Copyright Complements and Piracy-Induced Deadweight Loss

Abstract

Conventional wisdom suggests that copyright piracy may in effect reduce the deadweight loss resulting from copyright protection because it allows the public unlimited access to information goods at a price closer to marginal cost. It has been further contended that lower copyright protection would benefit the society as a whole, as long as authors continue to receive sufficient incentives from alternative revenue streams in any ancillary markets, e.g. touring, advertising and merchandizing. By evaluating the empirical evidence from the music, performance and videogame markets, this article highlights a counterintuitive yet important point: Copyright piracy, while decreasing the deadweight loss in the music market, could simultaneously increase the deadweight loss in ancillary markets via the interaction between complementary goods. The deadweight loss in ancillary markets tends to become dominant if a substantial portion of relevant consumers have high valuation but low frequency in music consumption, are risk averse towards upfront payment with uncertain demand, and/or discount future value at a high rate. Additionally, the findings shed new lights on the current debates on several competing propositions to reform indirect copyright liabilities in the digital age.

Keywords: intellectual property, copyright, complementary goods, music, video game, Internet, complements