Fair Use and Copyright Protection: A Price Theory Explanation

Abstract:     
Copyright scholars suggest that computer technology has reduced transaction costs associated with copyright transfer, allegedly eliminating the need for the fair use doctrines that were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. According to this emerging view, in an ideal world with no contracting costs, third party use of copyrighted material could realistically only take place with the express consent of the copyright holder. This would give the author absolute power to dispose of his work, including the right to veto uses, without the possibility of a fair use override of any sort.

This paper shows the limits of such transaction-cost based arguments. If transaction costs provide the dominant economic justification of fair use doctrines, an exogenous reduction of such transaction costs would limit the scope and application of the defense of fair use. Nevertheless, in this paper we suggest that, when viewed in light of the anticommons theory, fair use doctrines retain a valid efficiency justification even in a zero transaction cost environment. Fair use defenses are justifiable, and in fact instrumental, in minimizing the welfare losses prompted by the strategic behavior of the copyright holders. Even if copyright licenses can be transferred at no cost (for instance, in a click and pay frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses.

In this context we identify a number of critical variables that should guide and constrain the application of fair use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate.

Accepted Paper Series