Gray Markets in Cyberspace
91 Pages Posted: 12 Mar 1999
In this paper I respond to Professor Julie Cohen's argument that Cyberspace is lochnerized through the use of neo-classical economics to support a regime of strong property and contract rights for web-based transactions. I develop an alternative model that also has neo-classical foundations but has different implications from the prescription of Professor Cohen's cyberlochnerians. The legal and economic analysis I develop puts flesh to Professor Carol Rose's category of "limited common property" and draws on the theory of gray markets and club goods. I propose that a gray market model is an appropriate one by which to describe and analyze Cyberspace transactions. In the paper, I develop the gray market legal model and apply it to the phenomenon of hypertext linking and framing. The paper concludes with my laying the foundation for the legal model in the economic theory of club goods, especially the problem of club good pricing. I show how websites can be understood as club goods, and I discuss the resulting allocation and distribution issues. Appropriate allocation mechanisms will depend upon the nature and heterogeneity of uses by users of the site. If users are heterogeneous in the intensity of use, website owners are better off if they allow some unauthorized uses of the site as opposed to expanding resources on technological and legal means of exclusion. As a result, gray markets in information arise and are socially desirable. The economic model I develop supports my legal prescription: relatively weak contract and property rights for web-based transactions and greater allowance for fair use under intellectual property law.
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