The marketplace of ideas

Please note that this post is from 2010. Evaluate with care and in light of later events.

Intellectual property, despite the name, doesn’t quite work like regular property. A look at intellectual property markets highlight problems with a pure free-market approach that aren’t necessarily visible with other markets. For example, perfectly competitive markets require products that are perfect substitutes to best match buyers and sellers and to allow for market-based choices by buyers (and efficient determinations of price).

But with intellectual property, even more than with traditional goods, one encounters dissimilar products that are not substitutable. Shubha Ghosh, in The Fable of the Commons: Exclusivity and the Construction of Intellectual Property Markets, uses songs to illustrate this: one song is both the same as and different from another song, but they are not perfectly interchangeable. The same may be said for some chemical and industrial processes. As a result, the intellectual property market cannot allocate goods based on price alone, but also on other characteristics (like quality or type of product). This does not lead to efficient trades or distributional balance.

In addition, intellectual property markets are deeply concerned with the licensing of rights, such as royalties and similar pricing arrangements. The complexity–with dimensions going beyond simple price–means often there is an asymmetry in information and strategic behavior by creators and users. The result is inefficient and undesirable distribution.

As a final example, most analyses of ideal markets suggest that buyers and sellers will reach agreement, but such analyses typically ignore situations in which a customer’s life is at stake–leading to a tendency to pay any price to get a product. There is, notes Ghosh, “something troubling” about this situation. But it is not necessarily easy to select a better alternative to these market-oriented models–somehow justice needs to factor into the model, but how?