Copyright and the Supposed Efficiency of First-Degree Price Discrimination

Abstract

The article focuses on the economic conclusion that first-degree price discrimination is Pareto optimal and hence socially desirable. This economic conclusion tends to support congressional or judicial modifications to copyright law that would enhance the ability of copyright owners to engage in price discrimination, including, for example, limitations on copyright's first sale doctrine. Such limitations on the first sale doctrine may arise either through direct congressional action, such as the Computer Software Rental Amendments Act of 1990, through congressional inaction, such as the refusal to extend expressly the first sale doctrine to the interactive digital environment, or through judicial acceptance of copyright owners' attempts to characterize certain transactions as licenses, rather than sales. The article demonstrates that the supposed desirability of first-degree price discrimination relies on certain assumptions inherent in partial equilibrium analysis that are unlikely to hold in the real world. Through the use of a second-best, general equilibrium model, the article demonstrates that a switch to first-degree price discrimination in a particular market can reduce social welfare and derives principles that suggest when such a switch is likely to reduce social welfare. Applying these principles to the types of price discrimination schemes commonly employed in the distribution of copyrighted works, the article concludes that most of these schemes seem likely to reduce social welfare.

Keywords: copyright, first sale, license, price discrimination

JEL Classification: O34, l11