The
debate on intellectual property rights (IPRs) at the global level seems to rest
primarily on a single size fits all model. The US driven agenda to enforce
stricter norms for IP across countries is ostensibly an attempt to push the US
agenda. Now that the incoming US administration led by President Biden is
likely to revive TPP, it is possible that IP issues might come to the fore yet
again. However, while examining the empirical realities, the IP practices vary
from industry to industry. Rarely there exists an industry which has an uniform
IP practice relative to other industries. It must beg to be explained why the
differentials in IP exists across industries.
In
an earlier paper, one had discussed at certain length on how IP differentials
could be linked to interplay between costs and utility. In economics, firms
strive for profit maximization while consumers seek maximization of utility. The
interplay between the two can be analysed through an examination of the firm’s
cost structure as against the utility derivation from the consumers. Firms with
high costs but price elastic might demonstrate different perspectives as
against firms with low fixed costs. As one examines the costs, higher fixed
costs signify the essence of economies of scale. Consumer utility maximization is premised on
the existence of income constraints and the presence of diminishing marginal
utility. The following table posits the juxtaposition of the two factors.
IPRs and Industries-
Utility Cost Analysis
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Source: Prashant Kulkarni, Towards Locating Market
Failure as an Outcome of Intellectual Property Regime: Mapping the IPR-Market-Society Interfaces
(2013)
When
one examines the above matrix and looks at the evidence from the field, an
interesting patterns emerge. Those industries which tend to have high variable
costs are relatively lax in enforcing certain types of IPRs. For instance,
fashion and accessories industries emphasize on trade-marks and are not so obsessed
with the patents or copyrights. Derivative reworking of fashion designs is not
uncommon. In fact, there is a tacit encouragement towards the same despite some
public protestations. Apparently, the presence of knock-offs do not affect the
industry revenues as evident from their reactions in contrast let us say to the
entertainment industry. This perhaps has to do not just with nature of costs
but with the nature of consumer utility that exists in the industry. The fashion
trends fade off fast. The marginal utility seems to diminish and the differentiation
element wears off fast. Technological interventions are not possible. The only
differentiator is the brand and therefore they are obsessed with brands and
trade-marks and not with copyrights. The firms know their users seek the brand
and the associated signals it indicates, an indicator of Veblen good. Therefore,
their emphasis on the trademarks and not copyrights. They perhaps would not
mind seeking induced obsolescence thus allowance for fresh designs each year.
Yet
as one examines the entertainment industry, it seems the other way round. They do
experience a short product cycle accompanied by faster diminishing utilities. They
too need fresh investment each season. Piracy levels are similar to those
present in the fashion industry. Yet the response to piracy by the
entertainment industry is completely in contrast to the fashion industry. While
at one level, the fashion industry seems oblivious to the phenomenon of piracy,
entertainment industry in particular seems to take Broken Windows model very
seriously and goes after the smallest of the violators. The answers perhaps lie
in the cost structure. The cost structure in the entertainment industry is
strongly geared towards the fixed costs. The industry exhibits high degree of
instantiation. It is an industry that can be digitalized cent per cent in
contrast to the fashion industry which is physical. Replication costs in the
entertainment industry are close to zero. Branding while being an important
differentiator is not the sole determinant. The availability of substitutes and
the people’s motivations to try out entertainment goods differ considerably. Therefore,
the industry demonstrates its attitudes towards the pirates very differently
and thus obsessed with copyrights.
In
the pharmaceutical industry, Broken Windows does make them go hard after the alleged
violators but often find themselves struggling against national sovereignty the
very reason they came up with global patent regime in the Uruguay round of
international trade negotiations. While they have high fixed costs, the
availability of substitutes do not exist in a similar manner like the
entertainment industry. They too exhibit instantiation properties yet, the
marginal utility remains relatively higher for considerable period of time. The
product cycles are not short. They have high fixed costs and marginal utility
does not diminish fast. This perhaps explains why they seek patents which confer
a monopoly for a longer period. They seek to control on the flow of duplicates
if one might have to call it.
The
high variable costs and low diminishing marginal utility perhaps does not have
too many examples and they perhaps are not relevant in the debate on IP. In the
matrix illustrated above, there is no doubt presence of industries that do not
fit in the above explanations. Automobile industry does experience a high fixed
cost accompanied by lower levels of marginal utility but perhaps what changes
the dimension is the reproduction costs. It is not easy to replicate a car as
opposed to let us say pharmaceutical drugs or movies or music. Therefore,
economies of scale is essential for reproduction too thus these costs might
come in the way of their application of IP rules and the consequent enforcement
of the same. Furthermore, they might be subject to holdouts in their build up
to the launch of the vehicle and thus might get reflected in their own attitude
towards IP enforcement. Each industry has it own set of motivations towards
enforcement of IPRs. The current post seeks to build on the past research and
try and seek explanation what could account for those differentials. This is perhaps
the beginning of the research discussion and questions being framed. It needs
to be built up and expanded to account for other factors too.
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