Thursday, January 09, 2003

Lexmark and the DMCA

Lexmark has invoked the DMCA to try and stop other companies selling (cheap) toner cartridges that work with Lexmark printers and undercut Lexmark's own lucrative toner cartridge business. This is a wacky and novel use of this wacky legislation that will probably be laughed out of court, illustrating 1) the unintended consequences of centralized decision making, 2) the value of common law judgements in adding intelligence to legislative fiat, and 3) the ridiculousness of the DMCA.

The economics are kinda interesting though. I'm sure many of you have heard the phrase "give away razors and sell razor blades" to describe businesses where one "half" of the product is given away and full whack is charged for the other "half". It makes sense to do this when you can use different consumption levels of the two halfs to figure out which customers value your product most, and charge them a higher price. The printer business works like this, and toner usage is a good way to price discriminate between heavy users and light users, and charge heavy users more because they're willing to pay more. If you take away the ability to price discriminate, toner prices will fall and printer prices will rise. This is an unalloyed good for heavy users, but makes life worse for light users. The net effect will be to transfer economic surplus from Lexmark to consumers, even through a few of the most marginal consumers may get squeezed out of the market.


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