electronic copy of copyrighted material. He can't even stand the old model of the library Xerox machine--you know, the present vagueness in the law, which, in effect, lets Americans make informal clips for personal use. Especially I hate the harm that the Green Paper, if made into law, will inflict on American schools. It will discourage sharing by law-abiding schoolchildren and turn the not-so-tractables ones into little criminals. Those children are my future market. I want a copyright system that lets students dial up my copyrighted works of interest to *them*. Ask any literacy instructor and you'll hear the obvious: Children are more likely to become lifelong readers if they can find books on their favorite subjects. That means easy, affordable access to copyrighted material. Children needn't visit the library to watch television; why must they go to read copyrighted electronic library books, especially students who live in rural areas and dangerous urban neighborhoods? Meanwhile I have a friendly suggestion for Bruce Lehman--a former lawyer-lobbyist for intellectual property interests--and all other policymakers dealing with copyright law. They should disconnect their Mead Data terminals, rip out their SLIP/PPP connections to the Internet as soon as this virtual conference is over, and rely entirely on information from the public library. That might give them a little more empathy with schoolchildren they propose to shaft. More than one pol has spent time in a public housing project to research the needs of the Have-Nots. I heartily recommend the public library experience for Bruce Lehman. -David "Voted for Clinton, but not for kangaroo-style copyright hearings" Rothman rothman@clark.net [Reposting encouraged] From public4@efn.org Mon Nov 14 20:20:23 1994 Received: from skinner.cs.uoregon.edu (skinner.cs.uoregon.edu [128.223.4.13]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id UAA09582 for ; Mon, 14 Nov 1994 20:20:22 -0800 Received: from efn.org by skinner.cs.uoregon.edu with SMTP id AA25055 (5.65/IDA-1.4.2 for intellec@virtconf.ntia.doc.gov); Mon, 14 Nov 94 17:12:28 -0800 Received: by efn.efn.org (4.1/smail2.5/05-07-92) id AA06500; Mon, 14 Nov 94 17:09:54 PST Date: Mon, 14 Nov 1994 17:09:53 -0800 (PST) From: Public Terminal 4 To: intellec@virtconf.ntia.doc.gov Subject: ping In-Reply-To: <199411142248.OAA02332@virtconf.digex.net> Message-Id: Mime-Version: 1.0 Content-Type: TEXT/PLAIN; charset=US-ASCII Is this still running? We've gotten no traffic for a couple of hours. From TIMPARK@aol.com Mon Nov 14 23:33:56 1994 Received: from mail02.mail.aol.com (mail02.mail.aol.com [152.163.172.66]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id XAA11194 for ; Mon, 14 Nov 1994 23:33:56 -0800 From: TIMPARK@aol.com Received: by mail02.mail.aol.com (1.38.193.5/16.2) id AA08587; Mon, 14 Nov 1994 23:25:36 -0500 Date: Mon, 14 Nov 1994 23:25:36 -0500 Message-Id: <941114221111_7715087@aol.com> To: intellec@virtconf.ntia.doc.gov Subject: existing Copyright law and digital information The fundamental reason that existing Copyright law cannot be modified to be relevant to digital information is because existing Copyright law relies upon an object's extension in space and time for its efficacy. This is what I assume Doug Masson means when he refers to a "...fixation of a work in the physical realm, subject to all the limitations of physical objects...". If this is the case, then an appropriate vision for the future must take into account the real nature of the material that is to be protected. If this material is the idea as such, one can never really protect it. Rather, one ends up with overly-burdensome regulation and legislation that is difficult if not immpossible to enforce. Rather than persure an unproductive legislative path, then, one might instead focus upon the nature of digital information itself. Along these lines, is anyone familiar with Phil Agre's argument as presented in a WIRED editorial (No.2.11. Nov 94. "Living Data," pages 94-96) regarding data? He envisions a new type of data that includes the characteristics he calls Ownership, Error bars, Sensitivity, Dependency, and Semantics. I am intrigued with his argument and think that this may be the only productive and creative route that combines all of the issues at hand. Timothy Kent Parker From stseng@CCGATE.HAC.COM Tue Nov 15 08:11:56 1994 Received: from igate1 (igate1.hac.com [192.48.33.10]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id IAA14225 for ; Tue, 15 Nov 1994 08:11:55 -0800 From: stseng@CCGATE.HAC.COM Received: from ises01.ES.HAC.COM ([147.16.5.2]) by igate1 (4.1/SMI-4.1) id AA03465; Tue, 15 Nov 94 05:02:06 PST Received: by ises01.ES.HAC.COM; id AA15184; Tue, 15 Nov 1994 05:03:38 -0800 Received: from cc:Mail by CCGATE.HAC.COM id AA784904650; Tue, 15 Nov 94 00:44:15 PST Date: Tue, 15 Nov 94 00:44:15 PST Message-Id: <9410157849.AA784904650@CCGATE.HAC.COM> To: intellec@virtconf.ntia.doc.gov Subject: Re: Modifying existing Copyright law probably i > >The basic reason why copyright can no longer operate as it does is >because at its base, it assumes fixation of a work in the physical >realm, subject to all the limitations of physical objects (ie >scarcity and difficulty of transportation).> >===Doug Masson > Indiana University School of Law I also think that we need to redefine the basis of what we protect with copyright laws and go back to first principles. Here are some of my thought... 1. We want a system to reward creators of original material and maximize the benefit to society (and promote the progess of science and the useful arts). Right now the existing copyright system reward the creator with some benefits, but the lion share usually goes to some publisher (for promoting, printing, marketing costs and risk). Most struggling authors would probably agree while our richest billionaire list is filled with media owners. Are we rewarding the right person in the right porportions? Can this be redefined to "create" a diversity of publishing resources while meeting society's goal of fair return for work. The electronic media redefines relationship between creator, "middleman" and users. The users should have a say in the "value" of the original material and the $ share to the middleman should drop. We need an infrastructure that would allow anyone to draw a political cartoon, be able to post it for viewing, have users vote with their reaction to the cartoon, and be paid in proportion to the enjoyment of the work of art. Why do we need to force all cartoonist to go through syndicates, newspapers, etc.? Do we need pay so much to all those gatekeepers when software can perform the function and the users can vote with their patronage. Right now the link between user and value is very diffused. A cartoon in a newspaper may only be read by a small group. But the newspaper does not have a fast and easy way of measuring that value. Thus we suffer from a derth of options. If the marketplace is redefined, a lot of creator artists could make a good living from create works of art that are "valued". Isn't that the meaning of creating jobs from the NII. 2. We want a system to reward people that contribute to piece of the total original work instead of letting one "winner" take all. Einstein said that technology is built upon the shoulders of giants. We need a reward system that is commensurate with the value each giant adds. The final creator that pulled it all together can get the bulk of the reward for a short period of time - a few years (until they recoup their investments by x numbers of time). Then the payment for the technology should be shared among the contributors. If the technology advance is general in nature, then the funds should be used by the industry to fund cross-industry cooperative reasearch. Universities with basic research should be able to reaping the benefits of their research. In the long run, universities should be able to use funds from previous original works to fund new research. Why do we make universities beg for funding from a public purse or migrate to become one firm's R&D arm? Why force our politicians to pick winners or losers? Why not redefine how people get paid and let universities compete with diversity of options. 3. The system of deciding what is the original work of art should involve participation from the "experts" of the industry. Perhaps the industry association should take a more active role. And we need some way for measure the votes of experts to come to some consensus. But we really don't want judges and lawyers unfamilar with the technology trying to decide who has the patent to a work of art. This is espically true in the software industry. Shirley Tseng "Opinion expressed are purely my own." From kerdmann@reach.com Tue Nov 15 10:21:33 1994 Received: from reach.com (reach.com [199.29.96.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id KAA15675 for ; Tue, 15 Nov 1994 10:21:32 -0800 Received: from ad0.reach.com ([192.9.208.9]) by reach.com (4.1/SMI-4.1) id AA04079; Tue, 15 Nov 94 10:03:32 EST Date: Tue, 15 Nov 94 10:03:24 EST From: kerdmann@reach.com (Kevin Erdman -- Baker ^ Daniels - Fort Wayne ) Received: by ad0.reach.com (4.1/3.2.083191-Reach Networks) id AA10387; Tue, 15 Nov 94 10:03:24 EST Message-Id: <9411151503.AA10387@ad0.reach.com> To: intellec@virtconf.ntia.doc.gov Subject: Comments Reply to Doug Mason on the physical limitations: The lack of physical limitations on the digital transmission of information is not so new. We have used photocopy and facsimile machines for years, and these machines produce nearly identical copies without altering the original. However, the law has managed to keep up to date with this newer technology with rules like it is OK to photocopy and distribute the listing of articles of a publication, but not to photocopy and distribute the entire publication. This "rule" was a result of real world considerations, fair use legal rulings, and enforcement by publishers. While we do not have a set of "rules" for transmissions, the law may figure out what works in cyberspace. I suggest that it is OK to let a few interested parties litigate these issues to determine what the electronic transmission "rules" are for cyberspace. Reply to Christine Sundt: 1. Who owns popular culture vis-a-vis copyright? The textbook answer is the creator of the original expression of the creative works icons owns them. The more difficult question is how much expression is in the author of the icon? While only minimal creativity is needed for copyright, two authors could create very similar icons if both based their icon on, e.g., the Mona Lisa. Besides the copyright questions, there is also the issue of entities acquiring trademark/trade dress rights from the use of the icons in commerce. As for humanist teachers and scholars, they should be able to use the icons for purely academic purposes. However, it would be possible to cross the "purely academic" line, for example by publishing a book on "Mona Lisa in Contemporary Culture"--possibly OK by itself--and still violate the copyright of the icon by reproducing the copyrighted Mona Lisa adaptation on the front cover to promote the book. 2. What is a "fair use" of and *electronic* image of art or culture? Would a "fair use" of an *electronic* image be the same as the "fair use" of an hard copy image. Depends on the copyrightability of the underlying work and the amount, if any, of expression involved in transforming it to digital. My gut feeling is that an electronic image of a public domain artwork would receive very minimal copyright protection, so the parameters of "fair use" would be broad. 3. How can information consumers retain their current rights of access to information once the same information is presented in digital form? How can we be assured access comparable to what we currently enjoy once cyberspace is under the control of licenses and contracts where fair use has no legal equivalent? One way is to ensure full market competition so that consumers will have the choice of licenses and contracts and can vote with their pocketbooks. Unfortunately, the market solution depends on the economics of cyberspace being able to allow numerous information providers. Another recourse would be to legislatively extend fair use to any license or contract for copyrighted materials. From jn@tommy.demon.co.uk Tue Nov 15 12:06:34 1994 Received: from tommy.demon.co.uk (tommy.demon.co.uk [158.152.11.125]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id MAA00146 for ; Tue, 15 Nov 1994 12:06:19 -0800 Date: Tue, 15 Nov 1994 15:57:15 GMT From: jn@tommy.demon.co.uk (John Nissen) Reply-To: jn@tommy.demon.co.uk Message-Id: <2879@tommy.demon.co.uk> To: intellec@virtconf.ntia.doc.gov Cc: jn@tommy.demon.co.uk Subject: Re: [INTELLEC:6] Modifying existing Copyright law probably insufficient X-Mailer: PCElm 1.10 Lines: 71 Doug Masson raises the issue of copyright for electronic information in the message appended. The publishers' fear of indiscriminate copying (pirating) must be the biggest barrier to making more information available in electronic form. This barrier must be lowered if one is to equalise opportunity for information access, and hence education and employment, across the whole population. This is especially true for blind people. Blind students would benefit enormously if more books were available in electronic form. If publishers were confident that access to an electronic version of a book was effectively restricted to a group of disabled people and/or subscribers, then they would be happy to publish such a version. This is now possible with a combination of encryption and other techniques. However the US government seems to be actively discouraging use of the kind of encryption required. Cheers from Chiswick, John Nissen --------------- In message <199411142248.OAA02332@virtconf.digex.net> Doug Masson, via intellec@virtconf.ntia.doc.gov writes: > It is usually the habit of legislators to modify old law in order > to deal with new problems. Normally, this is somewhat desirable since > it provides continuity and a degree of predictability. However, in > the case of fashioning a copyright law that can deal with the > exigencies of the new digital technology, I'm afraid the standard > approach will be like trying to pound square pegs into round holes; > sure it can be done if you pound hard enough, but you normally > end up breaking the frame work. > > The basic reason why copyright can no longer operate as it does is > because at its base, it assumes fixation of a work in the physical > realm, subject to all the limitations of physical objects (ie > scarcity and difficulty of transportation). Physical limitations > play a very small role in the digital transmission of information, > ideas, and the like. Any limitation based on physical existence > must now be ineffective. It seems to me that the only way to > protect the economic investment of the copyright holder must be > rigidly limiting to the uses to which a work can be put without > the express consent of the copyright holder if we are to play by > the old rules in a digital age. > > Of course, I don't have a comprehensive vision of what the new > regime should look like, but I suspect that, in order to preserve > the rights of both society and the copyright holder, the whole > of copyright law will end up looking like the fair use exception. > But, then again, I suppose I'm falling into the trap of thinking > in the old fashion, but it seems like without the existence of > the physical product as a limiting factor, all decisions will > have to be based on considerations of the nature of the work and > the use. > > In any case, since my thinking is obviously drifting to the level > of ramblings, my time is running short, I have a desire for feedback > considering my premises before moving forward with them, and since > I know my reading becomes less careful after the first couple of > pages and I don't expect more from others; I shall pause this > discussion in the hopes that others have thoughts on the matter. > > ===Doug Masson > Indiana University School of Law > > -- {-: John Nissen, Chiswick, London. Telephone +44 81 742 3170 :-} From ntiagate@virgin.uvi.edu Tue Nov 15 15:31:17 1994 Received: from virgin.uvi.edu (virgin.uvi.edu [146.226.200.110]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id PAA03520 for ; Tue, 15 Nov 1994 15:31:14 -0800 Received: from localhost (ntiagate@localhost) by virgin.uvi.edu (8.6.5/8.6.5) id QAA22830 for intellec@virtconf.ntia.doc.gov; Tue, 15 Nov 1994 16:09:28 -0400 Date: Tue, 15 Nov 1994 14:14:43 GMT From: ab147@virgin.uvi.edu (Gary M. Goodlander) Message-ID: <1994Nov15.141443.16566@virgin.uvi.edu> To: intellec@virtconf.ntia.doc.gov Subject: A Writer's Viewpoint I am a freelance writer. The only thing that I have to sell are my words. I am, thus, quite concerned aboard matters of copyright. However, I think that there is a difference between copying a work for personal use, and copying a work for profit and/or distribution. In essence, I don't mind 'sharing' much of my work for free on the internet... but I certainly don't want anyone to copy that work and redistribute it or profit from it. I think this can be worked out legally. I hope so. I want to make the world a slightly better place... while making my living with... words. I want to be able to sell them, protect them, and yet still share them. Surely this is possible... Gary, aka Cap'n Fatty >From news Tue Nov 15 10:17:58 1994 Received: from localhost (news@localhost) by virgin.uvi.edu (8.6.5/8.6.5) id KAA16721 for alt-ntia-privacy@virgin; Tue, 15 Nov 1994 10:17:57 -0400 Date: Tue, 15 Nov 1994 10:17:57 -0400 From: News User Message-Id: <199411151417.KAA16721@virgin.uvi.edu> To: alt-ntia-privacy@virgin.uvi.edu Status: RO X-Status: D From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:40:12 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00265 for ; Tue, 15 Nov 1994 19:40:12 -0800 Message-Id: <199411160340.TAA00265@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8422; Tue, 15 Nov 94 19:32:14 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9492; Tue, 15 Nov 1994 19:32:14 -0500 Date: Tue, 15 Nov 94 19:31:15 EST From: "W. Curtiss Priest" Subject: Introduction to a Framework for Public Policy and Intellectual Property To: NTIA discussion on Intellectual Property As a public policy analyst I find it difficult to deal with a subject as complex as intellectual property without a thorough analytical framework. Our Center has gone on record about the need for better public policy analysis: See our "Public Policy Research, the NII, and the Public Good," September 26, 1994 at gopher.eff.org (related organiziations, under Center for Information, Technology & Society: Newsletters In the spirit of the value of strong frameworks for policy and action we are posting our study for the U.S. Congress, OTA, called THE CHARACTER OF INFORMATION: CHARACTERISTICS AND PROPERTIES OF INFORMATION RELATED TO ISSUES CONCERNING INTELLECTUAL PROPERTIES. This report provided the cornerstone of OTA's report to Congress on Intellectual Property and new information technologies of 1987. Unlike the much of the chatty material on the Internet, this is a description of the science of information economics and how that relates to policy issues of intellectual property. We suggest the report be archived and reviewed when the reader has sufficient time and interest to encounter many new terms that hopefully will the reader comprehend public policy aspects of information and information technology Due to its length, we have divided the report into seven parts. The report is provided for both the public record and to aid all of us in appreciating the many public issues involved in new forms of information media. _______________________________________________________________________________ | W. Curtiss Priest, Ph.D. *********************** | | Center for Information, Technology, & Society * Improving humanity * | | * through technology * | | 466 Pleasant Street *********************** | | Melrose, MA 02176-4522 | | Voice: 617-662-4044 Gopher to our publications: | | Fax: 617-662-6882 GOPHER.EFF.ORG _____________________________________________________________________________| From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:41:03 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00276 for ; Tue, 15 Nov 1994 19:41:02 -0800 Message-Id: <199411160341.TAA00276@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8428; Tue, 15 Nov 94 19:33:04 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9504; Tue, 15 Nov 1994 19:33:03 -0500 Date: Tue, 15 Nov 94 19:32:42 EST From: "W. Curtiss Priest" Subject: CITS Report Chapter 1. To: NTIA discussion on Intellectual Property Archive Information: gopher.eff.org, Related Organizations, CITS, Reports Circulation Title: An Information Framework for the Planning and Design of "Information Highways" Dr. W. Curtiss Priest Center for Information, Technology, and Society 466 Pleasant Street Melrose, MA 02176 617-662-4044 BMSLIB@MITVMA.MIT.EDU NOTE: This is a seminal work for the design of the National Information Infrastructure (NII). Contained in the 14 characteristics of information are the seeds of how to build better information systems. In particular, the 8 characteristics related to market failure provide the rational for non-profit and government involvement. Contact us if you are interested in supporting or partic- pating further development of this work. NOTE: Report has been converted to ASCII. Underlining of text has been removed and subscript/superscript are indicated by >text< and , respectively. THE CHARACTER OF INFORMATION: Characteristics and Properties of Information Related to Issues Concerning Intellectual Property February 10, 1985 (Revised September 2, 1985, October 1, 1994) In Support of the Office of Technology Assessment Project on Intellectual Property Contract 533-1510.0 (c) Center for Information, Technology & Society, 1985, 1994 Parts may be copied in derivative works with full attribution under the Doctrine of Fair Use. Author: W. Curtiss Priest, Ph.D. Submitted to: Congress of the United States Office of Technology Assessment Washington, DC 20510 The Character of Information: Characteristics and Properties of Information Related to Issues Concerning Intellectual Property Table of Contents Page 1. An Operational Definition of Information 1 1.1 The Function of Information in Achieving Outcomes 1 1.2 Information as Intellectual Property 3 1.3 Conclusion 5 2. Characteristics and Properties of Information in Commerce and Transactions 6 2.1 Market Related Characteristics of Information as 6 a Commodity 2.1.1 Intrinsic Co-production 6 2.1.2 Time Constrained Consumption of Information 7 2.1.3 High Investment to Reproduction Cost Ratios for Information 7 2.1.4 Relevance of Information More Variable Across Consumers 8 2.2 Market-failure Related Characteristics of Information 10 2.2.1 Public Good Characteristics 11 2.1.1.1 Inappropriability 12 2.1.1.2 Non-depletability 13 2.2.2 Externalities 13 2.2.3 Indivisibilities (of supply) 15 2.2.4 Economies of Scale and Scope 16 2.2.5 Inherent Uncertainty and Risk in Information Production 17 2.2.6 Information/Knowledge About the Information 19 2.2.7 Intangibility 19 2.2.8 Transaction Costs and Information 21 Page 2.3 Non-market Related Characteristics of Information 23 2.3.1 High Intrinsic Relationship to Human Welfare 24 2.3.2 High Intrinsic Relationship to Freedom and Privacy 26 3. Relationship of Information to Products and Services 28 4. Rewards, Incentives, and Funding Sources for the Creation of Intellectual Property 36 4.1 Rewards, Incentives, and Funding for Science 36 4.2 Rewards, Incentives, and Funding for Culture 39 4.3 Rewards, Incentives, and Funding for Products and Services 40 5. Structural Role of Intellectual Property in Maintaining a Viable Economy 43 6. Summary 45 Appendix A - Bibliography 46 EXECUTIVE SUMMARY To comment on issues concerning intellectual property it is useful to identify what distinguishes information from other forms of property. Fourteen distinguishing characteristics of information are identified and discussed in relation to property rights. These characteristics, however, are not only useful for considering issues concerning intellectual property but for more generally inquiring into the nature and purpose of information in society. Summarized below are brief definitions of the fourteen characteristics and introductory remarks about the general importance of the distinguishing characteristic. Definitions and Introduction to Fourteen Characteristics of Information As a Commodity: 1. Intrinsic Co-production The character of information to be instrumental in achieving other goods and outcomes. This character makes information inherently more valuable than goods that are not instrumental in character. 2. Time Constrained Consumption The character of information to occupy more consumer time per dollar expenditure than other commodities. This characteristic combined with the relatively low reproduction cost characteristic (3) has long run employment implications. 3. High Investment to Reproduction Cost Ratios The creation costs of information divided by the cost of reporducing one unit of the good. The implications of this characteristic are economies of scale and scope, and resulting market structure. 4. Relevance, More Variable Across Consumers The character of particular information be be acquired usually only once. The results is high variability in consumption by each consumer. This characteristic tends to work in the opposite direction of low reproduction costs, since it implies that information will become more and more customized and particularlized. Market-failure Related Characteristics: 5. Public Good The same information can be used by many consumers without interference. Inappropriability The difficulty in receiving full market compensation for the creation of infor mation due to the problem of exclusion. The result is under-production and under-compensation. Non-depletability Information does not dissipate with use. Producers must compete with past producers but society benefits with an accumulation of knowledge. Goods with substantial public good characteristics such as national defense, recreational parks, and safety facilities such as lighthouses are usually supplied by the government to reduce the "free rider problem" associated with inappropriability. 6. Externalities The effects of information, usually positive, that are not accounted for in its price. The effects of information, especially as education, have considerable positive externalities in terms of reducing unemployment and increasing general social welfare. 7. Indivisibilities (of supply) Information must be purchased in lumps; these lumps may be vastly greater than the information actually sought. This characteristic along with the variable relevance characteristic will contribute to utilization of information technology that reduce indivisibilities and permit customization. 8. Economies of Scale and Scope 1) Decreasing unit costs when the scale of operation is increased; and 2) decreasing costs associated with joint production. Historically, information distribution such as telegraph, telephone, radio, and television have exhibited sufficient economies of scale and scope as to require government regulation to reduce problems associated with natural monopolies. 9. Uncertainty and Risk in Production The inability of firms to produce information when risks and uncertainties are present. A problem, in particular, in the generation of basic knowledge that requires substantial investment in research. 10. Information/Knowledge Information about information is less likely to be available because of appropriability problems. This leads to under-consumption of information due to problems of search. 11. Intangibility The character of the value of some information to be non-monetizable. Information is the basis of education, communication, and other activities which are difficult to value because the contribution of these activities to the welfare of society is largely intangible. 12. Transaction Costs The additional costs incurred by the producer in appropriating the value of information. [Transaction costs, in the economic sense, are those costs associated with negotiation, contracting, and enforcement, and does not refer to the the general costs related to distributing or transmitting information.] Transaction costs are a major contribution to indivisibilities in the supply of information since contracting and enforcement costs are difficult to reduce below a certain minimum. Non-market Related Characteristics: 13. Intrinsic Relationship to Human Welfare Human welfare is a product of individuals and groups achieving desired outcomes. Thus, information is intrinsically related to human welfare in that it inherently facilitates the achievement of outcomes. 14. Intrinsic Relationship to Freedom and Privacy Freedom -- Information affects the range of choices available to the individual. Freedom is a lack of restriction on choices. Thus information leads to greater freedom. Privacy -- Incomplete information may result in defamation of character. Therefore, information must be selectively made private to reduce the probability of defamation. The Character of Information Characteristics and Properties of Information Related to Issues Concerning Intellectual Property 1. An Operational Definition of Information The common-use definition of information refers to the act of informing or the condition of being informed. But how can we really judge if some arrangement of bits, words, etc. really does inform? To answer that we should look at what it means to inform -- we should see what is different about a person after information has been communicated to him or her. 1.1 The Function of Information in Achieving Outcomes As the section title implies, it is useful to think in terms of the function of information to define it. Indeed, the common-use definition states a function -- "the act of informing." Once "informed", what is different about the person? The choices that a person might make are different. For example, if I inform a shopkeeper that it may rain, the shopkeeper may choose to cover-up outside merchandise or may choose to close the shop's windows. By informing the shopkeeper I have provided "... a basis for choice -- that is, a belief in the greater efficiency of one choice compared to another" (Ackoff, 1972, p. 153). The concept of "efficiency" is a very key one. It is tied with a fundamental purpose of information and human activity. Nearly all human activity is directed toward achieving outcomes. Outcomes include getting to the bank on time, relaxing, getting an A in a course, and cheering a friend. These outcomes can be achieved with more or less efficiency. Now there are two basic attributes about a person that affect the efficiency of achieving an outcome -- 1) The ability to choose among alternative ways of achieving the outcome, and 2) The capability to make sure the choice succeeds. Returning to the shopkeeper, the outcome is keeping rain off the merchandise. Informing the shopkeeper of the possibility of rain changes his choices -- he can now know to protect the merchandise before it rains. But having chosen to, say, cover an outside table with plastic, his capability to keep the plastic in place (using lead weights or whatever) also determines the efficiency of achieving the outcome. For if the plastic were to blow away the efficiency of protecting the outside merchandise has gone to zero. If information affects the basis for choice, what affects the capability of ensuring success? Success comes from practice, instruction, and other activities that affect capability.<*> --------------------- <*> In accounting for the shopkeeper's actions we said, as a result of the information about rain, he could now "know" to protect the merchandise. The literature on information often refers to the related term knowledge. Indeed, Macklup's general term in his writings is the word knowledge rather than the word information (Macklup; 1962, 1980, 1984). Also, Lamberton's anthology of writings was on "economics of information and knowledge" (Boulding, 1971, etc.). With the concepts introduced so far we can relate information and knowledge. A person's "degree of knowledge" is his efficiency in achieving an outcome by making choices -- i.e. his ability to make good choices. Information -- by informing the person of possible choices and their relative potential for achieving outcomes -- improves a person's degree of knowledge (cf. Ackoff, 1972, p. 48). -2- Thus the fundamental function of information in human activity is to affect the efficiency of achieving outcomes. The effect need not always be positive for if I am poorly informed, I will make less efficient choices and my efficiency will decline. By defining information in terms of outcomes, the value of information follows immediately. Take the expected value (EV) related to achieving an outcome -- this is the sum of the probability of each particular choice, times the efficiency of each choice, times the relative value of the outcome (cf. 2.3 for relative value). Considering the expected value (EV>1<) without the information and the expected value (EV>2<) with the information, the value of the information (EV) is: EV>i< = EV>2< - EV>1< In economic terms, EV>i< = P (price), but only: 1) When there are no market imperfections, and 2) For those consumers where the marginal utility (the utility of the last unit) equals the market price. Examples of where the price is not a proxy for value include situations where the information provides benefits to other than the purchaser (a positive externality) or where the purchaser would have paid more than the market price. In the latter case, with no market imperfections, we know that the value to the purchaser is at least the market price and we could attempt to use a "willingness-to-pay" measure (how much the person says or indicates he might pay) for the information as a better proxy for its value (cf. discussion in 3). This choice based approach to the value of information differs from Machlup's approach where he uses the opportunity cost of the productive factors as a shadow price for the value of information (Machlup, 1980, p. 208). The approach is more like Hall's -- "[the] value of a specific message is equal to the utility gained from shifting to a better choice among terminal actions" (Hall, 1981, p. 161) and Taylor's description of information value in decision contexts (Taylor, 1985). We can now define information as: Information: A communication that produces a change in the tendencies to choose certain actions over other actions (where a change in tendency can be observed by noting changes in the probabilities of choice). (cf. Ackoff, 1972, p. 144). Mackaay (1982, p. 107) states, "[i]nformation is the essential ingredient in choice..." Cherry (1966, p. 170) states, "Information can be received only where there is doubt; and doubt implies the existence of alternatives -- where choice, selection, and discrimination is called for." At the recent Elsevier Symposium on Information Policy and Scientific Research, Manten and Timman examine "external" and "internal" definitions of information. An external definition of information presented by Vinken (Manten & Timman, 1983, p. 154) defines information as something someone is willing to pay for. Internal definitions of information are typically: "Information consists of data, that change the world view of the receiver" (Manten & Timman, 1983, p. 7). The internal definition is rejected because "it is impossible to say which data are information and which are not." -3- The above definition, however, is not an internal definition but a different and more fundamental external definition. The problem with the strictly economic external definition is that it excludes all information for which pecuniary (monetary) measures are inapplicable and all information which a person wouldn't pay for. For example, if I inform my daughter that she must stay in at night, I doubt she would pay me for that information. Manten & Timman, similarly, reject the external economic definition. We can also define communication as: Communication: A message between sender and receiver that affects 1) the choices of the receiver (information, as above), 2) capabilities of the receiver (instruction), and/or 3) affects the receiver's values (motivation).<*> 1.2 Information as Intellectual Property To what extent is intellectual property a piece of information? We should investigate some particular forms of intellectual property and see how they meet the definition. Some forms are: An invention -- An invention is the embodiment of many new choices. The invention combines parts and processes in new combinations to produce the desired effect. A description of the invention, such as a patent, or the invention itself in practice is informing since it conveys to others how a desired effect can be attained with new choices or different combinations of choices. For example, to create a letter printer, the invention may relate to spraying ink rather than transfering ink by impact. (The idea of spraying ink, per se, cannot be patented, rather the embodiment of the idea in a specified set of choices for making the printer is what is patentable.) Thus, invention clearly is information. A song -- The music and score are copyrightable under law. Songs can evoke past feelings and evoke new feelings by providing a vicarious experience and stirring empathy as well. They can be symbols and images to identify with and emulate. A sense of catharsis is common as difficult situations are experienced at-a-distance. --------------------- <*> This, like the definition of information, is an "idealized" definition. We determine whether communication took place by whether behavior changes. The difficulty in actually observing changes is a secondary issue. Also, communication may have occurred but not resulted in an observable behavior change. This is also a secondary issue since we could construct a situation for the individual to test for changes in choices that would reveal whether communication took place. The advantage of the approach is that it distinguishes between communication and noise -- if a message is heard but does not result in behavioral change the message was noise rather than communication. Similarly, a message is said to contain information only if there are resulting changes in choices, otherwise there was no information, only noise. A message is a set of one or more signs intended by its producer to produce a response in the receiver (where a sign is anything that is a potential producer of a response to something other than itself). -4- Since much of the effect of a song is affective (affecting feelings) the relationship among feelings, outcomes, and information should be identified. A feeling is the sense of satisfaction or dissatisfaction associated with a particular outcome or potential outcome. For example, the feeling of anxiety is a sense of dissatisfaction with the uncertainty of a potential positive outcome. (If I sense that the actions of a co-worker will jeopardize my getting a promotion, I will feel anxious about my job.) Thus, feeling is an evaluation associated with an outcome (cf. Ackoff, 1972, p. 100). A song provides the listener with a synthesized experience that temporarily replaces (or becomes) "reality." The experience can be mainly vicarious, mainly empathetic, or both. If it is vicarious, the experience substitutes for one's own; if it is one of empathy, the experience becomes like a close relationship to another. There are two behavioral effects of these experiences 1) The positive and negative feelings can be "consumed", for example, a stirring piece of music can evoke exhilaration and that can simply be felt, and 2) The feelings evoked can influence future choices. Feelings influence choices mainly by becoming attitudes. For example, marching music can be used to build up strong attitudes of nationalism. A strong nationalistic attitude will then result in loyalty to country and other forms of patriotism. Thus a song is partly information but not obviously so. A song, by creating synthesized experiences, creates feelings and attitudes that influence choices to achieve outcomes and is, therefore, by definition information. Songs also are motivational (i.e. produce changes in a person's values) and are consumptive goods -- to be enjoyed for the immediate sensate. A Textbook -- Textbooks are subject to copyright. The material in the textbook directly changes the reader's available choices through the knowledge that it brings the reader. For example, if the reader needs to show a correlation between crop growth and rainfall there are varying degrees of efficiency he can achieve in obtaining the outcome -- a statement of the correlation. He might have no notion about how to go about making this statement. A textbook on statistics would provide information about the technique of regression analysis and the R<2> term that expresses correlation as a number from 0 to 1. With this new information, the reader would choose that analysis and his efficiency would significantly increase. (His capability may still be low and require practice and instruction to be very efficient in achieving a correct outcome.) Thus, a textbook squarely fits the definition of information. In summary, while most intellectual property is mainly information, there are exceptions. In particular, music, movies, and similar products that create synthesized experiences are part informational, part motivational, and part consumptive. Further, the proportion of these three components depends on the response of the viewer or listener. -5- What remains is the question of what is it that intellectual property rights are really given for. As technology continues to change the medium of expression, it is important to distill what is fundamentally being protected by patent law, copyright law, etc. It is commonly stated that what is being protected are not these ideas but the form of expression. While this loosely pins things down, it is too vague to apply to many new situations resulting from technological change. Let us consider the textbook again. Paul Samuelson's Economics is an excellent textbook. Why do I say that? Because it is comprehensible, anticipatory, progresses logically, is well illustrated, and is comprehensive. These features make it easier for me to improve my knowledge. This comes back to a notion of efficiency. As indicated above, what makes information valuable is how it changes my efficiency in achieving an outcome. Thus, what is valuable about a piece of intellectual property is how effective it is in changing my efficiency. The list of positive features on Samuelson's textbook all relate to how effective it is in changing my efficiency. It is this aspect of the work that is unique and can be protected. As a short cut, however, copyright protects the work by preventing copying. Of course, a good copy would have the same efficiency characteristics as the original, and by preventing copying the work is "protected." Can we, however, generalize the notion of efficiency to get a more fundamental protection approach? Particularly when "bits and pieces" of various works can be combined on wordprocessors, in film editors, etc. problems of copyright and royalties become difficult. To accomplish this, the concept of efficiency would have to be generalized to include not only information but motivation and consumption so we can account for synthesized experiences. With these in place, we could deal with issues of imitations, replicas, and partial copies. As a guide, it would be useful to compare court decisions on copyright and patent infringement with the evolving theory. 1.3 Conclusion The definition of information permits us to identify the extent that information is embodied in intellectual property. The value of information follows readily from the definition. The definition, by tying messages to outcomes, is not suceptible to the problems associated with definitions of information that are defined in terms of bits. The definition is also a reasonable extention of the common use meaning of the word. _______________________________________________________________________________ | W. Curtiss Priest, Ph.D. *********************** | | Center for Information, Technology, & Society * Improving humanity * | | * through technology * | | 466 Pleasant Street *********************** | | Melrose, MA 02176-4522 | | Voice: 617-662-4044 Gopher to our publications: | | Fax: 617-662-6882 GOPHER.STD.COM (under nonprofits) | _____________________________________________________________________________| From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:41:36 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00287 for ; Tue, 15 Nov 1994 19:41:35 -0800 Message-Id: <199411160341.TAA00287@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8433; Tue, 15 Nov 94 19:33:37 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9516; Tue, 15 Nov 1994 19:33:37 -0500 Date: Tue, 15 Nov 94 19:33:22 EST From: "W. Curtiss Priest" Subject: CITS Report Chapter 2.1 To: NTIA discussion on Intellectual Property -6- 2. Characteristics and Properties of Information in Commerce and Transactions Information in commerce has different characteristics from most economic commodities. In a society whose commerce is based increasingly on buying and selling information these characteristics will have increasing significance. Also, there are inherent characteristics of information that relate to non-economic transactions such as the role of information in maintaining human relationships. Fourteen different characteristics of information are identified and their implications to commerce, transactions, and intellectual property are described. The characteristics are grouped in three categories. The first category, "market related," pertains to commodity characteristics that set information apart from other goods in market activities. The second category, "market-failure related," pertains to characteristics of information as a commodity that cause markets to behave inefficiently (or not at all). The third category, "non-market related," pertains to characteristics of information in non-economic transactions -- primarily those comprised of human relationships. 2.1 Market Related Characteristics of Information as a Commodity Drawing on the definition of information in Section 1, information as a commodity can be examined. Fundamentally, producers of information are in the business of increasing the efficiency of choices made by the purchaser of information. Their products are the instruments by which the purchasers increase their efficiency by "consuming" the product. 2.1.1 Characteristic I -- Intrinsic Co-production Information is not typically the object of consumption as are apples, coal or umbrellas. In contrast, information has an instrumental value -- it aids in attaining desired outcomes. We thus refer to information as an intrinsic co-producer. Information inherently is a co-producer of outcomes. New information works in tandem with the knowledge already possessed by the person and with the capabilities of the person to achieve outcomes. The same applies to groups, families, firms, and other organizations. There are many classes of commodities that are co-producers. While we do consume pencils as they wear down, the pencil is a co-producer of the written word. Cosmetics are co-producers of romance and cars are co-producers of transportation. But all of these co-producers are dissipated as we use them. Perhaps the closest parallel to information is the chemical catalyst. The catalyst is not consumed in the reaction and yet accelerates the process. But even most catalysts become contaminated after a while and need to be replaced. Some writers have termed information a resource (Levitan; 1980, 1982, Cleveland, 1982). A resource is something that can be drawn on for help. Most resources are depleted with use -- oil, iron ore, etc. A non-depletable resource such as solar power is a closer analogy to information. Cleveland (1982, p. 36.) describes two characteristics of information that are directly related to intrinsic co-production. Cleveland refers to the "expandability" of information. "[I]nformation expands as it is used." Information is co-productive of more information -- knowledge builds upon existing knowledge and news often repackages -7- older information with newer information. The proliferation of information has been referred to as the information explosion and has resulted in "information overload." Indeed, the production of information for information's sake is not necessarily co-productive of other desired outcomes. Thus there is a need to manage information to keep it relevant and make it efficiently co-productive. Secondly, Cleveland refers to the substitutability of information (Cleveland, 1982, p. 37). "It can replace capital, labor, or physical materials." This primarily emphasizes the co-productive capacity of information through invention. As information contributes to the transformation and automation of manufacturing, capital will further substitute for labor. To refer to this as information replacing labor is perhaps euphemistic. In summary, we can define the intrinsic co-productive capacity of information as: Intrinsic Co-production -- The character of information to be instrumental in achieving other goods and outcomes. This character makes information inherently valuable. Since information is inherently valuable it is significant whether the information can be held as property. Property rights will enable the owner to gain some return from its creation (cf. 2.1.1.1 -- Appropriability). 2.1.2 Time Constrained Consumption of Information For a message to be information it must affect the choices of an individual (see def. Section 1.) To affect choices, the receiver must take time to assimulate the information. This process involves reception, memorization, thinking, and reflecting. (Even the process of synthesized experiences, such as watching a movie, takes considerable time.) In relation to many other goods, more consumer time is occupied by information than most other goods per dollar of expenditure. For example, $2.00 of beef can be consumed in ten minutes while a $2.00 movie can last two hours (and $2.00 of basic cable service can occupy days of time). The economic significance of this characteristic of information has not been specifically studied. In general, it would operate to reduce the demand for information. Reduced demand would work against the potential for economies of scale (cf. 2.1.4). In summary, we can define the time-constrained consumption of information as: Time-Constrained Consumption -- The character of information to occupy more consumer time per dollar expenditure than other commodities. Reduced demand would result in reduced prices, making the value of information as property less valuable to its owner. 2.1.3 High Investment to Reproduction Cost Ratios for Information The initial costs for creating information are high relative to the costs of reproduction. This contrasts sharply to most other goods where the production of multiple units of a good require considerable factor inputs of capital, labor, and materials. -8- Returning to the definition of information, the reason for this large difference relates to the necessary facilities needed to affect the choices in behavior. The informing process is mainly one of communication. Communication primarily consists of transferring audio and visual images. For the written word printed paper is quite effective and very low in cost. For motion picture images, the VCR cassette is less than $5.00 plus recording or pre-recording costs. Equipment for accessing information such as VCR's, television monitors, computer terminals, and communication lines are not low in cost. If one amortizes the costs of these devices over the media costs, the reproduction costs are noticeably higher for some types of information. For example, the cost of a basic VCR over five years would be around $700 including maintenance and the cost of capital. Allocated over a film library (and rentals) of 200 tapes, this would add another $3.50 per tape. While appreciable, the additional cost is not large. The literature abounds with accounts of dropping prices for terminals, minicomputers, and other hardware. Though this is not expected to continue to drop as steeply in future years, even the costs of the more expensive devices will probably not swamp the situation. Nonetheless, there is still considerable room for improvement in picture resolution, 3-dimensional display, and the instant accessibility of large quantities of information. The question remains, how much more effective would the communication be with these types of enhancements and what will be the costs of these improvements? High investment costs put pressure on the industries to search for the means to reduce these costs. The development of information is labor intensive. Some film footage can cost $2000 a second to produce. Because of the skill and intellect required to produce information, these costs are not likely to drop soon. Thus the investment/reproduction ratio is likely to remain high. In summary, we can define the investment to reproduction cost ratio of information as: Investment/Reproduction Cost -- The creation costs of information divided by the cost of reproducing one unit of the good. The implications to issues of intellectual property are important and one of the main problems today. Since investment costs are high and it is so relatively costless to reproduce the product, it is extremely important to protect the owners of the investment (cf. 2.1.1.1 -- Appropriability). 2.1.4 Relevance of Information More Variable Across Consumers There are various factors that determine the relevance of a good to a consumer. The most common factor is the consumer's preferences (or values). Consumer goods that are purchased out of preference are generally consumed again and again. Further, while many goods are slightly differentiated by styling, the demand for many basic goods is consistent across consumers. Combs, pencils, shovels, lumber, etc. are demanded consistently by many consumers. Information, by contrast, is peculiarly different. The basic goods of information, such as the alphabet, vocabulary, etc. need only be consumed "once." The consumer does not generally go back for a second helping of learning arithmetic. He does go on to learning more -9- arithmetic. Thus at any time, each consumer of information has a stock of knowledge that he or she is adding to and makes selections for more information based on an assessment of what further information is useful. Only when "memory fails" might the consumer go back and then usually to a familiar reference already on the shelf. The "synthesized experiences" (cf. Section 1), if they are consumed again and again (like seeing a movie many times), become less and less information each time and more a simple consumptive good like food. Thus, a second factor that determines the relevance of a good is its utility in building up a stock of knowledge. If the person reads something that is completely redundant to what he or she already knows, the material is not information at all -- for there will be no changes in the future choices of the individual as a result of the message. If the person persists in re-reading it we can only assume there is a consumptive value in doing so. This characteristic of relevancy produces high variability in the "consumption" of information as a commodity. What I require for information today I will probably not require tomorrow. Only if we look at information in the aggregate, over time, does its variability substantially decrease. Everyone will learn the alphabet at some time; everyone will probably read Romeo and Juliet. In summary, we can define the variable-relevance of information as: Variable-relevance -- The character of particular information to be acquired usually only once. The result is high variability in consumption by each consumer. The implication of this to property is striking. Basically a producer of information gets "one shot" at his consumer. The market segments for information as a commodity are much more tightly drawn than for other goods. The success of a "reader" for five year-olds is very dependent on previous learning environments and the age-group. But because of the variability in prior information, it encourages product differentiation -- information can be packaged and repackaged to fit the particular circumstance of the consumer. (Computer-assisted instruction, with the ability to branch as required by the student, is a good example.) But product differentiation is problematic to establishing property rights. I must continue to copyright each variant to try to protect it and if someone else produces a variant for a slightly different market segment, that producer might be able to take most of my product without compensating me. From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:42:10 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00306 for ; Tue, 15 Nov 1994 19:42:09 -0800 Message-Id: <199411160342.TAA00306@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8438; Tue, 15 Nov 94 19:34:10 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9530; Tue, 15 Nov 1994 19:34:09 -0500 Date: Tue, 15 Nov 94 19:33:51 EST From: "W. Curtiss Priest" Subject: CITS Report Chapter 2.2 To: NTIA discussion on Intellectual Property -10- 2.2 Market-Failure Related Characteristics of Information The failure of markets has been a subject of public finance study for many decades. Market-failure and the role of government are closely entwined since a major role of government is to provide what the market cannot. In the early part of the twentieth century, market-failure problems associated with transportation (railroads, trucking and airlines), communications (telephone, radio, and eventually television), public utilities (water, gas, etc.), and food, drugs, and cosmetics were closely studied and the associated industries were subjected to "economic regulation." In the mid-part of the twentieth century market-failure problems associated with health, safety and the environment were addressed with "social regulation." Economics, as a discipline, primarily concerns the operation of markets. Market-failure, therefore, represents exceptions to the rules of the discipline. The basic concepts of Pareto optimality and cost/benefit analysis, however, transcend market operation and are thus useful economic concepts in the analysis of market-failure. (But even these concepts seldom address the form of market-failure associated with the distribution of wealth.) In a short space it is not possible to describe all of the economic concepts related to markets and market-failure. To provide some common reference, however, the following terms are germaine: Allocating Resources -- Using labor, raw materials and capital in production Efficiency -- Allocating resources to their most valuable use (also called allocative-efficiency) Pareto Optimality -- The condition where all resources are allocated to their most valuable use Pareto-move -- a change in allocation that increases the net value to society Market-failure -- a situation where the operation of markets will not result in pareto-optimality or the fair distribution of wealth Perfect Competition -- many producers and many buyers, where no individual producer or buyer can affect price; the absence of market-failure in a competing market Imperfect Competition -- competition under forms of market-failure Good -- Something bought and sold Consumptive Good -- A good that is acquired mainly to be consumed Instrumental Good -- A good that is acquired mainly for its co-productive capacity Marginal -- the last unit of production or consumption Marginal Cost Pricing -- Usually a firm operates where: marginal cost (the cost of producing the last unit) equals the market price for that good (Stated as MC=P) -11- Marginal Utility -- The utility derived from the last unit of a good Rate-of-Return -- the income (or benefit) derived from an investment (Typically expressed as a percentage of the original investment) Information as a commodity is subject to many forms of market failure. The recognition of some of these in economics date back to the mid-1920's when Pigou (1924), and Marshall before him, recognized that knowledge provided benefits to society as well as to the purchaser (cf. 2.2.2 -- externalities). The recognition of externalities of information and knowledge was continued by Viner (1931), Meade (1952), Scitovsky (1954), and Bator (1958). In 1962, Arrow (1962) wrote a seminal piece "Economic Welfare and the Allocation of Resources for Invention," in which he recognized three forms of market-failure associated with information: indivisibilities, inappropriability, and uncertainty. This was one of the first treatments of "information as a commodity." Others who have addressed information as a commodity and the subject of market-failure include Braunstein (1976, 1981), Levitan (1982), Mackaay (1982), Cooper (1983), and Priest (1984a, 1984b). 2.2.1 Public Good Characteristics Public goods include goods like national defense, parks, and lighthouses. They are goods that multiple consumers can enjoy at the same time (sometimes referred to as jointness-of-consumption). Information has the characteristic of a public good -- the use by one consumer does not prevent the use by others. Public goods are often provided by government. Since consumers cannot be excluded from enjoying the benefits of a public good, use of tax-payer money to supply the good can be often justified. Economists and public administrators are quick to point out that government is not obligated to provide all public goods -- there are situations where the waste and distortion of government in trying to counteract the market failure results in more inefficiency than the original inefficiency (cf. Machlup, 1984, p. 157). The market failure associated with public goods relates to the concept of marginal-cost-pricing described above. For maximum profit and maximum social efficiency, the firm should set the price of the good equal to the cost of producing the last unit (P=MC). But for a pure public good the cost of the last unit is zero and the firm should charge nothing at all. Thus for public goods social efficiency and private efficiency diverge. Pareto-optimality would be achieved only if the good were given away but then no firm could stay in business to produce it. (Baumol and Ordover suggest that the analysis is not this simple. "Resource allocation may benefit by the imposition of positive prices for public goods in cases where such prices are collectable" [1975, p. 1]). One common prescription for the situation is to have government subsidize the firm to an amount equal to the cost of creating the information. Another is to have government supply the good. -12- In summary, we can define the public good characteristic of information as: Public Good Characteristic of Information -- The same information can be used by many consumers without interference. Before exploring the relationship of this characteristic to property, it will help to explore two closely related characteristics -- inappropriability and non-depletability. 2.2.1.1 Inappropriability The term inappropriability is from the word appropriate. To appropriate something is to take possession for use by oneself. In the economic sense, it means to be able to take possession of the worth of something -- typically by selling it at the market price. Inappropriability is the difficulty in taking possession of the worth of something. As indicated in the public good discussion, there is difficulty in excluding people from using information who have not paid for it. This occurs in two basic ways: Exclusion 1 -- Materials such as books and films are often passed along. This is particularly the case when they are provided by libraries or rentals. Fifty percent of computer software is copied (Frazier, 1985). Exclusion 2 -- The information contained in any one material often represents the embodiment of prior work. For example, while I give credit to those writers from whom I have drawn for this piece, I have not financially compensated them. The major result of inappropriability is under-production of information. If the producer of information cannot appropriate its full market value the producer will only produce information where he can recover costs and make a profit. This results in fewer books, movies, information systems, etc. than is socially efficient (all other things being equal). Further, the types of information that are produced are distorted toward those types that can be subject to exclusion. In summary, we can define the inappropriability characteristic of information as: Inappropriability of Information -- The difficulty in receiving full market compensation for the creation of information due to the problem of exclusion. The result is under-production and under-compensation. Problems of appropriability have been recognized by Arrow (1962, 1971), Boulding (1971), Braunstein (1976, 1981), Cleveland (1982), Gordon (1982), Hall (1981), Macklup (1962, 1984), O'Brien (1980), and Priest (1984a, 1984b), and in inventive activity by Dutton (1984), Nordhaus (1969), Mansfield (1977), and Scherer (1977). Cleveland (1982) refers to information as diffusive, easily shared, and transportable. He relates Colin Cherry's comment that information by nature cannot give rise to exchange transactions, only to sharing transactions (p. 37). Some of the positive effects associated -13- with ease-of-sharing and transportability are discussed in Section 2.3 (Non-market characteristics). 2.2.1.2 Non-depletability Information is a very durable good. It does not dissipate with use. It may become less valuable when "better" information is generated but the original information is still present. Information and knowledge can therefore accumulate over centuries and millennia. From society's standpoint this is a very positive characteristic but from a firm's standpoint this is a negative characteristic. A producer of information must not only compete with other present producers of information but also with all past producers. During periods like the twentieth century this is not an insurmountable problem because of the enormous increase in scientific and technological information, and the significant changes in media technology.<*> In summary, we can define the non-depletability characteristic of information as: Non-depletability of Information -- Information does not dissipate with use. Producers must compete with past producers but society benefits with an accumulation of knowledge. In relation to property and property rights, the public-good nature of information makes holding information as property very difficult. Thus the assignment of rights in the form of patents, copyrights, trade marks, and mask works, directly addresses the public-good nature of information. Appropriability is a serious problem for the producers of information. The 1976 Copyright Act tackled Exclusion 1 (above) by establishing the Copyright Clearance Center to collect royalties for photocopies (McDonald, 1983, p. 19). Also, the Act established the Copyright Royalty Tribunal to collect payments from cable operators for the importation of distant signals. Valenti (1982) notes how low these royalties are in relation to other income. Besen (1978) points out that royalties set by a tribunal are unlikely to resemble real market valuations and will result in social inefficiency. Solutions to Exclusion 2 are more difficult. The fair-use provision of the copyright law generally assures that exclusion will not occur. (For a most comprehensive discussion of fair-use and market-failure see Gordon [1982]). Non-depletability can result in dwindling markets for information, particularly if new information cannot be readily generated. It is generally believed that extending the seventeen years of patent protection will not provide the inventor significantly more return on the invention's value. Within seventeen years newer inventions tend to take the older's place, but with notable exceptions such as xerography and the instant camera.<*> 2.2.2 Externalities If there is an effect associated with a good -- positive or negative -- that is not accounted for in its price, there is an externality present. For example, the polluting of a stream by a pulp and paper mill represents a negative externality. The production negatively affects others and the good is more cheaply produced than if the pollution were controlled. We refer to internalizing the externality if there is ------------------ <*> Patent life extensions have been suggested for products where government regulation delays the product's entry. FDA requirements can hold back a new drug or device for up to ten years. -14- some way to have the firm more fully account for such effects. A set of water quality standards could be established that the mill must meet by law. The presence of negative externalities was a major impetus for health, safety, and environmental legislation. Information, in contrast, has few negative externalities, but significant positive externalities. The non-depletability character of information leads to positive externalities that extend for generations -- the "wealth of knowledge" that has accumulated over time. To determine the value of a positive externality we can turn to cost/benefit analysis. Cooper (1983) reviews a number of C/B studies which include assessments of various information science activities. A study by Goddard assesses the benefits of public and school libraries. These libraries are seen as promoting education and therefore resulting in externalities in education -- the benefit to more than just the person being educated. The positive externalities of fine arts has been a subject of congressional debate for decades. For example, in introducing a bill in 1953 to establish a National War Memorial Arts Commission, Charles Howell of New Jersey said, "There is a philosophical difference in viewpoint which must be considered in the evolution of the measure I have sponsored. The debate is between the proponents of the belief that the arts are living and must be encouraged with every resource at hand, and those who regard the arts basically as the product of a past age, which must be preserved rather than encouraged" (Larson, 1983). The positive externalities of science have been recognized in the massive support the government provides for it. Alvin Weinberg commented, "society expects science somehow to serve certain social goals outside science itself. It applies criteria from without science -- broadly, criteria concerned with human values -- when it assesses the proper role of science as a whole relative to other activities" (Reagan, 1969, p. 34). Reagan reviewed congressional hearings, journals, and other sources and found five basic reasons for support of science (four of them externalities): 1. Intellectual and cultural values of science 2. The utility of basic research as the foundation of all technological development 3. Research as an essential component of graduate education 4. The high costs of scientific research, and the unlikelihood of adequate private financing (appropriability, risk, uncertainty) 5. The political values of science, especially in international affairs. Positive externalities and appropriability are closely tied concepts. Whatever the producer of information cannot appropriate will be, by definition, a positive externality. The appropriability of invention (see 2.2.1.1) has been a subject of considerable research. Nordhaus (1969, 1985) estimated the ratio of marginal social product to marginal private product using data on American agriculture. He calculated ratios of 12.7 for 1949 and 8.5 for 1959. These ratios imply very high social rates of return on research and verify earlier work by Griliches on the magnitude of the rate of return on hybrid corn. I.e., -15- Nordhaus found very high positive externalities to agricultural research. Mansfield (1977) performed an empirical study on social and private rates of return from industrial innovation. For seventeen innovations the median private rate-of-return was 25% (before taxes) and the social rate-of-return was 56%. Mansfield's ratio of social to private return was 2.2. The highest social return was 307% for a "thread innovation" (private return of 27%) and the highest private return was 2l4% for a "household cleaning device" (social return of 209%). Calculations of positive externalities, at best, are fraught with methodological difficulties. Thus these data should be considered suggestive of the possible externalities associated with information. In summary, we can define externalities associated with information as: Externalities of Information -- The effects of information, usually positive, that are not accounted for in its price. Externalities refers to the non-property aspect of information. Higher economic efficiency can be achieved by internalizing externalities, i.e., providing the producer of information greater appropriation. This can be achieved by the creation of property rights and corresponding payments to owners. For information, however, the transaction costs (see 2.2.8) of "keeping book" (adding up who owes what to whom) are likely to be high, thwarting attempts at increasing the appropriability. Perhaps in the era of the information utility, where computer information systems can keep track of many minor transactions, full accounting will be possible. Before that, we must struggle with clearinghouses and tribunals to attempt a solution. 2.2.3 Indivisibilities (of supply) Information users are confronted with an all-or-nothing option: they may either acquire the whole amount of information available at the prevailing price or buy no information at all (Pethig, 1983). At some level, all information is indivisible. Four years at college, a year, or a course can be purchased, but not a particular lecture. To have the editoral page of the New York Times the entire paper must be purchased. To have the telephone numbers of those I want to call, I have books mainly filled with the numbers of people I do not want to call. The problem of indivisibility relates to the organization of information and knowledge. To obtain new information I must continually pour over old information in search for new. So not only do I incur the cost of purchase but also the opportunity cost of search. In summary, we can define indivisibilities associated with the supply of information as: Indivisibilities (of supply) -- Information must be purchased in lumps; these lumps may be vastly greater than the information actually sought. In terms of property, it is easier to provide legal protection for a large lump of information than many small pieces. This tendency will help perpetuate the generation of larger lumps. This is not socially efficient since the consumer is forced to purchase unwanted information. -16- 2.2.4 Economies of Scale and Scope For some goods, increasing a scale of operations results in decreasing costs per unit. This condition is called economies of scale and explains why so many of the goods we buy are produced by large companies. As an example, Braunstein (1981) notes that daily newspapers have high set-up costs and low costs associated with the production of each copy printed. As a result, the vast majority of daily newspapers have no competing daily newspaper published in the same city. Economies of scale are usually associated with production involving high set-up or fixed costs, decreasing unit costs, or both. If economies of scale are substantially present when the output of the producer is equal to the total market demand, there is the condition of "natural monopoly." A monopoly in these cases can be more socially efficient than competing producers. Unfortunately, the monopoly can make higher profits by under-producing and thereby inflating prices (Samuelson, 1973). Public policy towards this situation has been to permit the monopoly to exist but to regulate rates so that price equals average costs plus some reasonable return on investment for the stockholders. Typical regulated monopolies are local gas and electricity distribution companies and local telephone companies. (Regulated monopolies have also been criticised for being socially inefficient because 1) They have little incentive to minimize costs, and 2) They often display lower innovative capacity for new inventions, features, etc.) Economies of scope arise when it costs less to produce several different products by the same firm. This can occur when one product utilizes a by-product of another or when both products draw from the same intermediate product. "Information, because it can be packaged in so many ways, is often produced or distributed under conditions of economies of scope (Braunstein, 1981, p. 59). The presence of economies of scale and scope is often indicated by industry concentration -- the presence of fewer, larger producers. Homet (1984) finds the electronic information-delivery sector increasingly characterized by concentration. He notes that in 1980, fewer than 100 corporations controlled a majority share of each of the mass media: daily newspapers, periodicals, books, records and tapes, radio and television distribution and sponsorship, and movie distribution. "Cross-ownership trends among these media drew the net even tighter: Time, Inc., with book publishing and cable (not to mention HBO), Times-Mirror with TV and cable and videotex, CBS with book publishing and records and magazines" (Homet, 1984, p. 14). Dertouzos and Wildman (1981) made a historical study of concentration in the recording industry. They found that the percentage of sales controlled by the top 4 firms declined from 1947 to 1972 from 79% to 48%. In 1972 a full 15% of sales were made by firms smaller than the largest fifty. But concentration in distribution and marketing of recordings has occurred as the major recording companies have increasingly been relied on by independent recording firms for distribution. Valenti (1982, p. 75) agrees with Homet about concentration in the cable area, [t]he 'Giants' are taking over the cable industry, concentrating power and increasing revenues." As of 1980 the 25 largest multiple system owners (MSO's) controlled over 60% of all U.S. subscribers. -17- Concentration and monopoly in telecommunications is not unexpected. Telephone was recognized as a monopoly and regulated in the first part of this century. The recent attempts to increase competition in telecommunications may be working against the condition of natural monopoly. In summary, we can define economy of scale and scope with regard to the production of information as: Economies of Scale and Scope -- 1) decreasing unit costs when the scale of operation is increased; and 2) decreasing costs associated with joint production. In relation to property, economies of scale and scope appear to mainly affect the distribution portion of the value-added process of information production. In those cases where property rights are given to independents and distribution occurs by "majors" there is little additional concentration effect. However, in vertically integrated firms that own both information creation and distribution processes, providing strengthened property rights will increase their monopoly. 2.2.5 Inherent Uncertainty and Risk in Information Production (particularly basic knowledge such as science and technology) A producer of information takes inputs such as capital and labor (e.g. medical instruments and physician-researchers) with some expectation of an output (e.g. a medical advance). In some cases, when there is sufficient prior experience, the producer knows that a particular percentage of the projects will be unsuccessful. This percentage is a statement of risk, e.g., 80% of the research projects will be unsuccessful. Using statistics, the producer can then determine how many projects must be supported to produce a success, say with a 95% confidence. This approach to risk employs the standard theory of portfolio selection to decrease the riskiness of investments by diversifying among projects with statistical independence (where the success of one is not dependent on the likely success of another). Risk has been termed a "mild uncertainty" (Nordhaus, 1969). We are uncertain about which project will succeed, but we are fairly confident that some will succeed. In some areas, however, there is not even sufficient experience to judge the probability of success. These are cases of full uncertainty. Cancer research and interstellar communications are subject to large uncertainties. If the risks and uncertainties are small, private investors will continue to produce. What they appropriate for the successful projects must cover not only the costs of the successful projects but also the costs of the unsuccessful projects. The costs of unsuccessful projects are part of the costs of doing business. When risks increase to the point that the producer lacks the ability to diversify enough to assure a success, the producer will withdraw. When there are sizable uncertainties the producer will also withdraw because there is insufficient information to justify the activity to stockholders or other investors. Under these conditions of risk and uncertainty, information will be under-produced. The problem is exacerbated when the size of firms in the industry is small. Smaller firms have less capacity to handle risk and uncertainty. In contrast, firms like IBM and AT&T can "afford" some -18- ventures that a smaller firm could not. Unfortunately, larger firms also tend to be more risk averse than smaller firms -- that is, they require greater potential return to risky ventures than a smaller firm does. Whether the degree of risk averseness of the larger firm negates its greater capacity to absorb risks is a point of current debate. If individual firms cannot bear risks or uncertainty, in some cases it is socially efficient that society do so. "In operational terms this implies that the government do all R&D or that the government have R&D done by firms or individuals on cost plus contracts" (McFetridge, 1977, p. 16). Other mechanisms include partial subsidies and forgivable loans where the state bears part of the risk associated with a given project. Finally, some projects are too risky or uncertain even for society to undertake. The public policy response to risk and uncertainty is fraught with unknowns and debate. The social rate-of-return must be sufficient to justify the risk and uncertainty. Thus, government tends to support basic science and R&D to a lesser extent. The greater the potential "co-productive capacity" of the resulting information (cf. 2.1.1) the more government involvement can be justified. In summary, we define the risks and uncertainties in information production as: Inherent Uncertainty and Risk in Information Production -- The inability of firms to produce information when risks and uncertainties are present. A problem, in particular, in the generation of basic knowledge. For an extensive treatment of uncertainty in the production of information see Arrow (1962,1971). The issue of property and uncertainty and risk relates to the interesting area of debate on property and government funding. Until recently, depending on the enabling legislation of the various federal agencies, patent rights are often assigned to the government. This follows from the argument that if the government pays for the information, the government (the tax payers) should own the information, not the private contractor. With the 1980 amendments to the Patent and Trademark Laws, universities and small firms were given rights to patents provided they would be developed; large businesses' patent rights must be reviewed on a case-by-case basis (Peyton, 1981, p. 80, 84). Supporters of these types of changes point out that government ownership of patents is not socially efficient. Since a major purpose in assigning property rights is to encourage invention and exploitation of the invention, government ownership greatly reduces the development of invention. This is particularly true when the government cannot issue an exclusive license. Providing property rights for information does not solve the problem of under-production under conditions of uncertainty and risk. This is because, for the property right to be useful, the invention, etc. must be forthcoming. But it is the very uncertainty in whether there will be property at all that is the source of market-failure -- protection is only useful once the property exists. -19- 2.2.6 Information/Knowledge About the Information Arrow noted a fundamental paradox in the determination of demand for information, "its value for the purchaser is not known until he has the information, but then he has in effect acquired it without cost" (Arrow, 1971, p. 148). If the seller could maintain property rights to the information this would not be a problem, but given problems of appropriability, "the potential buyer will base his decision to purchase information on less than optimal criteria (p. 148). The problems of "search" is a well known related topic in economics (cf. Kwon, 1982; Stigler, 1971). Perfect competition presumes the presence of perfect information -- that all buyers are aware of all sellers, their products, their quality, and their prices. Perfect information does not typically exist and the result is potentially inefficient: some products may be purchased at too high a price for their level of quality, performance, service, etc. Information is subject to the problems of search but the problem is compounded by the appropriability problem discussed by Arrow. A producer of information will hide information to the extent that it is not appropriable. But hiding information greatly increases the problem of search. The less the buyer knows about a product, the less likely the buyer is to purchase it, or to purchase it at the "correct" price (the price under perfect competition). To counteract this problem, producers of information rely on "brand recognition." Producers of information develop a reputation for the value of their information. For example, Standard & Poor is respected for its appraisals of the stability of firms and bond offerings. This tendency raises again the issues of monopoly and concentration addressed in 2.2.2. It is difficult for a new entrant (a firm that attempts to sell in the new market) to succeed. Thus information about information leads to "barriers to entry" and industry concentration. In summary, we can define the problem of information about information as: Information/Knowledge About Information -- Information about information is less likely to be available because of appropriability problems. This leads to under-consumption of information due to problems of search. With regard to property, the more property rights the producer has the less a problem information about information will be. Property rights will enable the producer to attain higher appropriability and thus will encourage the producer to provide more information about information. However, to the extent that property rights cannot be enforced, this form of market-failure will still be present. 2.2.7 Intangibility Thus far we have referred to the market price of information as some reflection of the marginal utility of information to the consumer. For simple consumptive goods (cf. definitions at 2.2) the price of a good is a reasonable proxy for its marginal utility. For instrumental goods, such as information and knowledge, the price of the good may have little resemblance to its marginal utility. -20- This problem has been referred to as the inability to monetize (set a monetary value on) a particular good. For example, what is the monetary value of good health? Good Health is the co-producer of many desired outcomes -- it permits thinking, locomotion, stamina, etc. The impact of an acute illness, an illness of three months or less, may in some circumstances be monetized but the impact of chronic illness cannot be monetized (Priest, 1981). What is the monetary value of education, libraries, guidance counseling, or church attendance? All of these activities involve substantial levels of information. Boulding (1971, p. 23) interprets the problem of intangibility as one of the problem of information measurement. "One longs, indeed, for a unit of knowledge, which perhaps might be called a 'wit', analogous to the 'bit' as used in information theory; but up to now no practical unit has emerged." The problem of intangibility and measurement relates back to the definition of information. Information derives its utility by changing the efficiency of achieving outcomes by changing choices. An activity such as education involves millions of changes in potential choices. "Education produces possibilities." To faithfully arrive at the utility of education then I would have to consider two situations, the attainment of all outcomes without the education and the attainment of all outcomes with the education. I would have to measure the efficiency with which each outcome was achieved under the two conditions, and sum the efficiencies to attain a single value of merit. Further, I should perform this exercise, not after the impact of the education has been seen (ex post), but before (ex ante), because this is the circumstance in making the purchase. This means forecasting the efficiencies and outcomes under the two situations. When a consumer is faced with purchasing education, however, it is exactly this calculation he must make to make the correct buying decision. But this is not how education is "sold." The U.S. adopted compulsory education for grades 1-12 because the value of the education was believed to be at least worth the cost (and effort). Much college education is purchased with the faith that the value of college education is at least worth the cost. (Occasionally this wisdom is questioned.) In summary, there are many forms of information, such as education, that affect a great many potential outcomes and are, therefore, largely non-monetizable. We can define intangibility of information as: Intangibility of Information -- The character of information to be non-monetizable. Intangibility and property are antithetical terms. Property is usually concrete and well defined. But something that is intangible is not. Specific components of education such as textbooks, film strips, and study guides can be copyrighted. But it is difficult to assess the value of these components, since they contribute to the "building process" of education. What is the value of a primer on the alphabet? What if another primer costs twice as much -- is it worth it? These questions have faced educators and others who have dealt with the intangibility of information. -21- 2.2.8 Transaction Costs and Information Besen (1977, p. 87) notes, "[i]t is unfortunate that, in the economics literature, the term "transaction cost" is used to describe two quite different phenomena." In the first sense "... the term is applied to the costs involved when agreement must be reached among a large number of parties in order to carry out an activity. Transaction costs are said to be high in such situations because the free-rider problem raises the cost of reaching an agreement. A second meaning of the term involves the costs of negotiation, contracting, and enforcement which exist even when exchange is bilateral" [first emphasis added]. Sometimes the term is misapplied to mean "the cost of transmitting information which has already been produced" (cf. O'Brien, 1980, p. 452). In this discussion we refer to the second meaning of the term. In this sense, transaction costs and indivisibilities (cf. 2.2.3) are related. As we attempt to reduce indivisibilities by breaking information into pieces, we increase transaction costs as we attempt to appropriate its value. In summary, we can define transaction cost and information as: Transaction Cost of Information -- The additional costs incurred by the producer in appropriating the value of information. The reduction of transaction costs was the explicit goal of the compulsory licensing of distant signals by cable television operators. According to Ladd (1982, p. 946) in congressional testimony: ... it would be impractical and unduly burdensome to require every cable system to negotiate with every copyright owner whose work was retransmitted by a cable system. Accordingly, the [House] Committee [on the Judiciary] has determined to ... establish a compulsory copyright license for the retransmission of those over-the-air broadcast signals that a cable system is authorized to carry pursuant to the rules and regulations of the FCC. Further testimony of Monroe M. Rifkin agreed: There are 4,350 cable systems, each carrying an average of five distant signals, (2 networks, 2 independents and 1 educational) each with a minimum of 6 - 17 hours of programming per day. Although it would be impossible to estimate the number of transactions that would be necessary, it is clear the the simple multiplication of 4,350 cable systems times 1,000 program suppliers seriously underestimates the probable number. While most program suppliers offer several programs, the number of contacts required to program five channels, 17 hours per day, 365 days a year would be enormous. In contrast, Valenti (1982, p. 86) argued that transaction costs are not sufficiently high to warrant compulsory licensing. In 1976, many cable operators were independents and there had not been the full scale use of "packagers" for pay TV. Valenti describes the marketplace for cable's licensing of its own programs as: -22- First, middlemen could package programs for basic cable systems and program suppliers just as they now package programs for existing cable origination services. The Satellite Program Network, a service of Southern Satellite Systems, is already providing such a program service to over 300 cable systems. The marketplace would quickly adjust to the new procedures. Packagers of cable programs would license programming material, take it to a satellite, and make a variety of programming available to cable systems. By catalogues and price lists, based upon a per subscriber rate, the packager would beam to the cable system whatever programming that system owner has chosen. Paperwork would be at a minimum. There would be no need for a forest of bureaucratic filings. Second, advertiser-supported programs, purchased by basic cable systems, are growing in number and revenue. It is one of the hottest phenomena in an industry that is full of tremendous changes... This will be a boon to the cable operator and will provide an additional source of large revenue without relying on an increase in subscriber costs. Today there are at least 35 "cable networks," ranging from Cable News Network to Home Box Office ... These networks include both "pay TV" operations such as HBO and advertiser-supported operations such as the Modern Satellite Network and the Satellite Program Network. Third, direct negotiations between program suppliers and cable operators. Right now, as noted earlier, 25 MSO's control some 60% of all cable subscribers. This concentration will grow even faster in the future, as large companies merge and/or buy out smaller operators. This concentration will simplify direct negotiations between program suppliers and cable systems. The attempt to reduce transaction costs through compulsory licensing is claimed to reduce the income to the property of the movie producers. Yet if transaction costs are "prohibitive ... exclusivity of property rights may ... reduce rather than increase the efficiency of a resource use (R. Posner in Gordon, 1982, p. 1608). Clearly a difficult balancing is required. The granting of property rights such as copyright reduces transaction costs (cf. Gordon, 1982, p. 1613). Without such explicit rights, contracts would have to be established under common law. This process would be far more tedious and time consuming. From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:43:39 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00365 for ; Tue, 15 Nov 1994 19:43:38 -0800 Message-Id: <199411160343.TAA00365@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8449; Tue, 15 Nov 94 19:35:40 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9563; Tue, 15 Nov 1994 19:35:40 -0500 Date: Tue, 15 Nov 94 19:35:16 EST From: "W. Curtiss Priest" Subject: CITS Report Chapter 2.3 To: NTIA discussion on Intellectual Property -23- 2.3 Non-market Related Characteristics of Information As the discussion on intangibles implied, information has dominant uses in non-market situations as well as market situations. Writers such as Boulding (1971), Priest (1972), and Cleveland (1982) have described the qualities of information for wisdom, reduced conflict, encouraging sharing relations, employment, and welfare. As the discussion in 1.1 showed, information is integrally tied to a person's efficiency in achieving outcomes. It is this integral link to achieving outcomes that gives information its two non-market characteristics. To cover non-market characteristics it is necessary to shift to a non-market set of concepts. Again, it is necessary to work with a few basic terms which may be unfamiliar to the reader. These are briefly defined here for reference<*>: Choice -- An individual displays choice when he produces one particular action from a set of possible actions. Courses of Action -- structurally different behaviors (different physical actions involving different objects, etc.) of an individual whose behaviors have one or more common functions (i.e. toward accomplishing the same ends). Co-productive -- an instrument is co-productive when it facilitates the achievement of an outcome. (Instruments are rarely valued for themselves, but for their co-productive capacity.) Outcome -- the product of an individual's or system's action Efficiency -- the degree of success in achieving an outcome Belief -- inferences drawn from past and present perceptions Value -- Value is defined relatively. Relative value is determined in an "intention situation" as the probability that the individual selects the course of action that has a maximum efficiency for a particular outcome. (Where an intention situation is one in which (1) there are the same number of available courses of action and outcomes, (2) each course of action has maximum efficiency for one outcome and hence no efficiency for any other, (3) each outcome has associated with it one course of action that has maximum efficiency for it, and (4) the alternative courses of action are equally familiar, known, and understood by the individual relative to the possible outcomes.) --------------------- <*> If the economist reader finds these behavioral and management science terms difficult, he or she should be reminded that, like the discipline of economics, it is important to carefully define terminology in science, for otherwise a discipline must be termed art. -24- (This particular definition requires considerable patience to comprehend but (relative) value is a key concept.) Capacity to Achieve -- The efficiency with which an individual achieves an outcome using a particular course of action. (Proficiency) 2.3.1 High Intrinsic Relationship to Human Welfare This concept is parallel to the High Co-productive Capacity (2.1.1) for the market. We begin with the basic behavioral science model of human behavior (cf. Ackoff, 1972). A choice is made from various courses of actions with an attendant outcome. Associated with an outcome is a relative value -- what the outcome is worth to the person, how well or poorly the outcome will make the person feel. The individual "models" the world by drawing on "beliefs" (inferences drawn from past and present perceptions). Using the model the individual attempts to predict the results of various choices. The individual is also guided by feelings and attitudes, as these represent "evaluations" of past outcomes in similar situations. There are three basic components of behavior 1) Tendencies to choose certain actions over other actions, 2) An efficiency to which a particular course of action will achieve the outcome, and 3) The expected value associated with the outcome. As we defined in 1.1, information changes tendencies in choosing certain actions over other actions -- a change in component 1: Information: A communication that produces a change in the tendencies to choose certain actions over other actions (where a change in tendency can be observed by noting changes in the probabilities of choice). One way information changes tendencies to choose is by modifying the beliefs used to model the results of choices. Returning to the story of the shopkeeper, information that it may rain changed his beliefs about whether the merchandise should be left uncovered. While there was a small chance he would cover the table just to be safe without the information, the information greatly increased the tendency to cover the table. Nonetheless, the information did not make his covering the table an absolute certainty since a fire could break out and the shopkeeper would then do other things. The linkage between human welfare and information can now be drawn. Human welfare is a product of individuals and groups achieving desired outcomes. Thus, information is intrinsically related to human welfare in that it inherently facilitates the achievement of outcomes. Information contributes to knowledge and understanding. Knowledge and understanding are venerated terms and by seeing how they are defined we can better understand why. These two terms can be defined in relation to the concepts of outcomes, efficiency, and choice: Degree of Knowledge: For a set of possible actions that can be used to attain an outcome, degree of knowledge (of the individual) is the efficiency with which the outcome is attained by the individual choosing one action compared with the efficiencies of all other choices. -25- Knowledge is an awareness of the efficiency of alternative subcourses of action when the person's capacity to achieve the outcome by a particular action is held constant. Understanding is responsiveness to whatever affects efficiency. "If, for example, when a change occurs in the environment or the [individual] to reduce the efficiency of his behavior, he modifies his behavior so as to increase his efficiency; then he is said to understand what has happened." (Ackoff, 1972, p. 50) The response consists of 1) changing his course of action to another, 2) changing the capacity applied in the course of action, 3) or both. Understanding can be defined as: Degree of Understanding: For a set of possible actions and set of different capacities that can be applied to the actions, degree of understanding (of the individual) is the probability of an outcome compared with efficiencies of all other choices and applied capacity. These definitions are at first counter-intuitive. We tend to think of knowledge and understanding in terms of something the individual holds or possesses. Definitions of knowledge and understanding that are based on a state of a person's perception are too internal -- they provide no external verification of the knowledge or understanding. Here, however, knowledge can be ascertained by the appropriate choice of action and understanding can be ascertained by the appropriate choices of action and application of capacity. Furthermore, these definitions are operational. With those it is possible to know whether and by how much some information increases understanding -- by changes in the degree of understanding. In summary, the intrinsic relation of information to human welfare can be defined as: Intrinsic Relation of Information to Human Welfare -- Human welfare is a product of individuals and groups achieving desired outcomes. Thus, information is intrinsically related to human welfare in that it inherently facilitates the achievement of outcomes. Cleveland (1982, p. 34) describes an intrinsic relation to human welfare using a less structured approach. He describes an "information-knowledge-wisdom hierarchy" as a process where information accumulates and results in more integrated knowledge. Cleveland notes that information is shareable, that the same information can be used by many at the same time in achieving human welfare. Property rights for information with regard to human welfare are incompatible in a major way. While it may be necessary to provide property right to spur the production of information, the holding of information as property thwarts its free and easy use in achieving human welfare. The fair-use provision of 1976 Copyright Act was in response to this tension. It provided more emphasis towards human welfare and weakened property rights. -26- The distinction drawn in 1.1 on information and "synthesized experiences" is germaine. Information is universally positive to human welfare as an instrumental good. Thus, the instrumental goods should be easily and freely accessible to the public. Synthesized experiences like many "pop" movies are mainly consumptive goods. They lack universality and should not be accorded the same free accessibility (at least for reasons of intrinsic welfare). 2.3.2 High Intrinsic Relationship to Issues of Freedom and Privacy The 1st Amendment provides guarantees of freedom of speech and freedom of the press. What is the function of this right? Freedom and choice are integrally tied -- freedom is a lack of restriction on choice. Since information changes the available choices, information is intrinsically related to freedom. Governments of societies that restrict freedom find that they must restrict communication of information. They are attempting to maintain a certain set of choices and exclude others. Privacy is mainly a problem of information and understanding. Perfectly upright citizens, who have "nothing to hide", insist that their privacy be protected. Unprotected privacy has two results 1) Interference due to unwanted publicity, etc., and 2) Interference due to mis-understanding, mis-interpretation, etc. We will concentrate on the second form of interference. Why does someone who has nothing to hide insist on privacy? -- because if there is 1) not full information about his actions, and 2) not full understanding of his actions, his actions may be misconstrued and the result may be defaming. Thus a major issue with privacy is an "all or none problem." It is not possible to give everyone enough information to properly judge, therefore, information must be selectively made private to reduce the probability of misjudgement. In summary, the intrinsic relationship of information to 1st amendment rights and privacy can be defined as: Intrinsic Relationship of Information to Freedom -- Information affects the range of choices available to the individual. Freedom is a lack of restriction on choices. Thus information leads to greater freedom. Intrinsic Relationship of Information to Privacy -- Incomplete information may result in defamation of character. Therefore, information must be selectively made private to reduce the probability of defamation. Pool (1983) recognized the relationship between freedom and information in his Technologies of Freedom. In particular, Pool saw the regulation of the channels of communication under the FCC as abridging free speech. Property rights for information and freedom can be in conflict or in harmony. If the property right is used to withhold information, freedom can be abridged. In contrast, if property rights encourage the production of new information, freedom can be increased. -27- Property rights are conducive to privacy. A property right gives an individual the power to withhold and, thereby, achieve privacy. From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:44:11 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00372 for ; Tue, 15 Nov 1994 19:44:10 -0800 Message-Id: <199411160344.TAA00372@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8452; Tue, 15 Nov 94 19:36:11 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9569; Tue, 15 Nov 1994 19:36:11 -0500 Date: Tue, 15 Nov 94 19:35:54 EST From: "W. Curtiss Priest" Subject: CITS Report Chapter 3 To: NTIA discussion on Intellectual Property -28- 3. Relationship of Information to Products and Services Talking about information is like talking about a calorie, no one buys a calorie, they buy food. To trace information as it becomes embodied in products and services one must follow the life cycle of information production. A simple version of the life-cycle model has the following steps: Through the generation of information there is created an information source; then through institutionalization of the source there is created an information resource; then through maintenance & enhancement there is created information products & services; then through dissemination the information becomes used (Levitan, 1982, p. 47). For example, a reporter writes up a story; the story is sent to UPI; an editor picks up the story, combines it with other information in the files; a newspaper article appears; the newspaper is delivered to the front door. More complex versions of the life-cycle model include various additional stages or components of "value-added" activity. Value-added can be considered in two ways. The strict economic definition can be defined as: Value-added -- The sum of the input factors of production excluding all purchases of materials and services from other firms. Returning to the example of the reporter, the value added by the editor is his labor, some percentage of management's labor, and depreciation on the editor's word-processor. But as so defined, we have not included "intermediate inputs" of the business such as telephone service, office space, paper, etc. This exclusion makes the economic definition of value-added appropriate to avoid double counting in performing the "national accounts"<*> but is not complete enough to give a sense of the full added value. To remedy this problem we can define a second term, full value-added, to be more complete: Full Value-added -- The sum of the input factors of production excluding all purchases of materials and services from other firms except intermediate inputs. This definition is reasonably workable. It provides the sense that everything a producer adds to information is his value-added contribution to the product or service. But like the economic definition of the value of information referred to in 1.1, even the full value-added (say stated in dollars) will not reflect the actual value added to information when there are forms of market-failure (cf. 2.2). Returning to the definition of the value of information in 1.1, we can state what value-added is in terms of final outcomes. The value-added is the increment of efficiency increase in achieving outcomes due to changes the value-added activity makes in the information. This can be defined as: ---------------- <*> The concept of value-added was developed to avoid double counting when the entire economy's activities are being tallied up -- as the U.S. Dept. of Commerce does for the National Accounts. For example, if Firm A makes dough and Firm B makes bread, we must avoid counting the dough again when we count the bread (cf. Samuelson, 1973, p. 183). Intermediate inputs must also be excluded since these too will be counted elsewhere. -29- Value-Added -- There is an expected value (EV) related to achieving an outcome -- this is the sum of the probability of each particular choice, times the efficiency of each choice, times the relative value of the outcome (cf. 2.3 for relative value). Considering the expected value (EV>1<) without value added to the information and the expected value (EV>2<) with value added to the information, the value added to the information (EV) is: EV>va< = EV>2< - EV>1< In those cases where the value-added activity makes otherwise unaccessible information available to the user, the value-added is at least equal to the value of the information. The economic definition defines value-added as an accounting of inputs, regardless of outputs. The behavioral and management science definition defines value-added as an accounting of output, regardless of inputs. For example, by the economic definition, there may be considerable value-added (labor, etc.) but the result, let us say, is confused, this added confusion would result in a negative value-added by the second definition. The individual would be better off consuming the information before the value-added step than after. One technique to attempt a quantifiable measure has been the use of willingness-to-pay (cf. Griffiths, 1982, p. 274). In willingness-to-pay, the individual is being asked to quantify in dollars, the perceived value of the information. I.e., he is being asked to translate the incremental increase in expected value into dollars. Willingness-to-pay, as a measure is subject to large uncertainties but in some situations provides useful data. Let us consider two extremes. The individual is about to go to a $5.00 dance club. A promotion service (value-added) calls the individual and says there is a free $5.00 ticket to the same dance club waiting for him. The individual's willingness-to-pay for this information would be $5.00 (ceteris paribus). In another situation, an individual is chronically depressed, irritable, and angry. The individual is informed that central sleep apnea (a form of sleep disorder) can cause these symptoms. Subsequently, the individual is cured. What is the willingness-to-pay of this individual? He might have hocked his soul. When intangibilities are high (cf. 2.2.7), there are significant externalities (cf. 2.2.2), or there is poor information about the information (cf. 2.2.6), willingness-to-pay is an unreliable measure of value-added. Products and Services Different types of value-added activities are associated with products and services. It is useful to distinguish between product and service, though as information technologies become more interactive, the distinction becomes blurred. We can define these as: Information Product -- An information product is usually a tangible piece. It may be bought and sold, if an external commodity, or it may be charged back, if internal within an organzation (Taylor, 1982b, p. 345). Information Service -- Services are intangible, they are usually provided on demand, are a performance rather than a product, are nearly inseparable from their production (Stankard in Taylor, 1982b, p. 345). -30- Taylor (1982b, p. 345) notes that products generally are mass-produced, i.e. there is little or no variation. In contrast, services are usually custom produced with large variation. Cuadra (1980, p. 98) recently compiled a list of the primary activities of 122 Information Industry Association members. In that list he distinguishes producers of products from producers of services. Table 3-1 shows the numbers of producers in 64 classes of products and services. Taylor (1982, p. 342) developed a value-added spectum for information. This appears as: DATA ----|: INFORMATION ----|: INFORMING --|: PRODUCTIVE ----|: ACTION KNOWLEDGE KNOWLEDGE grouping classifying selecting presenting matching goals relating analysing options compromising formatting comparing advantages bargaining signaling interpreting disadvantages choosing displaying ------------- ------------- ------------- -------------- ORGANIZING SYNTHESIZING JUDGEMENTAL DECISION PROCESSES PROCESSES PROCESSES PROCESSES Source: Taylor (1982, p.342) Taylor suggests that products are situated to the left side of the value-added spectrum. Services, being more unique and customized, are located to the right since they are based principally on human interpretion and intervention between system and client. Value-added is thus identified in terms of what is done to the information -- made accessible, enhanced, etc. For example, King and Zaltman performed a value-added analysis of scientific and technical information (STI) communications (1979, p. 17). They arrived at the following list of dimensions of "value": o Identification of User Needs. Does -- or could -- a component provide insight into the kinds of information desired by users or potential users? o Creation/Production Data. Does a component stimulate the development of new data and ideas? For example, symposia might stimulate the creation of new STI. o Creation of Awareness of Data. How many users become aware of STI only as a result of a component? How much earlier is awareness established among users as a result of a component such as preprints? o Quality Control: Validity of Data. Does a component such as refereed journals impact the quality of the data transmitted? o Quality Control: Potential Usefulness of Data. How helpful is a component in enhancing the usefulness of data? Does a component such as an abstract journal allow the practical relevance of data to become evident? o Storage. How valuable is a component for warehousing purposes? o Retrieval. How easily can data be recalled via a particular -31- Table 3-1 Primary Activities of Information Industry Association Members 26 Document Acquisitions and Delivery 8 Cataloging Services (S) (S) 8 Engineering Information (P) 26 Periodicals-publishers (P) 8 Environmental Information (P) 25 Publishing (P) 8 Legal Information (P) 22 Consulting Services (S) 8 Television Information (P) 22 Data Bases - Design and/or 7 Clearinghouse (S) Management (S) 7 Library Automation Services (S) 22 Data Bases - Information (P) 7 Medical Literature (P) (Publishers of Information About 7 Newsletters-Publishers (P) Data Bases) 7 Typesetting Services (S) 20 Indexing Publishing (P) 6 ASIA (P) 19 Data Bases - Searching (S) (firms 6 Economics (P) that carry out data base searches) 6 Electronics Information (P) 19 Information Systems - Design and 6 Forecasting Services (S) Evaluation (S) 6 Microform System Design Services (S) 19 Market Research Services (S) 6 Micrographic Services (S) 18 Business Information (P) 6 Records Management Services (S) 18 Micropublishing 6 Reprint Publishers (P) 17 Current Awareness Services (S) 5 Accounting Information (P) 17 Data Bases - Vendors/Lessors (S) 5 Agriculture (P) (Companies that Produce or Sell 5 Book Information (P) the Use of Data Bases) 5 Bookselling Services (S) 17 Government Information (P) 5 Chemical Information (P) 17 Literature Searches (S) 5 Computers-Hardware (S) 16 Corporate Information (P) 5 Conferences-Information (P) 15 Directories (P) 5 Drug Information (P) 13 Abstracting Publishing (P) 5 Education (P) 13 Indexing Services (S) 5 Europe (P) 13 International Business Info. (S) 5 Financial Information (Intl.) (P) 12 Energy Information (P) 5 Information Industry (P) 11 Abstracting Services (S) 5 Looseleaf Services (P) 11 Financial Information (P) 5 Management Information (P) 10 Marketing Services (S) 5 Patent Information (P) 10 Software (S) 5 Product Development (S) 9 Scientific Literature (P) 5 Social Science Literature (P) 8 Audiovisual Materials (P) 5 Statistics (P) --------------------------------------------------------------------------- (S) -- Service (P) -- Product Source: Cuadra, 1980, p. 98 -32- component. o Translation of Data into Implications. Does the nature of a component permit a statement of the way in which the data are important? Can bibliographics be retrieved on the basis of implications? o Translation into Action. Does a component permit statements about the actual use of the data once its relevance is determined? o Feedback. Does the component permit feedback from the user to the disseminator and creator of the data? How many journal channels must be altered to facilitate feedback? Taylor recently completed a major work on the value-added processes in abstracting and indexing services (1984a) He notes that abstracting and indexing services do not alter input. The references, papers, documents remain the same. What they do is provide a "whole series of tangible signals and intangible values that make it easier for customers to make choices (p. 131). Taylor identifies 24 specific ways value is added by abstracting and indexing services. These are listed in Table 3-2. Porat (1977) has developed the most comprehensive study of value-added in the economic sense. While the study provides little sense of what particular value is being added, it spans the entire information economy. (Recall also that intermediate inputs are not included.) He divides the information economy into two major sectors: the primary information sector -- "includes those firms which supply the bundle of information goods and services exchanged in a market context" (Vol. 1, p. 4), and the second information sector -- "includes all the information services produced for internal consumption by government and noninformation firms" (Vol. 1, p. 4). For the primary sector, he presents value-added (VA) by two-digit SIC (Standard Industrial Classification) categories (Vol. 1, Table 4.8, p. 55). For example, VA in 1967 for Services: Motion Pictures is $1,525 Million; for Service: Educational - $5,170 Million; and for Communication: Radio Broadcasting and Television - $1,580 Million. For the secondary sector, a similar table is presented but only at the one-digit level (Vol. 1, Table 9.2, p. 155). A second table is presented in the Appendices (Vol. 8, Table 10, p. 18-21) contains value-added at the two digit level. For example, VA in 1967 for all of Transportation - $8,115 Million; for all of Manufacturing - $57,880 Million; and for Agriculture, Forestry, and Fisheries - $467 Million. For more detail, the value-added process in particular information industries can be constructed from business books on the industry. While these books are mainly focussed on how to get into and keep in business, they cover the activities of business and from those activities the value-added process can be constructed (cf. Gomery, 1982 p. 82). For highly promoted products like soft drinks, cosmetics, and perfume the information components include the development of image and a market niche, the use of advertisement and promotion, and the use of "industrials" (film productions presented at sales conferences, etc.) to motivate and coordinate the sales force. In summary, value is added to information in two basic ways, 1) By adding greater accessibility, ease of use, etc., without changing the basic information such as in abstracting, and 2) By writing, editing, cutting, etc. where the basic content of the information and its -33- Table 3-2 Value-Added in Abstracting and Indexing Services Access (Reducing Noise): the values added by the intellectual technologies that provide the systematic means, based on subject matter, of narrowing the information universe to a set of data and information which have some probability of containing material that is wanted or needed. Different kinds of intellectual access provide different sets of the subject universe. Access I (Reducing Noise): the value achieved by the identification of any information chunk or discrete piece of data by systematic physical description and location information. Access II (Reducing Noise): the provision of a subject description through access points such as index terms, descriptors, names, etc. Access III (Reducing Noise): the result of processes that assure error-free transfer of data and information as it flows through the system and is eventually displayed to a client. Accuracy (Quality): the value added by system processes that assure error-free transfer of data and information as it flows through the system and is eventually displayed to a client. Browsing (Ease of Use): the capability of a system to allow a client to scan an information neighborhood, with the probability that the client will serendipitously find information of value. Closeness to Problem (Adaptability): the value added by the activities of the system, usually through human intervention, to meet the specific needs of a person in a particular environment with a particular problem; this implies knowledge of that person's style, bias, and idosyncracies, as well as the politics and constraints of the context. Comprehensiveness (Quality): value added by the completeness of coverage of a particular subject or of a particular form of information. Cost-Saving: the value achieved by conscious system design and operating decisions that save dollars for the client. Currency (Quality): the value added i) by the recency of the data acquired by the system; and ii) by the capability of the system to reflect current modes of thinking in its access vocabularies. Flexibility (Adaptability): the capability of a system to provide a variety of ways and approaches of working dynamically with the data/information in a file. -34- Table 3-2 (Continued) Value-Added in Abstracting and Indexing Services Formatting (Ease of Use): the physical presentation and arrangement of data/information in ways that allow more efficient scanning and hence extraction of items of interst from the store. Interfacing (Ease of Use): the capability of the system to interpret itself to users. Interfacing (Mediation) (Ease of Use): the means used to assist users in getting answers from the system. Interfacing (Orienting) (Ease of Use): the means used to help users understand and to gain experience with the system and its complexities. Linkage (Reducing Noise): the value added by providing pointers and links to items, sources, and systems external to the system in use, thus expanding the client's information options. Ordering (Ease of Use): the value added by initially dividing and organizing a body of subject matter by some form of gross ordering such as alphabetization, large groupings, etc. Physical Accessibility (Ease of Use): the processes of making access to information stores easier in a physical sense. Precision (Reducing Noise): the capability of a system which aids a user in finding exactly what he wants. Reliability (Quality): the value added by the trust a system inspires in its clients by its consistency of quality performance over time. Selectivity (Reducing Noise): the value added when choices are made at the input point of the system, choices based on the appropriateness and merit of information chunks to he client population served. Simplicity (Adaptability): the value achieved by presenting the most clear and lucid (explanation, data, hypothesis, method, etc.) among several within quality and validity limits; not to be confused with 'simplistic'. Stimulatory (Adaptability): those activities of an information system that may not be directly supportive of its primary mission, but which assume importance in establishing a presence in the community or organization served and which encourage use of the system and/or its staff expertise. Time-Saving: the perceived value of a system based on the speed of its response time. Validity (Quality): the valued added when the system provides signals about the degree to which data or information presented to users can be judged as sound. -35- presentation are changed such as in publishing. There are several issues in relation to property. In the case of abstracting, the abstracter distills out the points of an article or book. To the extent that abstract serves the user, rather than the original piece, the property right has been weakened. But in other situations, the property right can be enhanced such as when a book is made into a movie. The value-added activity of the movie increases the value of the book, and the author benefits from the new contract royalties. To the extent that "bare information" which is difficult to appropriate becomes bundled with a product or service, the appropriability is increased. For example, say there are eight principles by which to lead a good life. The value of these principles may be very great but highly inappropriable. But, in adding value by placing the principals into context in stories or screenplays, the information becomes bundled with synthesized experiences. These can be protected as property and the value is more appropriable. A trend in computer software is to bundle software with further access to information. A user becomes a subscriber to hot-line advice, further enhancements, and consulting. This bundling increases the appropriability of the software since only registered users can be subscribers. Unfortunately, bundling is not socially efficient from another perspective. It forces the buyer to purchase more than he may otherwise want, reducing allocative efficiency. It also can increase the monopoly power of an industry and produce serious antitrust issues. IBM was forced by the Justice Department not to bundle software with its hardware. The securities industry was forced by the SEC not to bundle their information services with the prices charged for stock transactions. Each form of bundling will have to be reviewed on a case-by-case basis, however, since there are no clearcut ways of predicting the affect of bundling on industry structure. From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:44:42 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00383 for ; Tue, 15 Nov 1994 19:44:42 -0800 Message-Id: <199411160344.TAA00383@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8458; Tue, 15 Nov 94 19:36:43 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9586; Tue, 15 Nov 1994 19:36:43 -0500 Date: Tue, 15 Nov 94 19:36:27 EST From: "W. Curtiss Priest" Subject: CITS Report Chapters 4, 5 and 6 To: NTIA discussion on Intellectual Property -36- 4. Rewards, Incentives, and Funding Sources for the Creation of Intellectual Property In the search for the best ways to provide incentives for the development of intellectual property, it is important to have a picture of what motivates the development of different types of intellectual property and what sources fund the work. While there has been a fundamental shift, with the advent of copyright, toward a market system approach for the motivation and funding of intellectual property, other forms of motivation and funding are still important such as art patronage and private endowment of colleges. Copyright can overcome only some forms of market-failure described in Section 2. It cannot overcome intangibility, risk and uncertainty, externalities, economies of scale, and indivisibilities. It contributes substantially to overcoming problems of appropriability (where copyright provides an enforceable right), and to a lesser extent aids in information about information (by making the producer less likely to retain information), and in reducing transaction costs (by providing clear contract obligations). Copyright will actually exacerbate problems of economies of scale and the existence of monopoly power and reduces social efficiency by withholding intellectual property from the public. This section treats three groups of intellectual property -- science, culture (art, music, etc.), and products & services. The types of rewards and incentives in each of these groups differ considerably. The first two involve "internal motivation" much more than the third. The nature of funding for the three groups is also distinctive -- patronage of science and culture is still common today while products and services are rarely funded outside of the market system. 4.1 Rewards, Incentives, and Funding for Science Intellectual property in science mainly consists of journal articles, books, and some computerized databases on physics, chemistry, etc. While scientists are paid salaries, the relationship between this compensation and the incentives to create intellectual property is weak. In science, there is a distinctly different set of rewards and incentives operating. Rewards and Incentives for Science Gaston (1978) studied the reward system in British and American Science. His findings affirmed what generally has been believed that scientists are rarely motivated by salary or other compensation. Merton (1973) contributed substantially by describing the sociology of science -- the networks, communications, and relationships among scientists. Considerable motivation to produce can be traced to these linkages. Science is an uncertain process that depends on data and information from others. While scientists tend to work with some isolation, they are dependent on others for information and critique. Associated with this dependency has been a form of "work motivation" -- scientists are pleased to be cited in other articles, are pleased to be invited for a paper, and particularly pleased when their work leads to a "break-through." "In the scientific world the highest value is for the research speciality or parent discipline to develop through contribution of new data and theoretical explanations to account for the data" (Gaston, 1978, p. 3). -37- Merton suggests that four basic norms consitute the "ethos" of science and guide the behavior of scientists -- universalism, organized skepticism, communism, and disinterestedness. These norms help explain the scientist's detachment from pecuniary (monetary) rewards. Disinterestedness requires that scientists do research for the "sake of science." While there are those scientists who have cared only about advancing their personal careers, most display disinterest and thus their progress is detached from monetary gain as well. Communism encourages the sharing of information among scientists. There are no "charges" for this beyond occasional photocopy expenses, journal subscription fees, etc. Thus, the scientist does not become involved in selling information. Motivation to Work General theories on the motivation of work have been developed by Abraham Maslow, Frederick Herzberg, D. Yankelovich. and E. H. Schein. A recent MIT doctoral dissertation reviewed the literature in determining incentives for engineers and scientists (Reece, 1981). A discourse on motivation goes beyond this paper but a few comments can be made drawing from the behavioral and management science concepts introduced in 2.3. The generation of intellectual property is a particular outcome produced by an individual. To increase this production we should think in terms of the parameters that lead to choice and success of an outcome. This differs from our discussion about the function of information. Information is fairly neutral with respect to motivation for it affects the choice of action (from a set of possible actions) to achieve an already determined outcome. We defined motivation in Section 1 as "a communication that produces a change in any of the relative values the receiver places on possible outcomes of his choice." Pecuniary (monetary) rewards motivate the individual in two ways. Money is instrumental in achieving many other desired outcomes. Thus the individual often places a high relative value on outcomes that produce money -- holding employment, winning the lottery, etc. Second, money becomes a proxy for success. Success is a recognized outcome in our society and the psychic rewards are high. This places an even higher relative value on outcomes that produce money. It is this pair of motivations that embraces the market system. It is also this pair of motivations that are considered narrow, sterile and unredeeming. Why so? This relates to other cultural values whose purpose is to make sure that human welfare flourishes. If all human welfare could be produced by the market, there would be no tension, but because of intangibilities, externalities, etc. they cannot; fortunately there is a non-market process that ensures these outcomes -- the production of poetry, kindness, charity, human growth, and science. Non-pecuniary rewards to motivate are thus tied with this set of other cultural values. These are values like "love of learning," "goodness to others," "courageousness," the "work ethic," etc. Through the process of inculcation, these values become part of an individual's values. The result is a high relative value placed on the generation of intellectual property that represents "contributions to society." Since these values, like the value of success in business, are recognized by society, the psychic rewards are high. In addition to pecuniary and non-pecuniary motivations there is one additional aspect that affects the production of intellectual property -- the efficiency of the choice of action to achieve the outcome and the -38- efficiency of achieving the outcome by that particular action (proficiency). The first efficiency is affected by information, and instruction and practice affects proficiency (cf. Section 2.3). Copyright is to pecuniary rewards what plagarism norms are to non-pecuniary rewards. Copyright gives possession and increases (monetary) appropriability. Copyright actually reduces non-pecuniary rewards by restricting circulation. What the author is concerned about in terms of non-pecuniary rewards is that he be cited and recognized -- that his ideas are recognized as his own. This is protected by the ethics regarding plagarism and the responsibility to acknowledge other's contributions. Copying, with acknowledge, is a form of non-pecuniary recognition. Thus copyright is a good tool to stimulate pecuniary motivation but not for non-pecuniary motivation. Incentives that have been useful for non-pecuniary motivation include forms of recognition such as: o Distinguished Titles at Universities o Distinguished Levels of Membership of Professional Associations o Honors o Prizes o Placed on Board of Editors of a Journal o Fellowships o Name Cited in Journals and Other Sources Funding In earlier periods of science, in Greece, and later in Europe, science was funded through patronage. The scientist would appeal to a wealthy citizen to support his work. Governments recognized problems of appropriability and high positive externalities (benefits) associated with science and adopted the role of funding science. Arrow (1962, 1977) noted that the economic relation of government support is very different than that in the usual markets. Payment is independent of product; it is governed by costs by the typical cost-plus fixed fee of contracts or costs alone in the case of grants. "This arrangement seems to fly in the face of principles for encouraging efficiency, and doubtless it does lead to abuses, but closer examination shows both mitigating factors..." (p. 157). Abuse is curbed since the award of future grants and contracts are contingent on prior performance. But more importantly, the system works because the incentive to produce is non-pecuniary. Forms of government support and incentives tend to be either forms of direct subsidy, or indirect subsidy through tax policy. Support and incentives include: o Grants -- for research -- for education o Contracts o Fellowships -- for research -- for education o Loans -- increased availability -39- -- lower interest -- some "forgiveable" o Provide Information Resources (e.g. MEDLARS for health research) o Tax -- option to "expense" research costs -- accelerated depreciation for capital -- 25% tax credit for qualifying projects -- 10% tax credit for capital investments -- deductions for charitable contributions to universities The implications of various funding and incentives from a standpoint of economic efficiency is complex. An excellent treatment of the relative efficiency of subsidy or tax measures is presented by McFetridge (1977, p. 5). Some have commented that in some circumstances government involvement produces more distortion than it reduces (cf. Eads in McFetridge, 1977, p. 15 on government support of aircraft research). 4.2 Rewards, Incentives, and Funding for Culture Many forms of intellectual property are considered an important part of a society's culture. These include music, painting, theatre, dance, poetry, and novels. The rewards and incentives for these are similiar to science, however, the sources of funding are different. Rewards and Incentives The artist is usually highly "internally" motivated. Some artists are like scientists, described above, who thrive on recognition. Others are producer-consumer-critic -- in almost complete detachment from others. Collingwood, the British philosopher, described art as a process by which the artist grows and affectively experiences the world through his own art. As such, art becomes an external product of an internal process. Others who can identify with the internal process are said to "appreciate" the art. The above discussion on cultural values is most germaine to understanding what causes the production of cultural forms of intellectual product. To use the word property is perhaps too antagonistic, since the purpose of most cultural products is for universal availability and use. Incentives for production of cultural products are integrally part of the culture. Mechanisms such as copyright have little positive effect. Attempts have been made to provide performing artists with performing rights (cf. 1981 Judiciary Hearings on Copyright, e.g. Dertouzos, 1981, p. 2). but this has met with no success. Funding Like science, cultural production has been classically funded by patronage. There was a close linking of patrons and artists. Haskell (1963, p.4) describes the process in Italy during the Baroque Age: The young painter would at first be found living quarters, in a monastery perhaps, by a cardinal who had once been papal legate in his native city. Through this benefactor he would meet some influential Bolognese prelate who would commission an altar painting for his titular church and decorations for his family palace -- in which the artist would now be installed. The first would bring some measure of public recognition, and the second would introduce him to -40- other potential patrons within the circle of the cardinal's friends. This was by far the more important step. For many years the newly arrived painter would work almost entirely for a limited group of clients, until at last a growing number of altar-pieces had firmly established his reputation with a wider public and he had sufficient income and prestige to set up on his own and accept commissions from a variety of sources. Once this had been achieved, he could view the death of his patron or a change in regime with some degree of equanimity. The role of government funding has been mixed in the U.S. During the depression, in 1936, the WPA arts project had more than 40,000 artists on its roles. Representative Sirovich of New York hailed the activity as bringing culture to the masses in a way that no government had before (Larson, 1983, p. 1). Unfortunately, art was increasingly viewed as linked with subversion and boondoggle as the country came out of the depression. For the next twenty years one bill after another failed to produce substantial government support for culture. There were also those on the side of art who were concerned about government intrusion. Even with the passage of a bill that established the National Endowment for the Arts, support was still low. The $2.5 million in program funds appropriated in 1966 was not even a third of what the Ford Foundation had spent on ballet alone the previous year and tiny compared with the $85 million symphony orchestra program announced by the Ford Foundation in October (Larson, 1983, p. 230). Thus, much of the support for culture comes from private foundations, charitable contributions of corporations, church contributions, and individual donations. For further documentation of these activities consult Miller (1970) on private endowment of education, Nielsen (1972) and Goulden (1971) on private foundation philanthropy, and Goldin (1969) on the support of public broadcasting. 4.3 Rewards, Incentives, and Funding for Products & Services Rewards and Incentives for Products & Services are largely pecuniary. Funding is mainly achieved by contracts from one firm to another or within the firm by revenues produced by sales. Rewards and Incentives The major debate in incentives to creators of intellectual property is the extent that ownership in the product (service) is important. Many creators of intellectual property are mainly salaried -- newspaper writers, editors, movie script writers, engineers, etc. In most businesses (as well as many universities) ownership of copyrights and patents reside with the institution. The argument is similar to the one regarding government ownership of patents (cf. 2.2.5). Business funded development should be the property of business. The argument is even stronger than government ownership, since the business has the resources to exploit ownership more than the individual (economies of scale, information about markets, etc.) the ownership should reside with the business. On the other side, individual ownership will increase the individual's production of valuable intellectual property. For example, employee stock ownership has been found to improve the productivity of firms. All other things being equal, individual ownership would be -41- desirable. However, this interferes with business control and the policy of many firms is to not provide ownership and to recognize important contributions through either cash bonuses or stock bonuses. The stock control this provides the individual would be too small to affect the company's operations. (For details on corporate-employee agreements and contracts regarding intellectual property cf. Gilburne, 1982). We should distinguish between for-profits and not-for-profits. Libraries, some of the abstracting and indexing services, the OCLC (Online Catalogue of the Library of Congress), are not-for-profits. With regard to incentives, these firms behave much more like scientists as described in 4.1. As Taylor (1984a) noted, these tend to be people dedicated to performing a socially valuable service. Almost by definition, for-profits operate with pecuniary incentives. Internally, a major task of management is to devise ways to distribute the incentives to maximize output. Some segments of the firm respond to pecuniary incentives more than others, for example, marketing and sales forces have been traditionally targeted for varying compensation keyed to sales. In attempting to accelerate the rate of production, incentives keyed to meeting deadlines have been sucessful. However, this is not universal, as some production of intellectual property depends on professionals with temperments unsuitable to such coarse persuasion. One of the most powerful tools for generating intellectual property, particularly invention, is equity. Members of a firm that hold sizable equity positions in the firm can be literally worth millions overnight in the right circumstances. Recall, under the risk discussion, that smaller firms tend to be less risk averse than larger firms. One major reason is the potential for enormous gain if the stock price is bid up quickly. If property rights cannot be obtained or protected, the firm must still be able to appropriate a return on its investment. Sometimes this is achieved by being first. If the new product or service is very attractive, and if it takes some time to imitate, the firm can appropriate its investment before others compete away the return. Also, sometimes it is possible to keep some hidden aspect of the product or service a trade secret. In such a case, the firm can appropriate a return without the need for intellectual property protection. If the return cannot be appropriated from the consumer there is a danger that an important intellectual product could go unproduced. If the social return is high and especially if there are positive externalities, it may be efficient for the government to create a market by guaranteeing certain levels of demand at a particular price. The government could also directly contract with the for-profit to produce the good on a cost-plus-fixed-fee basis. Government contracting with major aerospace firms for the production of planes and armaments falls into this category. Funding Holmes (1983) discusses intellectual property developed both internally to the firm and from outside resources. Funding flows are summarized as follows: o Intra-firm -- internally financed development o Research Consultants -- funding of external invention o Acquiring Externally Developed Intellectual Property -42- -- Acquisitions as part of a complete business or product line -- As separate intellectual property assets -- Exclusive versus non-exclusive acquisitions o Joint Ventures to Develop Intellectual Property o Pooling and Cross-Licensing Arrangements Involving Intellectual Property The last two forms of developing intellectual property are potentially socially efficient and socially inefficient. They are socially efficient because they solve problems of appropriability and can achieve economies of scale. They can be socially inefficient if they lead to collusion and other antitrust concerns. The Justice department has eyed both forms of joint development with suspicion and firms have been reluctant to be sued for antitrust infringement because they are liable for trebal damages. The current administration has sought to reduce these concerns and change the antitrust law to encourage more joint development (cf. Gellhorn, Antitrust Law and Economics, 1981). In the publishing field, Crew (1984) discusses the efficiency of different forms of contracts between author and publisher regarding payment. The five types of contracts are: o Standard Royalty -- publisher pays author a percentage based on sales, perhaps with a sliding scale o Profit Sharing -- author receives royalties based on publisher's profits on the book o Cost Sharing -- some of the costs of production are incurred by the author o Author's Fixed Fee -- fixed fee paid by the author to the publisher o Publisher's Fixed Fee - fixed fee paid by the publisher to the author In particular circumstances, contracts other than the standard royalty form of payment are superior in establishing a fair contract between author and publisher. -43- 5. Structural Role of Intellectual Property in Maintaining a Viable Economy There are two traditional functions of property. The first is to reduce the "tragedy of the commons." If a pasture is open to all herdsmen in a village, each herdsman will try to keep as many cattle as possible on the commons. When the land becomes overgrazed, the grass dies leaving everyone in disaster. In contrast, if the land is held as property, the owner will use the land wisely and only allow as many cattle to graze as can be supported by the land. Property rights, by making it possible to exclude others and their cattle, has increased the efficiency of production of the land. Pejovich (in Mackaay, 1982, p. 38) notes a second, dynamic function of property. From the individual's point of view the specification of property rights is associated with his search for more utility. For example, who would invest his time and effort in preparing land and sowing if at harvest time anyone could come and take the crop? For any investment to be worthwhile, the investor must rest assured that he can exclude others from the fruits and trade only at terms acceptable to him. There are internal motivations to ownership that has its owner press it into service or sell it to someone who will. Posner views the major function of law as to aid in attaining general economic efficiency. "The Common law method is to allocate responsibilities between people engaged in interacting activities in such a way as to maximize the joint value, or, what amounts to the same thing, minimize the joint cost of the activities" (Posner in Mackaay, 1982, p. 34). Thus, a major function of law is to assign property rights to the extent efficiency is increased. The economic function of property rights was recognized by A. T. Hadley in An Account of the Relations between Private Property and Public Welfare (in Cross, 1981, p. 37). Hadley traces the historical development of property rights and demonstrated that changes in economic structure, such as from hunting to agrarian societies, were accompanied in changes in the property rights that were held. Dutton (1984) documents the historical development of the patent system in Europe. He states that patent rights were typically justified by four arguments: the natural-law thesis, the reward-by-monopoly thesis, the monopoly-profit thesis, and the exchange-for-secrets thesis. The gradual change in emphasis from the natural right thesis to the economic efficiency thesis occurred over a period from 1790 to 1860. In 1791, French patent law enshrined the belief in natural property rights in invention -- that the use without some form of compensation amounted to theft since the property was personal and exclusive. By the patent reform campaign of the 1820s in England, J. R. McCulloch referred to both natural rights and the increase of the level of inventive activity that occurred. But even at that time few others spoke of natural rights. "When the Westminster Review brusquely announced that 'to talk of the natural rights of an inventor is to talk nonsense', it was condemning an idea already widely discredited" (Dutton, 1984, p. 18). In 1924, Commons (in Dugger, 1980, p. 47) said of "modern" property rights, "[t]hey protect the individual in his pursuit of rightful economic opportunity by enveloping him in property rights enforced by -44- state sovereignty." "Natural rights of man are a myth, even though the myth once helped free man from the divine right of kings ... such rights as we have proceed from national and other collective action, and are not natural (p. 47). In the Economic Council of Canada's study on intellectual and industrial property it is stated, "[t]he extent of private rights in property can have great political and sociological significance, notably at times when, as in seventeenth-century England and eighteenth-century France, the extent and distribution of property rights becomes one of the central issues in a major political and social revolution. Even at such junctures, however, the underlying struggle is more likely than not to involve strong elements of out-right economic interest as well, and at most times people appear to value the rights in property which the law grants them primarily for their ability to generate a stream of economic satisfaction of "income", using that word in its broadest sense" (Economic Council, 1971, p. 222). The report defends the notion of natural-rights in one way though, "they have played and continue to play a highly significant role in the evolution of human societies ... people who firmly believe that they possess not just an interest in some objective, but a basic 'natural right' in it, are likely to be more vigorous and indefatigable in the pursuit of that objective" (Economic Council, 1971, p. 225). There is still one further issue of political economy. This relates to the access or denial of access that granting property rights creates to all "potential players" in economic/political activities. For example, the National Broadcasting Corporation statement in hearings before the Judiciary commented on performing rights. First they said that performers can freely contract with producers to receive income. Secondly, that copyright legislation was not remedial labor legislation -- it was not to provide additional jobs for performers (U.S. Congress Judiciary Hearings, 1979, p. 664). But the question returns to the appropriability of the value-added by the performing artist. Is the provision of copyright for the author of a song sufficient to provide full appropriability by the artist? Can the producer fully appropriate the performing artist's contribution and pass that along to the artist? In the hearings, it was noted that a few of the performing artists made most of the income and that royalties would only increase their wealth and not that of the "struggling" performers. But we have progressive income taxation to handle our concerns about excess distributions of wealth. So the issue for performing artists, and any other contributor to intellectual property through "adding value" remains open. -45- 6. Summary This paper has shown that fourteen characteristics of information make it necessary to treat information different from other commodities. In particular, there are many ways in which information will be under-produced without legislation or government support. The assignment of rights to intellectual property is one mechanism to solve problems of appropriability, transaction costs, and encourage more information about information. However, the assignment of rights exacerbates problems when there are high social returns to the easy and free access to information. Further, problems of positive externalities, indivisibilities, and risk/uncertainty are not addressed by the rights approach. Alternatives to the assignment of rights include various forms of subsidies and tax incentives from government (and other sources) -- for example, the support of science through grants; research through tax credits. When the producer is motivated from mainly non-pecuniary (non-monetary) rewards, the abuse of these systems can be low. The development of an information product or service is part of an information life-cycle. Information sources become information resources. These are tapped in the creation of products and services, and the results disseminated. Along this cycle, value is added to the original information. The value-added data from the Department of Commerce was found to have limited application. More fruitful are industry level studies of value-added activities. Finally, little is still known about the political economy of the information sector. What are the employment effects? Are various segments of the industry seriously concentrating? To what extent can and should property rights be extended to those who add value to a basic piece of information? From BMSLIB@MITVMA.MIT.EDU Tue Nov 15 19:45:23 1994 Received: from mitvma.mit.edu (MITVMA.MIT.EDU [18.92.0.3]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id TAA00391 for ; Tue, 15 Nov 1994 19:45:22 -0800 Message-Id: <199411160345.TAA00391@virtconf.digex.net> Received: from MITVMA.MIT.EDU by mitvma.mit.edu (IBM VM SMTP V2R2) with BSMTP id 8460; Tue, 15 Nov 94 19:37:23 EST Received: from MITVMA (NJE origin BMSLIB@MITVMA) by MITVMA.MIT.EDU (LMail V1.2a/1.8a) with BSMTP id 9590; Tue, 15 Nov 1994 19:37:22 -0500 Date: Tue, 15 Nov 94 19:37:08 EST From: "W. Curtiss Priest" Subject: CITS Report -- Appendix A -- Bibliography To: NTIA discussion on Intellectual Property -46- Appendix A Selected References (contact CITS for a KWOC index) Abelson, Philip H. (1982). "Essential Federal Information Services," Science, vol. 216, May, p. 937. Abernathy, William J. and Utterback, James M. (1976). "Innovation and the Evolution of Technology in the Firm," Harvard University, Harvard Business School [Cambridge, MA], June. Ackoff, Russell L. and Emery, Fred E. (1972). Choice, Communication and Conflict (On Purposeful Systems). Seaside, CA: Intersystems Publications. Adler, Reid G. (1984). "Biotechnology as an Intellectual Property," Science, vol. 224, April 27, pp. 357-363. Aines, Andrew A. (1984). "The Grace Commission's View of Federal Research and Development," American Society for Information Science, February, pp. 8-10. Alderson, Wroe, Terpstra, Vern, and Shapiro, Stanley J. (1965). Patents and Progress: The Sources and Impact of Advancing Technology. Homewood, IL: Richard D. Irwin, Inc. Aldrich, Robert F., Belair, Robert R., Braunstein, Yale M., Peyton, David Y., Pogrow, Stanley, Roberston, Lawrence S., and Wildavsky, Aaron B. (1981). Issues in Information Policy. Washington, DC: U.S. Department of Commerce, National Telecommunications and Inf. Admin., February. Allen, Thomas J. (1977). Managing the Flow of Technology. Cambridge, MA: MIT Press. Arrow, Kenneth J. (1971). "Economic Welfare and the Allocation of Resources for Invention" in Economics of Information and Knowledge (edited by D. M. Lamberton). Baltimore: Penguin Books, Ltd. Arrow, Kenneth J. (1979). "The Economics of Information" in The Computer Age: A Twenty-Year View (Edited by Michael L. Dertouzos and Joel Moses). Cambridge, MA: MIT Press, pp. 306-317. Back, Frank E. (1968). Economics: An Introduction to Analysis and Policy. Englewood Cliffs: Prentice-Hall, Inc. Baran, Paul A. (1957). The Political Economy of Growth. New York: Monthly Review Press. Bator, Francis M. (1958). "The Anatomy of Market Failure," The Quarterly Journal of Economics, vol. 72, August, pp. 351-379. Baumgarten, Jon A. (1983). "Will Copyright Survive the New Technologies," American Society for Information Science Bulletin, August, pp. 20-22. Baumol, William J. and Ordover, Janusz A. (1975). On the Optimality of Public-Goods Pricing with Exclusion Devices. New York: New York University Department of Economics, Center for Applied Economics, November. Baumol, William J. and Ordover, J.A. (1976). "Private Financing of Information-Transfer - Theory and Execution," Proceedings of the American Society for Information Science, vol. 13, pp. 88-. Baumol, William J. et al. (1980). Manual of Pricing and Cost Determination for Organizations Engaged in Dissemination of Knowledge. New York: New York University. Bell, Daniel (1979). "The Social Framework of the Information Society" in The Computer Age: A Twenty-Year View (Edited by Michael L. Dertouzos and Joel Moses). Cambridge, MA: MIT Press, pp. 163-211. Ben-Ner, Avner (1986). "Nonprofit Organizations: Why Do They Exist in Market Economies" in The Economics of Nonprofit Institutions (Edited by Susan Rose-Ackerman). New York: Oxford University Press, pp. 94-113. Bendaniel, D.J. (1974). A Study of Severed Venture Mechanism for Technological Innovation and Its Broader Application to American Industry. Schenectady, NY: General Electric Co., The Technical Ventures Operation, December. Bentley, J. Marvin and Oberhofer, Tom (1981). Property Rights and Economic Development. Review of Social Economy, pp. 51-65. Besen, Stanley M., Manning, Willard G., Jr., and Mitchell, Bridger M. (1978). "Copyright Liability for Cable Television: Compulsory Licensing and the Coase Theorem," The Journal of Law & Economics, vol. 21, no. 1, April, pp. 67-95. Besen, Stanley M. (1984). The Effect of Reproduction Technology on Intellectual Property. Cambridge, MA: MIT Research Program on Communications Policy, March 22. Bikson, Tora K., Quint, Barbara E., and Johnson, Leland L. (1984). Scientific and Technical Information Transfer: Issues and Options. Santa Monica: Rand Corporation, March. Bobbitt, Philip C. (1974). "Cable Television and Copyright Royalties," The Yale Law Journal, vol. 83, no. 3, January, pp. 554-578. Boulding, Kenneth E. (1971). "The Economics of Knowledge and the Knowledge of Economics" in Economics of Information and Knowledge (edited by D. M. Lamberton). Baltimore: Penguin Books, Ltd. Bowman, Ward S., Jr. (1973). Patent and Antitrust Law: A Legal and Economic Appraisal. Chicago: The University of Chicago Press. Branscomb, Lewis M. (1983). "Improving R&D Productivity: The Federal Role," Science, vol. 222, October, pp. 133-135. Braunstein, Yale M. (1975). An Economic Rationale for Page and Submission Charges by Academic Journals. New York: New York University Department of Economics, Center for Applied Economics, August. Braunstein, Yale M. (1976). "Information as a Commodity," AAAS Meetings [Boston], February. Braunstein, Yale M. (1976). 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Summary: 270 Citations, 1152 Lines From ianp@peg.apc.org Tue Nov 15 21:29:39 1994 Received: from peg.apc.org (peg.apc.org [192.131.13.1]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id VAA13384 for ; Tue, 15 Nov 1994 21:29:36 -0800 From: ianp@peg.apc.org Received: (from ianp@localhost) by peg.apc.org (8.6.9/Revision: 1.3 ) id NAA29030 for intellec@virtconf.ntia.doc.gov; Wed, 16 Nov 1994 13:21:30 +1000 Date: Wed, 16 Nov 1994 13:21:30 +1000 Message-Id: <199411160321.NAA29030@peg.apc.org> To: intellec@virtconf.ntia.doc.gov Subject: Re: [INTELLEC:19] A Writer's Viewpoint unsubscribe Ian Peter From don@dcez.com Tue Nov 15 22:25:53 1994 Received: from relay3.UU.NET (relay3.UU.NET [192.48.96.8]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id WAA17861 for ; Tue, 15 Nov 1994 22:25:52 -0800 Received: from dcez.dcez.com by relay3.UU.NET with SMTP id QQxqfd17519; Tue, 15 Nov 1994 22:17:54 -0500 Date: Tue, 15 Nov 1994 22:13:37 -500 (EST) From: Don Evans Subject: Thought Experiment... To: intellec@virtconf.ntia.doc.gov In-Reply-To: <941114221111_7715087@aol.com> Message-ID: MIME-Version: 1.0 Content-Type: TEXT/PLAIN; charset=US-ASCII Sender: don@dcez.com For a moment, lets imagine that you just spent the last 10 years writing the great American Novel. You have sent it off to your publisher, and it has been accepted. You sign a contract, and receive 10% in royalties. Not a bad percentage. It seems to me that you have just become a minority partner in your lifes work. Is this perhaps a clue that current Copyright Law has been written to protect the publishers and not the artists? Seems like a no-brainer to me! In my oppinion, copyright laws need to be changed to protect the writers and artists that create the work. We certainly do not need just another way to litigate. But the current method is to ask the attorneys to figure it out, and put even more laws into place. Is there a constructive way to protect property rights, so that everyone is happy? Donald F. Evans %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% DC Easy-Link % You can not expect the water downstream % Washington, DC % to be clear, when the water upstream % don@dcez.com % is muddy.... % % Chinese Proverb % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% From don@dcez.com Tue Nov 15 22:31:32 1994 Received: from relay3.UU.NET (relay3.UU.NET [192.48.96.8]) by virtconf.digex.net (8.6.9/8.6.9) with ESMTP id WAA18292 for ; Tue, 15 Nov 1994 22:31:31 -0800 Received: from dcez.dcez.com by relay3.UU.NET with SMTP id QQxqfd18239; Tue, 15 Nov 1994 22:23:34 -0500 Date: Tue, 15 Nov 1994 22:19:22 -500 (EST) From: Don Evans Subject: Move Only Files? To: intellec@virtconf.ntia.doc.gov Message-ID: MIME-Version: 1.0 Content-Type: TEXT/PLAIN; charset=US-ASCII Sender: don@dcez.com Instead of looking for a legal solution to property rights, might a better way of approach be in a technical solution? If we had a file type that was move only, as apposed to read only, a publisher could create 1000 copies of the file and then "sell" them by moving them. The new owner could then loan them to friends or sell them further, simply by moving them. Under this system, copying would be much more difficult. As it is hard to copy a 500 page paperback, it would be hard to copy a digital file. Could it work? Donald F. Evans %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% DC Easy-Link % You can not expect the water downstream % Washington, DC % to be clear, when the water upstream % don@dcez.com % is muddy.... % % Chinese Proverb % %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% From sconnell@silver.ucs.indiana.edu Tue Nov 15 23:25:55 1994 Received: from silver.ucs.indiana.edu (sconnell@silver.ucs.indiana.edu [129.79.10.6]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id XAA20054 for ; Tue, 15 Nov 1994 23:25:53 -0800 Message-Id: <199411160725.XAA20054@virtconf.digex.net> Received: by silver.ucs.indiana.edu (5.65c+/10jsm) id AA25437; Tue, 15 Nov 1994 23:17:54 -0500 From: Sean Subject: Re: [INTELLEC:29] Thought Experiment... To: intellec@virtconf.ntia.doc.gov Date: Tue, 15 Nov 1994 23:17:53 -0500 (EST) Cc: sconnell@silver.ucs.indiana.edu (Sean) In-Reply-To: from "Don Evans" at Nov 15, 94 10:26:41 pm Mime-Version: 1.0 Content-Type: text/plain; charset=US-ASCII Content-Transfer-Encoding: 7bit Content-Length: 2956 Donald Evans writes: > > For a moment, lets imagine that you just spent the last 10 years writing > the great American Novel. You have sent it off to your publisher, and it > has been accepted. You sign a contract, and receive 10% in royalties. > Not a bad percentage. > > It seems to me that you have just become a minority partner in your lifes > work. Is this perhaps a clue that current Copyright Law has been written > to protect the publishers and not the artists? Seems like a no-brainer > to me! > > In my oppinion, copyright laws need to be changed to protect the writers > and artists that create the work. We certainly do not need just another > way to litigate. But the current method is to ask the attorneys to > figure it out, and put even more laws into place. > > Is there a constructive way to protect property rights, so that everyone > is happy? There is no way to make everyone happy, but there sure as hell is a better way to do things. Copyright law is not set up to protect the publishers over the authors/creators, but delivery systems most certainly are. The cost of book publication is large and the risk is real. As an struggling writer will point out, publishers are loathe to take on authors that are not already proven sellers: the capital investment is not small and the losses can be significant. However, the NII offers a potential solution to said problem and combats problems in the field of intellectual property at the same time. Publishing on the net is outrageously cheap. The cost of storage of War and Peace in electronic form is far cheaper than paper *and* there is virtually no cost for producing more copies of said book. *If* the NII expands, but carries a similar form to the internet (i.e., not some telecom's wet dream of new ground for one-way, price intensive communication), then authors could easily publish themselves to the net. Bell Labs, among others, are working out systems of accounting and payment for the consumption of electronic documents right now. None are perfect, but a final straw will make the creators investment pay off. Now that the middle-man is cut from the deal, the author can publish his/her work charging less than $.50 a copy. Distribution is increased by lower price barriers and there is less need to copy without compensation since the price is so low. Copying would be priced out and authors (not publishers) would get their due. No more out of print books. The supply is almost perfect. Publishers *hate* this, but real people are happy :) -- ---------------------------------------------------------------~ | Sean Connelly "Cyberpunk is a revolution | | sconnell@silver.ucs.indiana.edu that has already become | | sconnell@acoma.ucs.indiana.edu the establishment." | | sleeze@well.sf.ca.us --Someone with a clue | ---------------------------------------------------------------~~ From DMASSON@ucs.indiana.edu Tue Nov 15 23:31:17 1994 Received: from PO3.indiana.edu (PO3.Indiana.Edu [129.79.10.63]) by virtconf.digex.net (8.6.9/8.6.9) with SMTP id XAA20299 for ; Tue, 15 Nov 1994 23:31:16 -0800 Message-Id: <199411160731.XAA20299@virtconf.digex.net> Received: from LOCAL:.prism.DECnet () by PO3.Indiana.EDU; id AA25455 (5.67bjsm/2.5.1jsm); Tue, 15 Nov 1994 23:13:10 -0500 Date: Tue, 15 Nov 94 23:24:19 EWT From: DOUG MASSON X-To: PO3::"intellec@virtconf.ntia.doc.gov" Subject: RE: [INTELLEC:19] A Writer's Viewpoint To: intellec@virtconf.ntia.doc.gov In response to Cap'n Fatty's desire not to have other folks profit from his words; I think at the very least that it would be fairly easy and uncontroversial to forbid others from profitting fiscally from the writings of others. Barring contracting and other voluntary grants of rights by the author. (Furthermore, upon second glance I feel the stirrings of regrets about being so hasty to use words such as easy and uncontroversial when talking about formulation of law and policy. For example, it could become problematic to draw lines between when somebody is profitting from their views of someone elses words and when they are actually profitting from the original author's words while the addition of anything original is just a happy accident). In any case, it's Cap'n Fatty's second concern which is the real killer. Often times, an author has absolutely no objection to personal uses of his/her work. It is quite another thing when losing control of one copy of a work creates the possibility of almost effortless recreation of endless reproduction. The answer seems to lie in finding a way to prevent this all or nothing development. On the other hand, it seems quite disturbing to deliberately create a scarcity of a product as a matter of public policy (of course that is perhaps at the heart of intellectual property law). Looking for answers and responses as always, Doug Masson Indiana University School of Law dmasson@indiana.edu **As winter approaches remember: there's no wind chill at absolute zero**