Decoding and recoding natural monopoly, deregulation, and intellectual property

University of Illinois Law Review

Volumn 2008, Issue 4, 2008, Pages 1125-1184

  Ghosh, Shubha ^a  

^a UNIVERSITY OF WISCONSIN LAW SCHOOL   (United States)

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EID: 52149124104     PISSN: 02769948     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (274)

1. Berkey v. Third Ave. Ry. Co., 155 N.E. 58,61 (N.Y. 1926).
2. For the current contours of the debate, see John Duffy, Intellectual Property Isolationism and the Average Cost Thesis, 83 TEX. L. REV. 1077 (2005); Mark Lemley, Property, Intellectual Property, and Free Riding, 83 TEX. L. REV. 1031 (2005). For a good overview of the debate and a resolution, see Mi-chael Carrier, Cabining Intellectual Property Through a Property Paradigm, 54 DUKE L.J. 1 (2004). For a discussion of the conflict between ontology and teleology in the case of trademark law, see Graeme Dinwoodie, The Death of Ontology: A Teleological Approach to Trademark Law, 84 IOWA L. REV. 611 (1999). The metaphor of intellectual property as property has received close scrutiny, particularly from those who argue that intellectual property is a form of regulation. See ANDREW GOWERS, GOWERS REVIEW OF INTELLECTUAL PROPERTY 3-4 (2006) (recommendations for reforming UK intellectual property law to create balanced and flexible rights); see also Thomas F. Cotter, The Pro-Competitive Interest in Intellectual Property Law, 48 WM. & MARY L. REV. 483, 486 (2006) (placing intellectual property law in its relationship to antitrust and competition policy); Lemley, supra, at 1073-74 (presenting alternate paradigms); Thomas B. Nachbar, Intellectual Property and Constitutional Norms, 104 COLUM. L. REV. 272, 351 (2004) (intellectual property as preferential trade regulation); Thomas B. Nachbar, Monopoly, Mercantilism, and the Politics of Regulation, 91 VA. L. REV. 1313, 1342-43 (2005) (discussing patents in the historical background of economic regulation). For an analysis of the "intellectual property concept" that parallels the discussion of natural monopoly theory in this Article, see Harry First, Microsoft and the Evolution of the Intellectual Property Concept, 2006 WIS. L. REV. 1369,1431 ("[B]oth concepts [of intellectual property and public utility] have been used to advance notions of natural monopoly and freedom from the rules of competition. Proponents' overcoming, and downright bad results, led eventually to approaches that limited - but did not eliminate - the use of the public utility concept. A similar fate should await the intellectual property concept.").
3. See Shubha Ghosh, Patents and the Regulatory State: Rethinking the Patent Bargain Metaphor After Eldred, 19 BERKELEY TECH. L.J. 1315 (2004).
4. S.T. COLERIDGE, 1 BIOGRAPHIA LITERARIA 63 (J. Shawcross ed., Clarendon Press 1907) (1817) (discussion located in footnote); see also Kenneth Burke, Theology and Logology, 11 KENYON REV. 151, 156 (1979) (quoting BIOGRAPHIA LITERARIA). The Coleridge quote is also discussed by Donald McCloskey in his analysis of figures of speech in economics. See DONALD N. MCCLOSKEY, THE RHETORIC OF ECONOMICS 69 (1985).
5. See GEORGE LAKOFF & MARK JOHNSON, METAPHORS WE LIVE BY 244-45 (2003).
6. Id. at 265.
7. For an overview of the doctrine, see RICHARD S. GRUNER ET AL., INTELLECTUAL PROPERTY IN BUSINESS ORGANIZATIONS: CASES AND MATERIALS 1027-69 (2006) (providing an overview of the major federal and state intellectual property regimes).
8. The conception of the activities regulated by intellectual property law is more fully developed in Shubha Ghosh, The Fable of the Commons: Exclusivity and the Construction of Intellectual Property Markets, 40 U.C. DAVIS L. REV. 855 (2007); Shubha Ghosh, How to Build a Commons: Is Intellectual Property Constriaive, Facilitating, or Irrelevant?, in UNDERSTANDING KNOWLEDGE AS A COMMONS 209, 209-46 (Charlotte Hess & Elinor Ostrom eds., 2007). For an economic analysis that tries to fit both personal and property rights under the broader umbrella of freedom and starts from the assumption of activities rather than rights, see Thomas Gale Moore, An Economic Analysis of the Concept of Freedom, 77 J. POL. ECON. 532 (1969).
9. See RICHARD A. POSNER, NATURAL MONOPOLY AND ITS REGULATION (1999). For an example of natural monopoly in the case law, see Munn v. Illinois, 94 U.S. 113 (1876). Even though the opinion does not use the phrase "natural monopoly," its discussion of property and regulation parallels the analysis of this Article with its focus on intellectual property as a regulatory system. For the earliest usage of the phrase "natural monopoly," see Richard T. Ely, Social Studies: The Future of the Corporation, HARPER'S NEW MONTHLY MAG., July 1887, at 258, 261. For an early discussion of monopoly privileges, which has echoes of contemporary analyses of natural monopolies, see T.H. FARRER, THE STATE IN ITS RELATION TO TRADE 78-79 (1883).
10. See, e.g., Rgueroa v. United States, 66 Fed. Cl. 139,151-52 (2005) (discussing patent as a system of reward).
11. See Eldred v. Ashcroft, 537 U.S. 186, 203 (2003) (justifying retroactive intellectual property protection as an incentive to disseminate works).
12. See, e.g., Bleistein v. Donaldson Lithographing Co., 188 U.S. 239, 251 (1903) (granting protection to even "low works" of creation, such as an advertising poster).
13. One illustration of the relationship between average costs and incentives is seen in the debate over the free riding rationale in intellectual property. See Duffy, supra note 2, at 1093 (explicitly adopting an approach to intellectual property based on natural monopoly theory); Lemley, supra note 2, at 1058 (suggesting the intellectual property protection should be set "to the extent necessary to enable [creators and inventors] to cover their average fixed costs"). For a discussion of the crosscurrents of intellectual property and natural monopoly, see Douglas G. Baird, The Story of INS v. AP: Property, Natural Monopoly, and the Uneasy Legacy of a Concocted Controversy (Unfair Competition), in INTELLECTUAL PROPERTY STORIES 9, 9-35 (Jane C. Ginsburg & Rochelle Cooper Dreyfuss eds., 2006). Many of the ideas in Professor Duffy's paper build on John F. Duffy, The Marginal Cost Controversy in Intellectual Property, 71 U. CHI. L. REV. 37 (2004).
14. The relationship between innovation and market structure is a rich subject for research. For an overview of these arguments, see STAFF OF S. SUBCOMM. ON PATENTS, TRADEMARKS, AND COPYRIGHTS OF THE COMM. ON THE JUDICIARY, 85TH CONG., AN ECONOMIC REVIEW OF THE PATENT SYSTEM (Comm. Print 1958) (surveying existing literature on innovation and questioning need for patent system); Wesley M. Cohen & Richard C. Levin, Empirical Studies of Innovation and Market Structure, in 2 HANDBOOK OF INDUSTRIAL ORGANIZATION 1059 (Richard Schmalensee & Robert D. Willig eds., 1989); Partha Dasgupta & Joseph Stiglitz, Industrial Structure and the Nature of Innovative Activity, 90 ECON. J. 266 (1980); Naomi R. Lamoreaux & Kenneth L. Sokoloff, Long-Term Change in the Organization of Inventive Activity, 93 PROC. NAT'L ACAD. SCI. U.S. 12,686 (1996); Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 MGMT. SCI. 173 (1986); Arnold Plant, The Economic Aspects of Copyright in Books, 1 ECONOMICA (n.s.) 167 (1934) (book publishing).
15. See supra note 2.
16. See, e.g., WILLIAM LANDES & RICHARD POSNER, THE ECONOMICS OF INTELLECTUAL PROPERTY (2003); Richard A. Epstein, Cybertrespass, 70 U. CHI. L. REV. 73 (2003).
17. See, e.g., Dan L. Burk & Mark A. Lemley, Is Patent Law Technology-Specific?, 17 BERKELEY TECH. L.J. 1155 (2002).
18. For a discussion of these expansions, see Pamela Samuelson, Enriching Discourse on Public Domains, 55 DUKE L.J. 783 (2006); see also Kevin Outterson, The Vanishing Public Domain: Antibiotic Resistance, Pharmaceutical Innovation and Intellectual Property Law, 67 U. PITT. L. REV. 67 (2005).
19. See FEDERAL TRADE COMMISSION, TO PROMOTE INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY, ch. 3, 38-39 (2003), available at http://www.ftc.gov/os/ 2003/10/innovationrpt.pdf (discussion of injunctive relief and potential abuses).
20. See, e.g., Julie Cohen, Copyright, Commodification and Culture: Locating the Public Domain, in THE FUTURE OF THE PUBLIC DOMAIN 121 (L. Guibault & P.B. Hugenholz eds., 2006).
21. See Elizabeth A. Rowe, The Experimental Use Exception to Patent Infringement: Do Universities Deserve Special Treatment?, 57 HASTINGS L.J. 921 (2006); Katherine Strandburg, What Does the Public Get?: Experimental Use and the Patent Bargain, 2004 WIS. L. REV. 81.
22. See, e.g., Brett Frischmann & Dan Moylan, The Evolving Common Law Doctrine of Copyright Misuse: A Unified Theory and Its Application to Software, 15 BERKELEY TECH. L.J. 865 (2000).
23. For an analysis of this shift, see Shubha Ghosh, Exclusivity - The Roadblock to Democracy?, 50 ST. LOUIS U. L.J. 799, 802-12 (2006).
24. See, e.g., Carrier, supra note 2.
25. See Justin Hughes, Copyright and Incomplete Historiographies: Of Piracy, Propertization, and Thomas Jefferson, 79 S. CAL. L. REV. 993, 1073 (2006) (urging the use of the category property with transparency).
26. See Brett M. Frischmann & Mark A. Lemley, Spillovers, 107 COLUM. L. REV. 257, 258 (arguing that "spillovers actually encourage greater innovation").
27. For an analysis of the function of the market system, particularly its role in standardizing products and services, see CHARLES E. LINDBLOM, THE MARKET SYSTEM: WHAT IT IS, HOW IT WORKS, AND WHAT TO MAKE OF IT (2001); JOHN MCMILLAN, REINVENTING THE BAZAAR: A NATURAL HISTORY OF MARKETS (2002). For an analysis of how markets can be formed for public goods, like the subject matter of intellectual property, through mechanisms of partial or complete exclusion, see William M. Oakland, Public Goods, Perfect Competition, and Underproduction, 82 J. POL. ECON. 927, 927-39 (1974).
28. See Ghosh, supra note 23, at 825-26.
29. See supra note 2.
30. See Lemley, supra note 2, at 1031.
31. Id. at 1058.
32. See Duffy, supra note 2, at 1078.
33. Id. at 1093.
34. See Duffy, supra note 13.
35. For a discussion of various theories of patent law, see Ghosh, supra note 3.
36. Lemley, supra note 2, at 1058.
37. For an overview of this literature, see Ronald R. Braeutigam, Optimal Policies for Natural Monopolies, in 2 HANDBOOK OF INDUSTRIAL ORGANIZATION 1289, 1291-99 (Richard Schmalensee & Robert D. Willig eds., 1989).
38. Duffy, supra note 2, at 1079.
39. The point about imperfect competition is made partly in Mark A. Lemley, What's Different About Intellectual Property?, 83 TEX. L. REV. 1097, 1102-03 (2005).
40. See YORAM BARZEL, ECONOMIC ANALYSIS OF PROPERTY RIGHTS (1997).
41. See Braeutigam, supra note 37, at 1292.
42. Id. at 1293.
43. 723 F.2d 1324, 1329 n.5 (7th Cir. 1983).
44. Id.
45. 527 F. Supp. 758, 762-63 (D. Del. 1981).
46. 76 N.E. 424 (Ind. App. 1905).
47. Id. at 428.
48. Id. at 430.
49. 437 F.2d 1336, 1344 (9th Cir. 1970).
50. Ajir v. Exxon Corp., No. C93-20830, 1995 WL 429234 (N.D. Cal. July 7, 1995); Sadler v. Rexair, 612 F. Supp. 491, 494 (D. Mont. 1985); Dimidowich v. Bell & Howell, 590 F. Supp. 45, 49 (E.D. Cal. 1984); Island Tobacco Co. v. R.J. Reynolds Indus., Inc., 513 F. Supp. 726, 744 (D. Haw. 1981).
51. Disenos Artisticos E Industriales, S.A. v. Work, 676 F. Supp. 1254, 1273 (E.D.N.Y. 1987); Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 478 F. Supp. 243, 271 (E.D. Pa. 1979); Neugebauer v. A. S. Abell Co., 474 F. Supp. 1053, 1059 (D. Md. 1979); Wales Home Remodeling Co., Inc. v. Alside Aluminum Corp., 443 F. Supp. 908, 915 (E.D. Wis. 1978); Carlo C. Gelardi Corp. v. Miller Brewing Co., 421 F. Supp. 237, 244 (D.N.J. 1976); V. & L. Cicione, Inc. v. C. Schmidt & Sons, Inc., 403 F. Supp. 643, 651 (E.D. Pa. 1975).
52. Trixler Brokerage Co. v. Ralston Purina Co., 505 F.2d 1045, 1051 (9th Cir. 1974); Bushie v. Stenocord Corp., 460 F.2d 116, 120 (9th Cir. 1972).
53. Stearns v. Genrad, Inc., 752 F.2d 942, 946 (4th Cir. 1984); Spectrofuge Corp. v. Beckman Instruments, Inc, 575 F.2d 256, 282 (5th Cir. 1978).
54. Indus. Bldg., 437 F.2d at 1344 (citing United States v. E.I. DuPont de Nemours & Co., 351 U.S. 377 (1956)).
55. 218 U.S. 180, 202 (1910).
56. 545 U.S. 469, 513 (2005).
57. DuPont, 351 U.S. at 393.
58. 807 F.2d 520, 538 n.16 (7th Cir. 1986).
59. Id. at 538 (citing Brunswick Corp. v. Riegel Textile Corp., 752 F.2d 261 (7th Cir. 1984)).
60. Fishman, 807 F.2d at 538.
61. Id. at 538 n.16.
62. 547 US. 28, 31 (2006).
63. For standard references on the topic of natural monopoly and its regulation, see SANFORD V. BERG & JOHN TSCHIRHART, NATURAL MONOPOLY REGULATION: PRINCIPLES AND PRACTICE 21-24 (1988); DANIEL F. SPULBER, REGULATION AND MARKETS 513-14 (1989). I am adopting a very simple notion of declining average cost in the text for exposition purposes. The technical legal requirement for natural monopoly is subadditivity of cost functions, which intuitively means that it is relatively cheaper to produce in one big plant than in several small plants. The definition of subadditivity is related to the concept of increasing returns to scale, which states that increasing all inputs proportionately more than proportionately increases production of the output In the vernacular, both concepts capture the notion that the whole is bigger than the sum of the parts, either from the perspective of costs or from output. The concepts of declining average cost and increasing returns to scale are distinct, however. Increasing returns to scale implies the declining average cost but not vice versa. As the text indicates, average costs might be declining because of the presence of large fixed costs that result from the presence of large capital costs in infrastructure. For an excellent summary of these issues and the puzzles they pose for economic theory, written for the lay audience, see DAVID WARSH, KNOWLEDGE AND THE WEALTH OF NATIONS: A STORY OF ECONOMIC DISCOVERY (2006).
64. See BERG & TSCHIRHART, supra note 63, at 22-23. In the context of intellectual property, it is worth separating the costs of production and distribution. In many instances, creating the work may require a large expenditure of costs, such as developing labs and investing in research and development. But some works may not require much expenditure at all, such as producing music or writing a poem. However, in all instances, once the work is produced, copying and distributing the work may be minimal. Therefore, it is safe to say that the subject of intellectual property may demonstrate declining average cost of production but very likely will demonstrate declining average cost of distribution. This distinction will have implications for how the market for intellectual property protected works should ideally be structured. More to the point of this section, natural monopoly type regulation may be appropriate as a model for the distributional issues affecting intellectual property, but not necessarily the production issues.
65. See supra discussion accompanying note 63. For a discussion of these issues of production and distribution in an economic model of monopolistic competition, see Christopher S. Yoo, Copyright and Product Differentiation, 79 N.Y.U. L. REV. 212, 212-80 (2004).
66. Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 359-60 (1991).
67. See Graham v. John Deere Co., 383 U.S. 1, 3 (1966).
68. Id. at 17.
69. See 35 U.S.C. § 103(a) (2004).
70. See, e.g., Arkie Lures, Inc. v. Gene Larew Tackle, Inc., 119 F.3d 953, 955 (Fed. Or. 1997) (illustrating use of secondary considerations such as commercial success in nonobviousness analysis).
71. 383 U.S. 519, 531 (1966).
72. See id.
73. See, e.g., In re Brana, 51 F.3d 1560 (Fed. Cir. 1995). But see In re Fisher, 421 F.3d 1365, 1370 (Fed. Cir. 2005) (holding that applicant had not established specific and substantial utility for express sequence tags).
74. See, e.g., In re Bell, 991 F.2d 781 (Fed. Cir. 1993).
75. See, e.g., KSR Int'l Co. v. Teleflex, Inc., 127 S. Ct. 1727, 1730 (2007).
76. See discussion in Arkie Lures Inc. v. Gene Larew Tackle, Inc., 119 F.3d 953 (Fed. Cir. 1997).
77. Id.
78. 714 F.2d 1240 (3d Cir. 1983).
79. CONTU stands for "National Commission on New Technological Uses of Copyrighted Works" and was established by Congress in 1975 to prepare a report on how copyright law should adapt to the challenges from developments in software and the computer industry. The Commission issued its final report in 1978, and the report is available online at http://digital-law-onune.info/CONTU/ PDF/index.html (last visited Mar. 8, 2008).
80. Apple Computer, 714 F.2d at 1254.
81. See, e.g., CDN Inc. v. Kapes, 197 F.3d 1256 (9th Cir. 1999) and cases cited therein. But see Southco, Inc. v. Kanebridge Corp., 390 F.3d 276 (3d Cir. 2004).
82. See, e.g., Concord Fabrics, Inc. v. Marcus Bros. Textile Corp., 409 F.2d 1315 (2d. Cir. 1969).
83. See, e.g., CDN, 197 F.3d 1256.
84. 499 U.S. 340 (1991).
85. Id. at 340.
86. Id. at 358, 360.
87. See, e.g., Castle Rock Entm't, Inc. v. Carol Publ'g Group, 150 F.3d 132, 137 (2d Cir. 1998).
88. Council Directive 96/9, 1996 O.J. (L77) 20.
89. Case C-203/02, 2004 E.C.R. I-10415.
90. See id.
91. See id.
92. See Feist Publ'n, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 353 (1991).
93. See cases cited supra notes 49-53.
94. See Robert G. Bone, Hunting Goodwill: A History of the Concept of Goodwill in Trademark Law, 86 B.U. L. REV. 547, 549 (2006).
95. Id. at 550-51.
96. BLACK'S LAW DICTIONARY 694 (6th ed. 1990).
97. 558 P.2d 279, 280 (Wash. Ct. App. 1976).
98. For an excellent analysis and critique of the concept of goodwill, see Bone, supra note 94, at 567-72.
99. BLACK'S LAW DICTIONARY 694-95 (6th ed. 1990).
100. 664 F.2d 701, 706 (9th Cir. 1980).
101. See, e.g., BERG & TSCHIRHART, supra note 63, at 408-11.
102. 505 U.S. 763, 770 (1992).
103. Id.
104. Id. at 775.
105. Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159 (1995).
106. Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205, 212 (2000).
107. Id. at 214-15.
108. Id. at 215.
109. Frank I. Schechter, The Rational Basis of Trademark Protection, 40 HARV. L. REV. 813, 831 (1927).
110. See, e.g., John Temple Lang, The Application of Essential Facility Doctrine to Intellectual Property Rights Under European Community Law, in ANTITRUST, PATENTS, AND COPYRIGHT: EU AND US PERSPECTIVES 56 (Francois Leveque & Howard Shelanski eds., 2005).
111. See David L. Aldridge Co. v. Microsoft Corp., 995 F. Supp. 728, 752 (S.D. Tex. 1998).
112. See Herbert Hovenkamp et al., Unilateral Refusals to License in the U.S., in ANTITRUST, PATENTS, AND COPYRIGHT: EU AND U.S. PERSPECTIVES, supra note 110, at 20-21.
113. See Lang, supra note 110.
114. See generally Wye-Keen Khong, Selection and Arrangement in Electronic Databases: A Law, Economic, and Information Science Perspective, 1 MULTIMEDIA CYBERSCAPE J. 1, 1-12 (2002).
115. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
116. Id. at 380-82.
117. Id. at 378.
118. 540 U.S. 398 (2004).
119. Id.
120. Id. at 398-99.
121. 537 U.S. 186 (2003).
122. 383 U.S. 1 (1966).
123. 447 U.S. 303 (1980).
124. 499 U.S. 340 (1991).
125. 534 U.S. 124 (2001).
126. 539 U.S. 23 (2003).
127. Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004).
128. 364 F.3d 1288 (11th Cir. 2004).
129. Morris Commc'ns Corp. v. PGA Tour, Inc., 235 F. Supp. 2d 1269 (M.D. Fla. 2002).
130. Id. at 1275.
131. Morris, 364 F.3d at 1295.
132. Id. at 1295-96.
133. Id. at 1295.
134. See Shubha Ghosh, When Exclusionary Conduct Meets the Exclusive Rights of Intellectual Property: Morris v. PGA Tour and the Limits of Free Riding as an Antitrust Business Justification, 37 LOY. U. CHI. L.J. 723 (2006).
135. 248 U.S. 215 (1918).
136. See Baird, supra note 13, at 10.
137. For an extended discussion of the themes in this subsection, see BERG & TSCHIRHART, supra note 63, at 1-34.
138. See OZ SHY, THE ECONOMICS OF NETWORK INDUSTRIES 81-83 (2001) (analyzing externalities created by technology).
139. See SPULBER, supra note 63, at 46.
140. See BERG & TSCHIRHART, supra note 63, at 24-34.
141. See discussion supra note 63.
142. See RICHARD H.K. VIETOR, CONTRIVED COMPETITION: REGULATION AND DEREGULATION IN AMERICA 9-11 (1994).
143. Id. at 317-18.
144. For criticisms of traditional natural monopoly style regulation and regulatory reform, see STEPHEN BREYER, REGULATION AND ITS REFORM (1982).
145. See Jean-Jacques Laffont, The New Economics of Regulation: Ten Years After, 62(3) ECONOMETRICA 507, 531 (1994).
146. See, e.g., id. at 530 (describing auction mechanisms to promote competition in previously regulated markets); WILLIAM J. BAUMOL ET AL., CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE (1982) [hereinafter BAUMOL].
147. See RICHARD EELLS, THE POLITICAL CRISIS OF THE ENTERPRISE SYSTEM (1980); MARC ALLEN EISNER, REGULATORY POLITICS IN TRANSITION (1993); JOHN G. FRANCIS, THE POLITICS OF REGULATION: A COMPARATIVE PERSPECTIVE (1993); ANDREI SHLEIFER & ROBERT W. VISHNY, THE GRABBING HAND: GOVERNMENT PATHOLOGIES AND THEIR CURES (1998). For a general discussion of the need for better understanding of political constraints in developing economic regulation, see Laffont, supra note 145, at 533-35.
148. See VIETOR, supra note 142, at 229-30.
149. See id. at 12-14.
150. See Harvey Averch & Leland L. Johnson, Behavior of the Firm Under Regulatory Constraint, 52 AM. ECON. REV. 1052, 1059 (1962). For a survey of these critiques, see Laffont, supra note 147, at 510.
151. For the earliest statement of this critique, see GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY 18-22 (1968).
152. See BERG & TSCHIRHART, supra note 63, at 247.
153. See discussion in Laffont, supra note 145 and MICHAEL WATERSON, REGULATCON OF THE FIRM AND NATURAL MONOPOLY 122-44 (1988) (summarizing research on privatization and market deregulation).
154. See WATERSON, supra note 153, at 136.
155. See JEAN-JACQUES LAFFONT & DAVID MARTMORT, THE THEORY OF INCENTIVES: THE PRINCIPAL-AGENT MODEL (2002).
156. For a survey of the literature with a focus on political and market institutions, see WATERSON, supra note 153, at 122-44. For an engaging discussion on the role of regulation in the construction of the marketplace and the consumer in bookselling, see LAURA J. MILLER, RELUCTANT CAPTTALISTS: BOOKSELLING AND THE CULTURE OF CONSUMPTION 197-205 (2006) (analyzing the politics of consumption); see also Charles Wolf, Jr., A Theory of Nonmarket Failure: Framework for Implementation Analysis, 22 J.L, & ECON. 107, 114-33 (1979) (developing a theory of political failure that complements theory of market failure).
157. For some background to the ideas in this section, see ASHISH ARORA ET AL., MARKETS FOR TECHNOLOGY: THE ECONOMICS OF INNOVATION AND CORPORATE STRATEGY 115-41 (2001); ERICH KAUFER, THE ECONOMICS OF THE PATENT SYSTEM 24-41 (1989).
158. For the more technically inclined, it might be worth distinguishing between fixed costs and sunk costs. Fixed costs are the costs that must be paid if a firm undertakes a certain project independent of how much the firm produces. Think of fixed costs as the costs of infrastructure and legacy costs that must be paid even if the firm ceases to produce and sell any goods or services. Sunk costs are costs that have been incurred when undertaking a particular activity. Last year's payments are an example of sunk costs. Economic theory has long held that sunk costs are irrelevant to present decision making. In some situations, however, sunk costs might be relevant as a signal of how aggressively a firm intends to litigate. For example, the payment of legal fees is argued in some instances to signal to an adversary a willingness to litigate and therefore serves as a means to extract settlement from the other side. Even though the payment of legal costs is a sunk cost, its expense may still be relevant from a strategic perspective. However, from an accounting perspective, it is generally held that sunk costs are irrelevant. For a discussion of sunk costs, see IVAN PNG, MANAGERIAL ECONOMICS 240-46 (2d ed. 2002). For a discussion of the strategic use of sunk costs, see ERIC RASMUSSEN, GAMES AND INFORMATION: AN INTRODUCTION TO GAME THEORY 101 (1989). An early reader of this Article suggested that most costs in intellectual property are sunk and not fixed, and therefore, the natural monopoly argument is irrelevant. Other readers of this Article may have been thinking about a similar point. Whether the costs of creating a work are sunk or fixed depends upon when one looks at the problem. I think the early reader was considering the situation when the work was already created and produced, in which case the costs of investment are sunk and irrelevant, except for the special situation of strategic behavior. However, before the decision to create is made, the costs of creation should be considered fixed costs and therefore relevant to the analysis. The early reader was assuming that the sole problem for the design of intellectual property is that of distribution. My argument here is that both production and distribution are relevant.
159. 35 U.S.C. § 103(a) (2004) ("Patentability shall not be negatived by the manner in which the invention was made.").
160. See 17 U.S.C. § 102(a) (2000).
161. For the best articulation of natural rights theory in patent law, with implications for intellectual property more broadly, see Adam Mossoff, Rethinking the Development of Patents: An Intellectual History, 1550-1800, 52 HASTINGS L.J. 1255 (2001).
162. W. KIP VICUSI ET AL., ECONOMICS OF REGULATION AND ANTITRUST 345-47 (1992).
163. Id. at 347-49.
164. Thomas J. DiLorenzo, The Myth of Natural Monopoly, 9 REV. AUSTRIAN ECON. 43 (1996).
165. EISNER, supra note 147, at 170-75; KENNETH E. TRAIN, OPTIMAL REGULATION: THE ECONOMIC THEORY OF NATURAL MONOPOLY 314-15 (1991); WATERSON, supra note 153, at 122-25; Peter J. Boettke, 32 J. ECON. LITERATURE 1916, 1916-18 (1994) (reviewing CHRISTOPHER D. FOSTER, PRIVATIZATION, PUBLIC OWNERSHIP AND REGULATION OF NATURAL MONOPOLY (1992)).
166. See BERG & TSCHIRHART, supra note 63, at 22; TRAIN, supra note 165, at 5-12.
167. See Braeutigam, supra note 37, at 1299-1305.
168. See, e.g., TRAIN, supra note 165, at 33-35.
169. See BERG & TSCHIRHART, supra note 63, at 299-307; David P. Baron, Design of Regulatory Mechanisms and Institutions, in 2 HANDBOOK OF INDUSTRIAL ORGANIZATION 1347, 1356-62 (Richard Schmalensee & Robert D. Willg eds., 1989).
170. See 17 U.S.C. §§ 114 (d)-(j), 119, 122 (2000); see, e.g., R. Anthony Reese, Copyright and Internet Music Transmissions: Existing Law, Major Controversies, Possible Solutions, 55 U. MIAMI L. REV. 237 (2001).
171. See 17 U.S.C. §§ 513, 801-805 (2000). For an intriguing discussion of the role of Copyright Royalty Judges, see Lawrence Cunningham, Private Standards in Public Law: Copyright, Lawmaking and the Case of Accounting, 104 MICH. L. REV. 291 (2005). For a brief discussion of the Copyright Royalty Tribune, the precursor to the Copyright Royalty Judges, see Ben H. Weil & Barbara Friedman Polansky, Copyright Basics and Consequences, 24 J. CHEMICAL INFO. COMPUTER SCI. 43, 48 (1984).
172. See Laffont, supra note 145, at 510.
173. See Averch & Johnson, supra note 150.
174. See Laffont, supra note 145, at 516-17.
175. For a discussion of alternatives, see TRAIN, supra note 165, at 297-99.
176. See supra note 89.
177. See, e.g., Robert P. Merges, Are You Making Fun of Me? Notes on Market Failure and the Parody Defense in Copyright, 21 AIPLA Q.J. 305, 307 (1993).
178. See, e.g., Robert Merges, Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents, 62 TENN. L. REV. 75 (1994); Robert P. Merges, A Transactional View of Property Rights, 20 BERKELEY TECH. L.J. 1477 (2005); Carl Shapiro, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting, in 1 INNOVATION POLICY AND THE ECONOMY (Adam B. Jaffe et al. eds., 2001).
179. See SUZANNE SCOTCHMER, INNOVATION AND INCENTIVES 31-59 (2004).
180. For an example of such circularity, see Am. Geophysical Union v. Texaco Inc., 60 F.3d 913, 929-31 (2d Cir. 1994).
181. See Wendy J. Gordon, Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 82 COLUM. L. REV. 1600 (1982); Glynn S. Lunney, Jr., Fair Use and Market Failure: Sony Revisited, 82 B.U. L. REV. 975 (2002).
182. See, e.g., SCOTCHMER, supra note 179, at 139-41.
183. See id. at 344.
184. See Julie E. Cohen, The Place of the User in Copyright, 74 FORDHAM L. REV. 347 (2005); Rochelle Cooper Dreyfuss, TRIPS-Round II: Should Users Strike Back?, 71 U. CHI. L. REV. 21 (2004); Joseph P. Liu, Copyright's Theory of the Consumer, 44 B.C. L. REV. 397 (2003).
185. See, e.g., Barton Beebe, Search and Persuasion in Trademark Law, 103 MICH. L. REV. 2020, 2024 (2005).
186. For case discussion of these issues, see KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 543 U.S. 111 (2004); Century 21 Real Estate Corp. v. Lendingtree, Inc., 425 F.3d 211 (3d Cir. 2005).
187. See YOCHAI BENKLER, THE WEALTH OF NETWORKS: HOW SOCIAL PRODUCTION TRANSFORMS MARKETS AND FREEDOM (2006).
188. See, e.g., SPULBER, supra note 63, at 139-43; TRAIN, supra note 165, at 303-06.
189. See VIETOR, supra note 142, at 50-53.
190. See BREYER, supra note 144, at 191-96.
191. See VIETOR, supra note 142, at 319-22; Darren Bush & Salvatore Massa, Rethinking the Potential Competition Doctrine, 2004 WIS. L. REV. 1035.
192. See supra note 146 and accompanying text.
193. See BAUMOL, supra note 146, at xv.
194. Id. at 349-50.
195. Id. at 4-5, 293-96.
196. See Steven C. Salop & David T. Schefrman, Raising Rivals' Costs, 73 AM. ECON. REV. 267-71 (1983); Joseph Gregory Sidak, Debunking Predatory Innovation, 83 COLUM. L. REV. 1121, 1141-42 (1983).
197. See BAUMOL, supra note 146, at 425-29.
198. See VIETOR, supra note 142, at 57-61.
199. Id. at 14-16.
200. See Badi H. Baltagi et al., Airline Deregulation: The Cost Pieces of the Puzzle, 36 INT'L ECON. REV. 245 (1995); Alfred E. Kahn, Surprises of Airline Deregulation, 78 AM. ECON. REV. 316 (1988); Ralph D. Sandler, Market Share Instability in Commercial Airline Markets and Impact of Deregulation, 36 J. INDUS. ECON. 327-35 (1988).
201. See VIETOR, supra note 142, at 68-69; Steven A. Morrison & Clifford Winston, Intercity Transportation Route Structures Under Deregulation: Some Assessments Motivated by the Airline Experience, 75 AM. ECON. REV. 57, 59 (1985).
202. See Severin Borenstein, Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry, 20 RAND J. ECON. 344, 344 (1989); Gloria J. Hurdle et al., Concentration, Potential Entry, and Performance in the Airline Industry, 38(2) J. INDUS. ECON. 119, 119 (1989).
203. See, e.g., Severin Borenstein, The Dominant-Firm Advantage in Multiproduct Industries: Evidence from the U. S. Airlines, 106 Q.J. ECON. 1237, 1248 (1991); Severin Borenstein, The Evolution of U.S. Airline Competition, 6 J. ECON. PERSP. 45, 69 (1992).
204. VIETOR, supra note 142, at 311-13.
205. Id.
206. See generally Shubha Ghosh, Market Entry and the Proper Scope of Copyright, 12 INT'L J. ECON. & BUS. 347 (2005).
207. See Stephen L. Carter, The Trouble with Trademark, 99 YALE L.J. 759, 760 (1990); Vincent N. Palladino, The Real Trouble with Trademarks, 81 TRADEMARK REP. 150, 153 (1991).
208. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001).
209. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 269 F. Supp. 2d 1213 (CD. Cal. 2003).
210. See Neil Weinstock Netanel, Impose a Noncommercial Use Levy to Allow Free Peer-to-Peer File Sharing, 17 HARV. J.L. & TECH. 1 (2003).
211. See James Thuo Gathii, Construing Intellectual Property Rights and Competition Policy Consistently with Facilitating Access to Affordable AIDS Drugs to Low-End Consumers, 53 FLA. L. REV. 727 (2001).
212. See Yoo, supra note 65, at 215.
213. See id. at 215-16.
214. See, e.g., F. Scott Kieff, IP Transactions: On the Theory & Practice of Commercializing Innovation, 42 HOUS. L. REV. 727, 739 (2005).
215. See Nachbar, Intellectual Property, supra note 2, at 281-87.
216. Id. at 353.
217. 35 U.S.C. § 271(e)(1) (2000).
218. 545 U.S. 193 (2005).
219. See, e.g., Embrex, Inc. v. Serv. Eng'g Corp., 216 F.3d 1343 (Fed. Cir. 2000); Lough v. Brunswick Corp., 86 F.3d 1113 (Fed. Cir. 1996).
220. 307 F.3d 1351 (Fed. Cir. 2002).
221. Integra Lifesciences I, Ltd. v. Merck KGaA, 331 F.3d 860 (Fed. Cir. 2003).
222. Id. at 874-76.
223. See Merck, 545 U.S. at 201-02.
224. Id. at 200-01.
225. See, e.g., Anna McMinn, Judicial Interpretation of 35 U.S.C. § 271(e)(1): An Improper Expansion Beyond the Legislative Intent, 16 ALB. L.J. SCI. & TECH. 195, 235-37 (2006).
226. See Brief of Amici Curiae Applera Corp. and Isis Phann., Inc. in Support of Respondents at 20-22, Merck KGAA v. Integra Lifesciences I, Ltd. et al., 545 U.S. 193 (2005) (No. 03-1237).
227. See Strandburg, supra note 21, at 121.
228. 17 U.S.C § 107 (2000).
229. 9 F. Cas. 342 (C.C.D. Mass. 1841) (No. 4,901).
230. See id. at 348. For a contemporary case, see Video Pipeline, Inc. v. Buena Vista Home Entm't, Inc., 342 F.3d 191 (3d Cir. 2003).
231. See Jane C. Ginsburg, Copyright and Control over New Technologies of Dissemination, 101 COLUM. L. REV. 1613, 1630 (2001).
232. See Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 456 (1984).
233. Id.
234. See Andrew Beckerman-Rodau, MGM v. Grokster: Judicial Activism or a Good Decision?, 74 UMKC L. REV. 921, 943 (2006).
235. See the discussion of electricity deregulation in Darren Bush & Carrie Mayne, In (Reluctant) Defense of Enron: Why Bad Regulation Is to Blame for California's Power Woes (Or Why Antitrust Law Fails to Protect Against Market Power When the Market Rules Encourage Its Use), 83 OR. L. REV. 207 (2004).
236. See MILTON L. MUELLER, JR., UNIVERSAL SERVICE: COMPETITION, INTERCONNECTION, AND MONOPOLY IN THE MAKING OF THE AMERICAN TELEPHONE SYSTEM (1997).
237. See Borenstein, Evolution, supra note 203, at 70-71.
238. Sony Computer Entm't, Inc. v. Connecta Corp., 203 F.3d 596, 602-09 (9th Cir. 2000).
239. See cases cited supra note 218.
240. See TRAIN, supra note 165, at 303-06.
241. See, e.g., Bush & Massa, supra note 191; Yoo, supra note 65.
242. See 17 U.S.C. § 106(2) (2000).
243. For a discussion of the conflict, see Castle Rock Entm't, Inc. v. Carol Publ'g Group, 150 F.3d 132 (2d Cir. 1998).
244. See Lee v. A.R.T. Co., 125 F.3d 580 (7th Cir. 1997); Mirage Editions, Inc. v. Albuquerque A.R.T. Co., 856 F.2d 1341 (9th Cir. 1988).
245. See, e.g., Rebecca Tushnet, Legal Fictions: Copyright, Fan Fiction, and a New Common Law, 17 LOY. L.A. ENT. L.J. 651 (1997). For an approach to derivative works that relies largely on economic
246. See Mark A. Lemley, The Economics of Improvement in Intellectual Property Law, 75 TEX. L. REV. 989 (1997).
247. Bonito Boats, Inc. v. Thunder Craft Boats, 489 U.S. 141, 151 (1989).
248. For an overview, see DANIEL A. FARBER & PHILIP P. FRICKEY, LAW AND PUBLIC CHOICE: A CRITICAL INTRODUCTION (1991).
249. See, e.g., Mark Kelman, On Democracy-Bashing: A Skeptical Look at the Theoretical and "Empirical" Practice of the Public Choice Movement, 74 VA. L. REV. 199 (1988). For a discussion of the more sophisticated literature mentioned in the text, see infra note 260.
250. JESSICA LITMAN, DIGITAL COPYRIGHT (2001).
251. LAWRENCE LESSIG, FREE CULTURE 134 (2004).
252. See Paul M. Schwarte & William Michael Treanor, Eldred and Lochner: Copyright Term Extension and Intellectual Property as Constitutional Property, 112 YALE L.J. 2331, 2332-33 (2003).
253. See Ghosh, supra note 3, at 1317.
254. See LESSIG, supra note 251, at 130-31 (quoting U.S. CONST. art I, §8, cl. 8).
255. See Jack M. Balkin, "Wrong the Day It Was Decided": Lochner and Constitutional Historicism, 85 B.U. L. REV. 677 (2005).
256. See, e.g., Pamela Samuelson, Toward a "New Deal" for Copyright in the Information Age, 100 MICH. L. REV. 1488 (2002).
257. See Copyright Modernization Act of 2006, H.R. 6052, 109th Cong. (2006).
258. See, e.g., KP Permanent Make-up, Inc. v. Lasting Impression I, Inc., 543 US. 111 (2004).
259. See Brief for United States as Amicus Curiae, KSR, Int'I Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007) (No. 04-1350).
260. This literature is a vast one and includes scholars in the fields of economics and political science. For a cross-section of the literature, see BREYER, supra note 144; AVINASH DIXIT, THE MAKING OF ECONOMIC POLICY: A TRANSACTION-COST POLITICS PERSPECTIVE (1996); FRANCIS, supra note 147; JEAN-JACQUES LAFFONT, INCENTIVES AND POLITICAL ECONOMY (2000); Laffont, supra note 145.
261. See Laffont, supra note 145, at 510-11.
262. See Shubha Ghosh & Jay Kesan, What Do Patents Purchase?: In Search of Optimal Ignorance in the Patent Office, 40 HOUS. L. REV. 1219 (2004).
263. See Craig Allen Nard, Deference, Defiance, and the Useful Arts, 56 OHIO ST. L.J. 1415, 1419-25 (1995).
264. See Orin Kerr, Rethinking Patent Law in the Administrative State, 42 WM. & MARY L. REV. 127 (2000); see also Stuart M. Benjamin & Arti Rai, Who's Afraid of the APA? What the Patent System Can Learn from Administrative Law, 95 GEO. L.J. 269, 284 (2007).
265. For an example of a scholarly suggestion for harnessing the administrative power of the Copyright Office, see Mark A. Lemley & R. Anthony Reese, Reducing Digital Copyright Infringement Without Restricting Innovation, 56 STAN. L. REV. 1345 (2004). For a general discussion of copyright as regulation, see Joseph Liu, Regulatory Copyright, 83 N.C. L. REV. 87 (2004). For a discussion of copyright administration and natural monopoly theory, see Ariel Katz, The Potential Demise of Another Natural Monopoly: Rethinking the Collective Administration of Performing Rights, 1 J. COMPETITION L. & ECON. 541 (2005); Ariel Katz, The Potential Demise of Another Natural Monopoly: New Technologies and the Administration of Performing Rights, 2 J. COMPETITION L. & ECON. 245 (2006).
266. See Laffont, supra note 145.
267. See DIXIT, supra note 260, at 38-45.
268. For an interesting approach that is influenced by public choice theory but develops a theory of regulation that considers both economic and political constraints, see JERRY MASHAW, GREED, CHAOS, AND GOVERNANCE: USING PUBLIC CHOICE TO IMPROVE PUBLIC LAW (1997).
269. Compare Toshiko Takenka, Non-Obviousness Standard Under Fire: Flexible Application of TSM Test May Result in Validity Challenges Against Many U.S. Patents, 2007 J. INTELL. PROP. L. PRAC. 508, 508-10, with Supreme Court Case May Make Challenges to Combination Drugs Easier, FDA WEEK, Sept. 1, 2006.
270. 127 S. Ct. 1727 (2007).
271. Graham v. John Deere Co., 383 U.S. 1, 17-18 (1966).
272. See Dennis S. Karjala, Congestion Externalities and Extended Copyright Protection, 94 GEO. L.J. 1065 (2006).
273. See, e.g., Southco, Inc. v. Kanebridge Corp., 390 F.3d 276, 286 (3d Cir. 2004).
274. See STEVEN E. RHOADS, THE ECONOMIST'S VIEW OF THE WORLD: GOVERNMENT, MARKETS, AND PUBLIC POLICY 61-75 (1985) (advocating for limited government intervention into markets); DANIEL YERGIN & JOSEPH STANISLAW, THE COMMANDING HEIGHTS: THE BATTLE FOR THE WORLD ECONOMY 338-78 (2002) (describing the politics and economics of the deregulation movement in the United States).