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seen. Similarly, the balancing of several interest groups may be noted in the establishment of the requirements for memberships on the Commission (Section 202 (a)):

"The Commission shall be composed of thirteen voting members,
appointed as follows:

(1) Four members, to be appointed by the President, selected

from authors and other copyright owners;
(2) Four members, to be appointed by the President, selected

from users of copyright works;
Four nongovernmental members to be appointed by the
President, selected from the public generally, with at
least one member selected from among experts in consumer

protection affairs;
(4) The Librarian of Congress."

CONTU must present its final report to Congress by July, 1978, if the extension of time it has requested is enacted by Congress. Otherwise its final report is due in December, 1977.

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This chapter has examined policymaking about copyright through a review of some important litigations and some aspects of enacted law and regulation which have concerned the impact of technological change. The review appears to show that some significant litigations in this field have concerned the boundaries of property rights left ambiguous because of the occurrence of technological change unforseen by Congress in previous revisions of law or the occurrence of specific situations not definable in legislation.

In general, the Federal Courts have approached the question of ambiguities due to technological change from two distinct points of view. The first viewpoint is that, if the general concept of current law can be easily extended to new situations without stretching the law's meaning too far, it should be done. The second viewpoint is that stretching the law's meaning (or specifically defining the ambiguous) beyond a certain point would be to take on a responsibility better left to Congress, particularly if a judicial decision would be precedent setting, involving relations between interest groups, not just the particular litigants.

The first viewpoint may be seen in the final decisions of the cases described involving broadcasting, motion pictures, and sound recordings except for White-Smith. The second viewpoint was taken in the prevailing decisions in White-Smith, the cable TV cases Fortnightly and Teleprompter, and in Williams & Wilkins.

Significantly, during all the cases above involving the second viewpoint, Congress was in the process of actively revising the copyright statute. Such statutory revision often involves representation of many opposing

interest groups and the ultimate statutory language may involve interest group compromise setting forth obligations and responsibilities and establishing new institutions in a manner completely impossible to accomplish through a judicial decision. In fact, in the 1976 General Revision, the new statutory language and associated legislative documentations involving cable TV and educational and library copying are examples of such a complex balancing of interests.

Furthermore, in the more recent situation described above, a new balancing of interests may be seen which is not apparent in the earlier cases. If persons concerned with copyrighted works may be considered either producers or users, the earlier cases described are all essentially conflicts between original producers and secondary producers. (The enactment of the compulsory license for phonorecord manufacturing in 1909 could be viewed as expression of user concern, however).

In the Fortnightly decision (1968), the view was taken that the cable TV company was the viewer's (i.e. user's) agent. In photocopying, the conflict between authors and publishers on one side and librarians and educators on the other is essentially a user-producer conflict (although some educators are also producers). This increasing concern with the user in the copyright field has been carried forward in the establishment of CONTU where both representatives of users and producers and "at least one member selected from among experts in consumer protection affairs" are included in the membership of the Commission by statutory requirement.

ms clear from the above that, in this field, administrative regulation plays a relatively small role in contrast with some other Federal domestic responsibilities. Nevertheless, the Copyright Office has played a role in technological change by agreeing to accept for copyright registration, works in micromedia and videotape by its interpretation of existing law rather than through explicit congressional action or judicial orders. However, see Section 5.5.1 and 5.5.2 for an important policy-impacting function of the Register of Copyrights.

4. TOWARDS AN EFFICIENT MARKETPLACE FOR COPYRIGHTED WORKS

The previous chapter considered the legal framework for copyright. This chapter is concerned with economic questions relevant to the market for copyrighted works. Clearly, an effective legal structure and an efficient marketplace for copyrighted works are both necessary and mutually supportive.

In this chapter, the fundamental question of transaction costs is considered. The question of exclusion and enforcement is discussed in light of the ease of modern technology to permit easily available and low-cost duplication of works. Mechanisms for the minimization of transaction costs are described including types of efficient pricing schedules. In addition, fair use is considered from an economic viewpoint. Lastly, the question of monopoly is discussed and government remedies are described.

4.1 THE PROBLEM OF TRANSACTION COSTS

The view of Professor Kenneth Arrow is that transaction costs are more fundamental than market failure as a basic problem pertinent to the choice of whether a particular good should be provided through the market mechanism or through some form of collective action. He states that:

"...transaction costs....are attached to any market and indeed
to any mode of resource allocation. Market failure is the par-
ticular case where transaction costs are so high that the exis-
tence of a market is no longer worthwhile."21

Two major sources of transaction costs, according to Arrow, are:

"(1) exclusion costs / and/ ) costs of communication and
information, including both the supplying and the learning of
the terms on which transactions are carried out."22

Steiner sees transaction costs specifically involved when there is an

"inability of the market to translate potential willingness to
pay into revenues / and 7 where the private market is techni-
cally able to collect revenues, but at a high cost."23

Hurt and Schuchman are, to a large extent, considering transaction costs when they ask:

"If there is a benefit from the copyright system, is it offset,
at least in part, by various administrative costs and frictions
inherent in the system?"24

Specifically, transaction costs play a large role in copyright problems, and overcoming high transaction costs plays a large role in the solution of copyright problems.

4.2 THE QUESTION OF ENFORCEMENT

There are situations involving copyright that concern the fundamental issue of what Arrow referred to as "exclusion." At the present time, some of these situations are occurring because of the availability of the technologies of high-speed photocopying and of copying digitized information by computer.

Persons with easy access to machines employing these technologies can become low-cost publishers, legalities aside. Thus, these persons are not easily "excluded" from ownership of copies upon their failure to pay a royalty. The question of enforcement then arises, and the cost of enforcement must become an issue. Concern with efficient allocation of resources as well as the deleterious effects of easy evasion of law must prompt the question of whether there is any value in issuing copyrights that cannot be enforced with any reasonable allocation of effort.

Hurt and Schuchman have theorized about strategies an original book publisher might employ in the absence of any copyright at all.25 According to one scenario, the original publisher must produce enough books in his first edition to saturate the market. If a copying publisher enters the market (probably with a similar number of copies), the first publisher must be prepared to compete by lowering his prices. Many unsold books can be expected in this situation. A second strategy is for the first publisher to be prepared with an extremely low-cost edition as a retaliatory measure.

Similarly, in a 1970 article in the Harvard Law Review opposing copyright protection for computer programs at that time, Professor Stephen Breyer proposed a strategy that could be employed by program developers in the absence of such protection. 26

"One may wonder, for example, whether, without protection,
smaller hardware or software firms would not find it easier to
use parts of IBM programs in their efforts to compete with
IBM,"

Professor Breyer wrote. 27

Although Professor Breyer did not extend his scenario, it is possible to theorize about protective behaviors available to the originators of computer programs to protect themselves in such a hypothetical situation. One such strategy could be for an originator to produce programs for sale in object code only, with minimum documentation, thereby making it very difficult for a potential copier to know exactly what he had in hand. In fact a proposal for "sealed-in software" that might be protectable by either trade secret or copyright has been made recently by Calvin Mooers. 28

4.2.1 Transaction Costs Even If No Copyright A conclusion that can be drawn from both these examples is that there

are transaction costs regardless of whether the imperfect protection of law exists or does not exist. To repeat from Arrow, "transaction costs ....are attached to any market and indeed to any mode of resource allocation." In the Hurt and Schuchman example, among the transaction costs that might be expected are the extra books left over, the poor quality of merchandise required to prevent financial losses, the extra secrecy required to prevent future plans and the first copies from being prematurely revealed, and the extra efforts that would be needed in merchandizing strategems to thwart a competitor's sales outlet possibilities. In the Breyer example, assuming the protective strategy of object code dissemination only with minimal documentation, among the transaction costs to be expected are the reduction in information dissemination about program content to everyone including disinterested observers who might benefit in another context, the reduction in ability to recognize mistakes in programs and to correct them, and the lowering of incentives to produce new programs that are genuinely novel or original.

Thus, in both examples which assume no Government copyright protection, we have postulated that cut-throat competition, losses in information flow and increases in secrecy would result. In a society in which the market protection of copyright is available, Government regulation has its cost and some infringement from imperfect exclusion can be expected to result, but we suggest that in addition, a more open society with greater opportunities for creativity exists. Thus, the choice is not just between the size of transaction costs inherent in the alternatives, but in the kinds of costs and their effects which a society is willing to tolerate.

4.2.2 The Optimal Level of Enforcement and Its Consequences

Hopefully, a society will select that set of resource allocation mechanisms that maximizes its satisfactions. However, a difficult state of affairs for a society to accept is that it cannot achieve the complete maximization of its satisfactions with any set of mechanisms because of the limited resources it can apply. A reasonable strategy is to achieve an optimum level of satisfaction from resources available, permitting a certain amount of dissatisfaction to remain. Professor Edwin Mansfield has demonstrated that there is an optimum level of crime whose cost ought to be tolerated, based on the finite resources of enforcement which a society is willing to allocate.29 This concept can be easily adapted to copyright infringement.

As shown in Fig. 1, the probability of apprehension and conviction of infringers increases with increasing expenditure of resources devoted to enforcement; but the costs to society of infringements increase as fewer resources are devoted to enforcement and the probability of conviction goes down. A minimum total cost results from the sum of infringement and enforcement costs, at a particular probability less than 1.0 of apprehension and conviction. This leaves some infringers unapprehended or unconvicted.

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