The Coyote Blog via CopyOwner points to this CRM Buyer article about “gray market piracy.” “Gray market piracy” is where companies in poor places, where copyright using products are sold cheaply, export the copyright using products back into rich countries to profit from the price differential. Both Coyote and CopyOwner bemoan the fact that the article calls these exporters “pirates.” CopyOwner is right to point out that gray market exporters are not legally pirates, the article says as much, but that does not mean it would be a bad idea to make reimportation of copyright using products illegal or restricted. The net effect of such a law would be to give copyright holders an improved ability to discriminate geographically, and I want to present what I think is a strong argument for why better geographic price discrimination would be good.

I should mention that I do not blindly advocate stronger copyrights; Chris and I both agree that current copyright term lengths seem far too long. Chris has noted some work by Rufus Pollock which calculated the socially optimum copyright term length to be 14 years, which is far shorter that the current term length of 70 years after the death of the author. Copyrights, and intellectual property in general, should be a means to induce the production of socially valuable ideas and not an end in themselves. But production of socially valuable ideas is not enough, in order to improve human welfare, they must be used a lot, and that is why we should consider how improved geographic price discrimination by copyright holders may harm or improve general welfare.

Improved price discrimination could be welfare improving by increasing the quantity of copyright using products consumed by the public. When monopolies, like copyright holders, cannot price discriminate perfectly, they price their goods socially suboptimally, because maximizing their profits involves high prices and limited supply. Better price discrimination allows monopolistic firms to make more money by selling to more people.

Some copyright holders do currently have some ability to discriminate geographically, charging high prices in rich regions and lower prices in poorer regions. For example, DVD region codes make DVDs work in some countries (I am not clear on how the use of region codes is enforced for DVD players, perhaps the patent holder of some critical DVD technology requires the use of region codes as a precondition for using DVD reading technology in DVD players). This allows DVD manufacturers to sell their products for different prices in different regions. In the case of DVDs, this price ability might disappear, because region codes have come under legal attack.

Improved geographic price discrimination abilities for copyright holders would allow them to sell copyright using products to people in poorer countries at lower prices without damaging their profit from selling in rich countries, creating an incentive for copyright holders to sell more copyright using products in poor countries. Reduced geographic price discrimination abilities for copyright holders, due to technological change or legal change (in the case of region codes), would mean that selling copyright using products to people in poorer countries at lower prices than in rich countries would reduce their net profit because of price arbitrage, creating an incentive for copyright holders to sell fewer copyright using products in poor countries. Copyright using products are generally free of negative externalities, so virtually any increase in the quantity consumed should be regarded as a welfare improvement and reductions in the quantity consumed should be regarded as welfare reductions, so allowing greater price discrimination should be welfare improving since more copyright using products would be consumed.

Although my libertarian sensibilities biases me against it, I think there is a strong argument to be made for restricting the reimportation of copyright using products, but more study of the welfare effects would definitely be a good idea.

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