[*PG545]TRADING POSTS IN CYBERSPACE: INFORMATION MARKETS AND
THE CONSTRUCTION OF
PROPRIETARY RIGHTS

Ruth L. Okediji*

Abstract:  Technological innovation is a predominant source of persistent economic growth. Endogenous factors, principally human capital, financial capital, and government intervention play an important role in how the innovation process can enhance welfare through the grant of intellectual property rights. However, the expansive reach of such proprietary interests in cyberspace has important implications for how e-commerce might contribute to overall economic growth. Thus far, the scope of intellectual property rights in cyberspace has been examined in isolation from empirical data reflecting how businesses seek to create value and effectively capture the benefits that the Internet offers over real-space markets. This Article argues that expansive construction of intellectual property rights distorts the informational properties of such rights and reintroduces high search and use costs to transactions in cyberspace. It also deters development and use of innovative business strategies that could generate greater value from e-commerce. Consequently, there is a need for more government intervention in regulating competition for markets in cyberspace.

Introduction

It is now an aphorism that information technologies have significantly affected the social, economic, and political structure of personal, national, and international relations.1 Although there re[*PG546]mains some debate over the magnitude of the changes caused by the Internet,2 and even lingering skepticism about the fact of any real change at all,3 the Internet has, at the very least, occasioned intense scrutiny of the justifications that inform prevailing economic theories pertaining to the regulatory function of government and, consequently, market structures. Prior to the Internet’s emergence as an important subject of economic analysis,4 a significant body of eco[*PG547]nomic literature had challenged assumptions fundamental to the economic paradigm of free markets with limited government intervention. Importantly, this body of economic analysis has contributed to the study of the role of information in decision-making by firms and individuals, identifying dislocations between competitive equilibrium models and market realities, while at the same time introducing models that might better inform government policies or explain policy failures.5

The role of information in a market for information is an important factor in considering the appropriate function of intellectual property rights in cyberspace, including the effect of such rights on the development of e-commerce.6 As societies seek to appropriate maximum returns from the many markets7 spawned by the Internet, scholars and the public at large have intensely scrutinized the comparative effects and efficacy of public and private law regimes in regulating behavior in cyberspace and in regulating cyberspace itself.8 The [*PG548]multiple regimes of cyberspace governance seek to bridge, or at the least to coordinate, the divide between the substance of real-space social institutions and the vast, unlimited realms of cyberspace, with its (mostly) private law and/or self-regulating norms.9 Much of the “law” of cyberspace thus is an experiment in social engineering between the two spheres, examining the ways in which each sphere influences the other, and the outcomes as they manifest in domestic and (less examined) global contexts.10 Intellectual property regulation assumes a central role in this engineering project.

The familiar orthodoxy of intellectual property rights justification is rooted in the classic assumption that property rights are indispensable to a well-functioning market.11 The theory assumes that proprietary rights granted by statutes are necessary tools to induce creative production to promote the public good through the progress of the national economy materially, socially, and culturally.12 However, the dynamic efficiency and social welfare goals implicit in the enabling constitutional clause for intellectual property protection13 require certain margins of permissible activity by users and subsequent [*PG549]innovators.14 It is the regulation of these activities that is most intractable in contemporary debates about the extension of intellectual property rights to the digital domain.15 The regulation of intellectual property rights is not a zero-sum game: “one-time” consumption where minimal or no additional value—private or social—is generated by using the product is inconsistent with the ideal of intellectual property protection.16 Additionally, if the construction of rights raises transaction costs beyond the level already internalized by the initial grant,17 then there are important implications both for whether markets for, or involving protected intellectual property will clear given [*PG550]the new externalities.18 There is also the familiar problem of how overall welfare is affected by a corresponding decrease in the scope of freely permitted activities.19

The debate about the regulation of proprietary interests in cyberspace focuses almost exclusively on how to preserve the “delicate balance” between public welfare and private interests in the digital arena.20 Particularly in the digital environment, every consumer/user [*PG551]is a potential creator/innovator, thus requiring a dynamic regulatory balance between the rights and interests of owners and users.21 Policy makers have not countered legislation and judicial decisions strengthening the proprietary interests of owners with corresponding limitations or exceptions. Indeed, as many have argued, policy makers have not sufficiently preserved even existing limitations under the new intellectual property regime designed ostensibly to offset the advantages gained by consumers with digital technology.22 In arguing for stronger protection, proprietors imply that the digital environment unleashes a “natural” brutish tendency in consumers to violate proprietary rights—a tendency that must be met and prevented with vigorous anti-copying mechanisms—both legal and technological. Commentators, however, have focused less on how the information structure of information markets should affect intellectual property regulation, and what this implies for how well, if at all, intellectual [*PG552]property rights can be translated into cyberspace.23 In particular, the way in which copyrights, and more recently patents,24 function in the digital environment to a large extent establishes some a priori norms about governance in cyberspace. As legal realists argued, property rights designate a form of sovereignty.25 Consequently, the strength of those rights assumes qualities of governance that limit formal governments to the fringes of Internet regulation26 in a manner consistent with laissez-faire economic models of market efficiency.27 Given that the initial grant of intellectual property protection is intended to resolve the public goods problem, market creation is at least one function of intellectual property rights that applies with equal or greater force to the Internet.

My broad interest in this Article is the contest between government regulation and free markets. The very notion of a “market” in cyberspace preconditions us to anticipate certain returns based on the classic assumption of minimal or no government intervention. In a framework of competing markets and competition for markets, however, government is recast as the arbiter between an aggregate of forces that influence the behavior of firms and individuals, and the technological control over some of those forces that is inherent in the allocation of intellectual property rights.28 With the harmonization of intellectual property rights pursuant to the Agreement on Trade Re[*PG553]lated Aspects of Intellectual Property Rights (“TRIPs Agreement”),29 and the likelihood that the World Intellectual Property Organization (“WIPO”) Internet Treaties30 may serve to harden even the “soft” norms of TRIPs into legal rules,31 most governments can choose this dormant role as the optimal strategy without explicitly addressing distributional effects or other welfare concerns. As global trade rules32 bring countries closer by lowering or erasing barriers to market entry, the classic assumption that markets operate most efficiently if governments refrain from regulating them is already a powerful force in molding the shape of competition for markets in cyberspace. If free market policies significantly influence the construction of proprietary interests in cyberspace, it is important to explore how the Internet has affected the traditional functioning of markets. To do so, we must consider the informational properties of intellectual property rights and how these properties affect the behavior of firms and individuals.33

[*PG554] Two significant benefits of the Internet for markets are: (1) vast reductions in transaction costs;34 and (2) shifting boundaries of the firm that require new organizational strategies to enhance productivity.35 Expansive intellectual property rights in cyberspace can adversely affect the ability of firms to capture these benefits.36 For cyberspace transactions, intellectual property regulation is only one piece of a chain of strategies designed to take advantage of the opportunities to use the Internet to overcome limitations present in traditional markets.37 Intellectual property regulation thus peculiarly affects the link between innovation and productivity in the information economy.

Part I of this Article considers market solutions achieved by the competitive ethos as an important characteristic of cyberspace for policymakers.38 Indeed, it is within this competitive framework that governance practices are likely to “harden” as multinational actors, both corporate and individual, share, modify, and ratify commercial customs.39 Despite the strong influence of free market arguments in areas ranging from privacy concerns to First Amendment rights, the corresponding expansive construction of intellectual property rights only affirms a narrow vision of competition in cyberspace. As I argue, expansive rights will favor existing forms of business organization rather than encourage investment in strategies that exploit the bene-fits of the network beyond the pervasive pricing or advertising models that have characterized most firms’ entry into cyberspace. Many of [*PG555]these schemes entail large one-time sunk entry costs.40 Part II discusses several characteristics of information markets and how proprietary rights influence the utility of traditional market factors such as price, transaction costs, bargaining, and equilibria.41 Finally, Part III identifies some governance implications of the new challenges that a market for information poses, and what lessons can be gleaned about the future of proprietary rights in cyberspace, particularly for competition and, ultimately, for e-commerce.42 The discussion here is by no means exhaustive; indeed each of the issues merits significant analysis. However, by raising them in a preliminary fashion, this Article will demonstrate the risks and stakes of expansive construction of proprietary rights in a broader macroeconomic policy context.

I.  Lex Mercatoria and the Invisible Hand

For both commercial and personal activity,43 the construction of intellectual property rights largely determines the bounds of legitimate activity in cyberspace. In the classic regulatory model, the initial grant of rights rewards innovation and encourages further investment in the production of goods and services.44 It therefore is important to [*PG556]preserve incentives to innovate in order to secure continued productivity, and to enhance competitiveness. Even with regard to trademark protection, which is not premised on the reward/incentive model, investment in a distinguishing mark plays an important role in market structure by reducing information search costs and transaction costs.45

Among other informational values,46 a grant of copyright or patent protection ideally informs users/consumers about the scope of permissible uses of the protected good, including what is not protected and thus freely available for use.47 In copyright, for example, where search costs (such as costs incurred locating owners or obtaining permission) can be high, and success at times impossible, several scholars have argued that the rise of institutional agencies and rights management systems may alleviate such costs.48 The complex rules governing the scope of protection, however, make it very difficult for [*PG557]uninformed actors to obtain information about which acts are legitimate without permission of the owner.49 Indeed, the most robust limitations and exceptions to exclusivity involve balancing tests that are not susceptible to bright line rules, thus making it difficult to measure the costs occasioned by “fuzzy” signals sent by the grant of a proprietary interest.50

Consider, for example, the fair use doctrine or the idea/expression dichotomy, which have been the subject of intense scholarly debate and judicial scrutiny.51 The typical user of a copyrighted work is unlikely to have a definite sense of when a particular use qualifies as a “fair use,” or how to distinguish an unprotectable “idea” from protectable “expression.” The affirmative rights of the public under the copyright scheme effectively do not exist when the exercise of those rights requires users to incur such significant information costs.52 Consequently, although proprietary rights may motivate capital markets in positive ways and reduce information asymmetries between investors and firms, there may in fact be a corresponding increase in information asymmetry between consumers and owners.53 The fact is, most owners tend to overstate the scope of [*PG558]their rights, and most users do not have sufficient knowledge of the increasingly complex rules of copyright law.54 Users must therefore acquire the necessary information to determine whether and how to use the protected work. Information acquisition, however, may not sufficiently resolve this asymmetry because even an attorney’s best guess as to whether a particular use is “fair,” or what distinguishes idea from expression, cannot predict with certainty how a specific case will be determined in court. It is possible that this depiction exaggerates the case: indeterminacy may simply be a problem at the margins and the case law reveals some aggregation of factors that guide a court in making determinations so that outcomes are largely predictable. Although this may be true in a world of print materials,55 the boundaries have certainly shifted in the digital context, and the scope of limitations on protected works is not at all clear.56 Institutional solutions may be just as over-inclusive as technological systems to prevent unauthorized access to the work; a license for a use that may be guaranteed to the public by the copyright scheme arguably is still an added cost in social welfare terms.57

It is necessary to mention a point concerning the acquisition of information by users to facilitate use of the protected work. A user’s decision to acquire information is efficient and socially desirable when the accuracy of the information is certain and the social benefit of the information exceeds the cost of acquisition. In other words, will the benefits that flow from a consumer’s change in behavior due to the acquired information maximize welfare? In the intellectual property context, this question specifically refers to the benefits of compliance with the scope of the right as decided by the owner when compared with the social value/benefit of the intended use. When the information is inaccurate and the consumer alters her behavior to conform to the information acquired, the possible welfare loss is doubled. [*PG559]Such loss consists of the cost of acquisition (search costs) and the cost of the use.

The situation may not be as bleak with respect to patents, in part because patents are subject to fewer exceptions and limitations, and because patent information tends to be much more significant between firms, rather than between firms and individuals. In most cases then, the incentive/reward model may supply sufficient motives for a firm wishing to invent around the patent to invest in costly information acquisition to determine the scope of legitimate innovative activity. Again, however, if the information is inaccurate (such as when the patent arguably is invalid), some welfare loss exists. This is because, in addition to the loss associated with the existence of wrong information, the would-be user incurred acquisition costs to innovate strategically around the invention. In light of increasing calls for patent reform,58 reliance on the informational properties of the patent grant is also suspect.59 Other policy interests, such as encouraging competition, may necessitate governmental interference with the way in which owners exercise patent rights in the market.60 Such actions may alleviate some of the welfare loss by limiting the power of the patent owner.

The way informational characteristics of intellectual property rights affect market structure and behavior requires consideration of the conditions under which such regimes make the initial allocation of a property right. Because the initial grant affects investment, proprietors conventionally argue for strong property rights.61 Indeed, the traditional debate is generally cast as one of property rules versus li[*PG560]ability rules.62 A distinction should be drawn, however, between well-defined property rights (perhaps through the use of rules rather than standards) and strong property rights. The latter facilitate market transactions and should be sufficient to encourage optimal levels of investment.63 It is difficult to define precisely how strong those rights should be, but there is a consensus that overly strong rights (either explicitly or through judicial construction) deter innovation.64 Investing more resources in maintaining the signal (meaning the proprietary right) in the cyberspace context, and further expanding the property interest without any evidence of greater transactional efficiencies or productivity, is simply socially wasteful and regressive.65

Perhaps then, defining the appropriate scope of rights for owners is not as pivotal as fashioning an appropriate remedy for users to deter overreaching by owners. Using remedies to encourage further creativity by users and to stimulate competition in the market, may better advance the goals of competition and innovation. In the first place, a system of remedies for infringement and for overreaching may create incentives for greater compliance on both sides of the transaction. Compliance in this sense would include cooperative bargaining by the parties to negotiate use of the protected work on mutually agreeable terms. Although this will not address the asymmetry problem, it gives creative users a bargaining tool.66 Thus, the overall social cost of the asymmetry may be reduced by bargaining that allows productive use on efficient terms.

Another possibility is to change the source of information from the owner, and to rethink ways of specifying rules67 rather than open-ended standards. This will facilitate effective screening68 by potential [*PG561]users and competitive uses of proprietary works in new ways to create new markets. In essence, it requires that the government become more involved in providing information either through simpler, clearer rules, or by directing the appropriate government agencies to provide counsel about requested uses of protected work, with such advice carrying some legal significance in the event of adjudication.

II.  Some Alternative Paradigms for the Market:
The Need for a Visible Hand

The most noted changes to the informational structure of markets in cyberspace are those associated with reduced transaction costs. Reduced transaction costs are most evident in the overwhelming ease with which buyers and sellers can find each other, acquire information about each other, and compare prices and products in cyberspace.69 The ability to create markets taking advantage of these characteristics can also introduce some monopoly features, as is evidenced by eBay, the largest marketplace on the Internet.70 Indeed, commentators have noted that, when dealing with the competing media giants, like AOL Time Warner, eBay chose the path of least resistance—rather than compete with AOL, eBay decided to work alongside it.71 Price aggregation and comparison software would eliminate monopoly gains of such large markets and enhance competition by eliminating advantages of large entities like eBay where markets are much more liquid.72 Ironically, it was precisely the use of intelligent software [*PG562]for this purpose that the court struck down, using a property theory of trespass to chattel, in eBay v. Bidder’s Edge.73 Such intelligent software also reduces the search cost for finding the lowest price to a point close to zero.

The same economic model of intellectual property rights in real-space pervades analysis of these rights in cyberspace: there is a presumed competitive equilibrium so that the allocation of property rights facilitates efficient markets.74 Economists, however, have demonstrated that equilibrium may be nonexistent in a competitive market with imperfect information.75 For example, in Bidder’s Edge, the court did not seem to give much thought to the fact that its decision at best reintroduced protection from price competition for eBay or, at worst, transferred the cost of finding the lowest price for goods back to users. The reduction or elimination of search costs improves competition in cyberspace;76 Bidder’s Edge’s attempt to gather this information with limited cost would have made the market more liquid.77 Price protection introduces information asymmetries that obscure what the parameters ought to be to determine whether the market is functioning well.

Imperfect information is also inherent in the construction of the permissible scope of activity with regard to exceptions to intellectual property rights. A competitive market assumes that each market participant believes that she has no effect on the activities of others. In a limitless market like cyberspace, this optimal state of competitiveness might even be considered “natural” in the classic sense, so that government intervention is hardly necessary. But, in fact, more government intervention may be necessary in cyberspace because the pres[*PG563]ence or absence of a particular market affects how other markets will function. For example, the presence of a market in data affects the market for licensing transactions: if consumers are highly concerned about privacy, standardized terms that give power to licensors to use consumer information in any way may induce dishonesty and reduce efficiencies in both markets. These cybermarkets are interlinked not only technologically, but also informationally. Consequently, there is a need to coordinate both types of linkages to achieve optimal social returns. Put differently, economies of scale made possible from standardization may be much less valuable where the information market reacts adversely to the proprietary tools that facilitate the interaction in the first place.78

The justification for intellectual property rights remains the same in cyberspace despite the fundamental difference in market structure. Like the incentive story of efficiency wage theory which states that firms will attract better workers (or induce workers to do better work) when they pay higher wages, the sacrosanct presumption is that granting intellectual property rights will create incentives for creators. Rights, like wages, operate as incentives in these markets. For cyberspace to function in equilibrium, however, such incentives must be given to all—and perhaps structured differently from the extant models. Incentives only truly have their desired signaling effect if others are able to respond with some degree of accurate information. As discussed in Part I, however, imperfect information abounds in the construction of proprietary rights.79 As such, it is possible to have an equilibrium (or multiple equilibria) where there is some “infringement” because narrower rights may force owners to be more creative and, in turn, may generate more robust markets.

Studies show that the capacity of firms to exploit the benefits of the Internet requires investment in both hardware and software.80 The form of protection employed by owners of the technology (such as patent or copyright) may affect the choice of a firm to outsource [*PG564]certain activities or to manage them internally. Where a firm chooses the latter, the terms of a license agreement will also determine the range of business strategies a firm may pursue.81 Basically, the structure of proprietary interests and how owners choose to leverage them in cyberspace may affect directly or indirectly each stage of a firm’s activities. Proprietary rights, then, impose additional costs on business decisions. Where costs are sufficiently high, firms will have to seek alternative ways in cyberspace to capture, increase, and maintain market share that do not require overly high payment of returns to owners of non-platform proprietary technology. Where costs are optimal, there should be an increase in productivity and innovation measured by Coasian bargains,82 innovative business strategies, or a combination of both. The ability to negotiate effectively around proprietary rights will serve to distinguish between goods and services of competitors as owners of technology learn to customize technology products to the specific needs of firms and individuals.83 The liquidity of most cyberspace markets, customized technology, and the reduction of information and transaction costs will enhance strategies for preserving investments in the technological infrastructure needed to participate effectively in the information economy.84

A large number of studies suggest that information technology is most valuable in its complementarity with other organizational changes within the firm, including the adoption of new business [*PG565]models.85 Using old organizational models and strategies with enhanced capabilities of information technology has generally been unsuccessful in markedly increasing productivity.86 If a significant portion of non-farm national productivity is related to investments in new organizational strategies,87 as much as capital investments in information technologies,88 the expansive trend in intellectual property rights as a means to foster innovation and national competitiveness in global markets is at least misplaced if e-commerce is expected to significantly expand markets. Further, some proprietary rights, particularly business method patents which very well may encompass such organizational innovations, will in fact harm national productivity.

Consider, for example, that e-commerce is dominated by firms that also dominate real world transactions.89 Indeed, e-commerce has become a shorthand for the extension of real-space power into cyberspace, instead of a means to leverage new businesses and expand the frontiers of existing business forms.90 Those few firms who experienced early success in cyberspace have turned predictably to intellectual property rights to exclude follow-on businesses. Thus, although small businesses may nibble around the edges of cyber-transactions, very few will become dominant market forces in cyberspace.91 This outcome may not necessarily be negative, and certainly it is not un[*PG566]precedented in the technological history of the United States.92 However, it is important to identify how intellectual property rights, which are more pervasive today than at any other time in history, might further lower the optimal number of new businesses, inhibit investment in organizational innovation, and eliminate incentives for firms with large intellectual property portfolios to invest in changes that may enhance firm output while at the same time these firms stifle competition through aggressive enforcement of intellectual property rights. Even where large traditional firms do engage in e-commerce, the construction of intellectual property rights may adversely affect optimal levels of competitiveness between firms.93

A few caveats are necessary. There are a number of reasons why e-commerce has not yet fully blossomed, and I do not mean to suggest that expansive intellectual property rights are the only, or even major, reason.94 Further, it is clear that intellectual property rights in cyberspace give a competitive advantage to businesses,95 either by providing new avenues for distribution, facilitating new business strategies, or enhancing existing ones.96 This inceptive stage of e-commerce has witnessed only incremental adaptations—using cybermarkets as substitutes for real markets. However, mere transfers of existing business models and strategies to the on-line environment is likely to be less of a source of increased productivity than the use of information technology tools to create new markets and to alter, fundamentally, the way consumers and businesses interact. The regulatory emphasis for intellectual property rights in the digital economy so far has been to preserve established business models and organizations, not to expand them or to facilitate entry by new businesses with the possibility [*PG567]for exponential increases in productivity through new organizational models. In part, the ill-fated Napster experiment is at least an example of this trend.97 Further, expansive rights, to the extent that they signal prospects for greater market share, also misdirect capital to ventures that, for organizational or other reasons, may not be sustainable over the long term. Intellectual property rights and the rights management system of the DMCA, along with common law theories that serve to augment, reinforce, and consolidate monopoly power without corresponding productivity gains, have the combined effect of inhibiting productivity and utilization of knowledge spillovers in cyberspace in unpredictable ways.

In the classic free market model, limited exceptions are recognized for government interference with a well-functioning market.98 Of these exceptions, my argument for the need for a visible hand in the regulation of cyberspace markets draws on the infant industry limitation to the free market model espoused by John Stuart Mill. According to Mill’s classic treatise, Principles of Political Economy, infant industries are those that are unable to withstand foreign competition without some form of protection by the government, but that with [*PG568]time, could grow and compete successfully in the global market.99 The case for protectionism with regard to infant industries is attributed to a mercantilist policy to promote domestic employment and industry. Mill argued that government assistance to overcome entry barriers and other obstacles associated with start-up costs is necessary for a short time to make it possible for the public gains of a new industry to be a viable prospect for the nation. Some of these gains include the creation of new wealth and capital, acquisition of new skills, and production of new goods and services by domestic firms.100 In addition to the considerable debate about the legitimacy of this exception to free trade and markets, scholars intensely debated which policy could best support such industries if they were to be protected. In particular, the choice between tariffs on imports or domestic subsidies evoked considerable comment. Alexander Hamilton, a strong proponent of infant industry protection, preferred the use of a subsidy.101 Unlike tariffs, subsidies do not lead to scarcity (and thus higher prices) and subsidies have a direct effect on the industry, thus increasing the prospects for early success. Other political economists adopted a focused theory of promoting infant industries through, for example, government assistance in the transfer of technology.102 Such an exception to free trade would be justified if the domestic industry could, with such technology, produce the goods at a comparative advantage to foreign manufacturers.103 One of the advantages of such a specialized exception was that greater domestic production of an imported product would foster innovative activity and

diminish the propensity to servile imitation. . . . Every useful art is so connected with so many, or with all others, that whatever renders its products more easily attainable, facilitates the operation of the whole circle of arts, and introduces change—the great agent in producing investments—under the most favorable form.104

[*PG569]Other economists writing from a protectionist perspective identified the infant industry exception as an important aspect of economic development.105 Mill’s work, however, was the formal incorporation of the infant industry exception into classical free trade theory. In later editions of his work, Mill qualified his commitment to the infant industry exception along the same lines as patent protection.106 He emphasized the importance of a limited duration and added an element of decreasing levels of protection in later years of the protection.107 Importantly, each of the major proponents of the infant industry exception focused on increasing domestic productive capacity and innovation returns that could be diffused to the society as a whole.

In the context of intellectual property rights, the initial grant serves to address a public goods problem by creating artificial fences around intangibles. As proprietors further expand rights by contract, real property, and even tort rules, the signaling properties of the initial grant are weakened and the informational structure of the market becomes more difficult to ascertain. This, in turn, raises information and transaction costs for would-be users and producers. To the extent that access and use are important pieces of the social value derived from well-defined proprietary interests, this value is eliminated through reliance by firms on extra-intellectual property rights to preserve market share, hinder market creation, or in other ways stifle competition in the e-commerce arena.108 Consequently, courts should severely limit recourse to penumbral common law claims.

Further, as discussed earlier, increased productivity gains in the information era is not limited to innovation that results in a product or service susceptible to protection through the extant intellectual property system. Most proprietary rights are associated with technol[*PG570]ogy that provides the platform for e-commerce; these rights do not directly contribute to productivity gains. Instead, they directly facilitate novel organizational changes that enhance efficiency gains inherent in new technological capabilities: greater productivity and innovation.109 Therefore, the reliance by traditional firms on large intellectual property portfolios, and the expansive trend of proprietary rights in the digital context, actually serve to divert investments to less desirable objects, such as investing in rights-management systems or other technological devices aimed at limiting access to proprietary works. Over-reliance on proprietary rights may suggest that the rate of on-going investment in innovation in such firms is less than optimal. Proprietary rights thus can serve as a disincentive for firms to engage in the organizational innovations that so far have been characteristic of increased productivity in the market for information.

Additionally, over-reliance on proprietary rights as a means of leveraging real-world advantage in cyberspace unduly burdens secondary users and innovators who, free from traditional organizational restraints, may bring the most value to the ways and strategies of utilizing the Internet to produce new goods and services. Finally, it is important that use of protected works in a manner that creates new markets or new goods and services in the information market should enjoy some protection from infringement claims in order to encourage the level of “risky” entrepreneurship that a new realm might involve. The infant industry exception was in part justified by the need to provide investors with some assistance to overcome the barriers to entry in market creation. Greater proprietary rights to account for shifts in externalities caused by digital technologies may be justified by property theory, but such rights also encourage a race to the bottom mentality to over-invest in “rights management” and compromise the prospects for significantly enhancing productivity in e-commerce.

III.  Information Markets, E-Commerce,
and Internet Regulation

Statistics indicate that e-commerce has not been a major contributor to the national economy, although there is anticipation that its effect will continue to grow.110 In my discussion so far, I have considered proprietary rights as part of a much larger e-commerce world. Intangible assets, such as management skills, training, and strategies [*PG571]not covered by intellectual property rights, are the key factors to enhancing innovation and productivity in a world of reduced transaction costs. The exercise of proprietary rights, however, can greatly affect the ease with which firms can implement such organizational models because these models incorporate technological platforms that are subject to proprietary control. Further, as information agents, grants of copyright or patent protection do not always send reliable signals either to investors, users, or secondary innovators. This is particularly true in new markets.111 Thus, the case for expansive proprietary rights in cyberspace, from a macroeconomic perspective, is problematic.

The use of information in markets is different from the notion of information as the subject of a particular transaction. Both are critical components of the efficiency of e-commerce business models: the former reduces asymmetries between market actors and facilitates more efficient markets, while the latter includes goods that often are the subject of proprietary rights. Transaction costs are at least doubled when the proprietary right signals inaccurate information to users and downstream inventors, and bargaining breakdowns cannot be avoided given the strong right given to the owner of the product.112 The use of institutions to address transaction cost problems in real-space may not sufficiently address the problem in cyberspace. First, as I mentioned earlier, transaction costs are not just economic: they include the cost of inaccurate information so that payment for use when that right is freely available for a particular instance is a social waste.113 Second, institutions tend to rely on standardized systems to enhance efficiency.114 The value of organizational changes in fostering the cyber-economy may require a flexibility in license terms that suggest that standardization might create barriers for some firms, or facilitate exit by others where the costs are sufficiently high.

If proprietary interests make use of information costly, or impossible, there certainly will be an adverse effect on the market for cyberspace. One could suggest that this simply means that proprietary rights should be weaker in cyberspace. The story, however, is more complex than this. It suggests that the structure of proprietary interests needs to be re-examined to determine how to maximize the [*PG572]benefits of property rights and the potential of the Internet to create new markets in user experiences, products, and services.

The global nature of the Internet raises important challenges for how governments may choose to interfere with markets in cyberspace, particularly with respect to the allocation and construction of proprietary rights. Governments cannot unilaterally contain strategic choices made to enhance competitive welfare in domestic markets by restructuring proprietary rights in cyberspace. Unilateral national changes in this regard may have some initial adverse consequences for domestic firms and innovation. Thus, nations should consider coordinated policy responses in these areas, particularly competition laws.

Among industrialized countries, significant differences exist in competition policies, information polices, and levels of R & D investment. Each of these regulatory schemes interact with innovative activity to yield optimal levels of productivity. These differences also contribute uniquely to the comparative advantage of each nation, thus suggesting that harmonizing the innovation regime is, at the very least, impracticable.115 In some aspects, it is important for nations to be able to fashion rules that benefit their own domestic e-commerce economies, while maintaining a framework that encourages regulatory cooperation. In this regard, international law offers some lessons.

International law demonstrates that it is possible, and expected, that nations should control acts/behavior that are considered deleterious to their national well-being or laws. Indeed, numerous examples of these “controls” with regard to cyberspace already exist.116 Further, the very existence of cyberspace is a reflection of common technological standards—”protocols”—that make it possible for interaction to occur between millions of users. The existence of a common technological language suggests that coordination games between nations and private “sovereigns” are indispensable for the viability of the Internet. For example, both the TRIPS Agreement and the WIPO Treaties are significant complementary legal protocols that are based on the current technological structure of the Internet.117 Certainly, U.S. implementation of the WIPO treaties indicates a supposition that the extant legal and technical design will (or should) remain the same so that owners may control their property interests in any way [*PG573]necessary.118 The controversial anti-device and anti-circumvention provisions of the DMCA serve as the tools of such preservation.119

The very existence of a protocol indicates that standardization is desirable in the social design of cyberspace, and that the conditions for exclusion are inherent in this design.120 Exclusion in this regard will not necessarily follow the traditional patterns of protection versus access. Indeed, I suggest that the coordination games, because they involve so many actors in different geographic regions, will facilitate some distributive efficiencies that will permeate orthodox barriers that have a tendency to exclude or marginalize individuals based on class, social status, or geographic location.121 A maximalist construction of intellectual property rights under new treaties, however, may erode such efficiency gains. In this regard, countries may raise sovereignty claims to facilitate bargaining around the minimum standards of the TRIPs Agreement to localize the effect of maximalist construction.122 Further, the presence of institutions designed to encourage compliance with evolving norms in cyberspace will not sufficiently ensure such compliance. Compliance with cyberlaw, as with international law, will depend on an aggregation of interests structured to create incentives and to maximize payoffs for a majority of the players. Thus, cyberspace, despite its seeming detachment from real-space constraints, is likely to be increasingly dependent on real-space institutions to sustain the tools that have molded its current shape.

Perhaps the most important lesson of international law for cyberspace is that the fundamental assumptions that govern the regulation of intellectual property rights may reveal biases that produce outcomes that we would otherwise not tolerate in a liberal market economy. It leaves us with the challenge that we may need to reconstruct intellectual property rights, as the currency of cyberspace, in a way that helps accomplish the constitutional goals of “progress” by elevat[*PG574]ing the twin values of freedom per se and freedom of commerce. Finally, international law teaches us that cyberlaw is not a unitary or isolated set of norms and legal prescriptions. Instead, the regulation of cyberspace will consist of a complementary collage of regulatory systems in a variety of subject areas to ensure that we maximize welfare in cyberspace. This will require courts to understand both the technology at issue and also the way information technology has altered our traditional notions of “markets” and how they function.

Conclusion

The expansion of intellectual property rights, particularly the endorsement of business method patents,123 has uncannily extended a historical project124 whose discourse focused on distance and difference to justify control and domination to an ultra-modern technological medium that relies on proprietary control to justify deference to efforts to strengthen rights and legitimize efforts to exclude access by others. The dominant laissez-faire model of international trade has been extended to e-commerce, suppressing close scrutiny of informational changes that information markets have occasioned in transactions in cyberspace. For example, prior to the Internet, firms enjoyed some protection from price competition where search costs were high and firms could not easily ascertain the expected benefits of finding a lower price.125 When prices are posted on the Internet, however, such protection is effectively eliminated. This in turn puts pressure on the firm in deciding whether to post the price in the first instance.126 Choosing not to post prices on the Internet, however, may eliminate some of the benefits that accrue from liquidity and reactivate transaction costs for buyers and sellers. As a regulatory matter then, proprietary interests should not be construed in a manner that impedes the ability of buyers to reduce search costs for the lowest price. The resulting increase in competition will foster creative business strategies that [*PG575]may spawn even greater benefits in the form of new business models or organizational structures and improved e-market performance.

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