Monday, January 21, 2002

Law and Economics It's frightening how poorly lawyers (and legislators) comprehend the economics behind the laws they pass. This article on "lockware" (which I call crippleware) talks about how DRM allows companies to increase profit through price discrimination. Price discrimination may or may not make markets more efficient (depending on how efficient they are currently) but it will move surplus from consumers to producers. Perfect price discrimination shifts ALL consumer surplus to producers. The US (and many other countries) have taken a pro-consumer stance on this issue, and mechanism that shifts surplus in this way is contrary to that position. Now, how efficient are markets for information goods (like music)? Terrible. The extraordinary length of copyright essentially gives the recording cartel unlimited ability to extract monopoly rents through artificially restricting quantity. The cartel also sets prices high through collusion. Because of this, I don't have many sellers competing to offer me "The White Album" even though half the group are dead. DRM might make this market more efficient, but it will also shift what meager surplus consumers have to producers. But this won't help artists, because in the music biz, distributors take most of the surplus (their quantity restriction acts as a "tax") which also shrinks the market for both consumers and producers (musicians). Distribution of live music also has a huge tax, Ticketmaster, whose "inconvenience charge" can add 50% to the cost of a ticket. Given there horrible inefficiencies, ruinous taxes, and shrinking value (surplus minus price) for consumers, it's not surprising folks aren't buying much music anymore.


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