Submitted by Benjamin Shiller, Assistant Professor of Economics

Two weeks ago, I had the pleasure of participating as an expert on a panel, sponsored by the national association of recording merchandisers (NARM), discussing the role of the first sale doctrine in a digital age.  A brief background: the first sale doctrine dates back to a 1854 Supreme Court case focusing on the question of whether a cartographer can restrict how a buyer of his maps uses them, including whether they can resell them.  The court found that the cartographer had no right to prevent resale of the original copy sold to someone else.   However, a person was not allowed to make copies of a map and resell those copies.  Otherwise, the cartographer would not be able to earn profits from selling maps, and would thus have no incentive to create it in the first place.  For many years, the law has evolved a little, but basically follows this original ruling for nearly all types of copyrighted goods.

Recent court cases in the last two years, however, have questioned whether this long-standing rule applies to the digital age.  The law is quite fuzzy and still evolving, but seems to imply that firms can restrict resale through licensing agreements. However, if the licensing agreement “looks” like a sale – i.e. places no meaningful restrictions on the user, or the user never agrees  – then for the purposes of the first sale doctrine, the license should count as a sale.   Moreover, the law implies that only the first copy can be resold.  For a download that is not licensed, this implies that the only way to resell it is to resell the entire hard-drive containing the file.  Congress considered changing this in 2003, allowing the “forward-and-delete” resale method, but failed to enact it.   An ongoing court case questioning whether ReDigi can legally resell iTunes MP3s has raised this issue once again, as has a related case the Supreme Court just agreed to take this week.

On the panel, we discussed whether the first sale doctrine should apply to licensed digital goods.  On one side was co-panelist Elizabeth Valentina, a leading lawyer for Fox.  On the other was co-panelist Corynne McSherry, the intellectual property director at the Electronic Frontier Foundation, a foundation whose aim is “to protect rights in a digital world.”  I took a neutral stance, intending to convey the economics.

I explained that my research shows that monopolists will often earn lower profits under resale when consumers grow bored or lose interest in products with use – an assumption relevant to most digital entertainment goods.  This stood in stark contrast to the early literature’s findings, which did not allow for this assumption.  My findings suggest firms would go to some length to restrict resale.  For example, they might distribute goods only as downloads or licenses even if many consumers do not have access to a platform.  This might require consumers to buy an iPad in order to read a book.   Even without such considerations, I find that on average consumers would be worse off with resale restricted.

There were quite a few considerations – enabling piracy, passing to heirs, the role of libraries, the role of platform competition, whether one law should apply to both digital licenses and physical media sales.  While the answer to the main question was not yet clear and more research is required, Corynne and I agreed on a basic premise – total joint surplus should be maximized.  Copyright protecting inventors should not exist for the sole purpose of enriching copyright holders.  Rather, the laws should only protect copyright holder to the extent that they give them the incentive to innovate, creating products that would not otherwise exist.

If anyone is further interested, they can view a rough working paper on this topic here. However, I would recommend against reading beyond the 2nd section for anyone who has not taken many PhD level classes in economics.


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