Circulation Title: An Information Framework for the Planning and
Design of "Information Highways"
Dr. W. Curtiss Priest
Center for Information, Technology, and Society
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-
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THE CHARACTER OF INFORMATION:
Characteristics and Properties
of Information Related to Issues Concerning
Intellectual Property
February 10, 1985
(Revised September 2, 1985, October 1, 1994)
In Support of the Office of Technology Assessment
Project on Intell
ectual Property
Contract 533
-
1510.0
(c) Center for Information, Technology & Society, 1985, 1994
Parts may be copied in derivative works with full attribution
under the Doctrine of Fair Use.
Author:
W. Curtiss Priest, Ph.D.
Submitted to:
Congress of the United States
Office of Technology Assessment
Washington, DC 20510
The Character of Information:
Characteristics and Properties
of Information Related to Issues Concerning
Intellectual Property
Table of Contents
Page
1. An Operational Definition of Information 1
1.1 The Function of Information in Achieving Outcomes 1
1.2 Information as Intellectual Property 3
1.3 Con
clusion 5
2. Characteristics and Properties of Information
in Commerce and Transactions 6
2.1 Market Related Characteristics of Information as 6
a Commodity
2.1.1 Intrinsic Co
-
production 6
2.1.2 Time Constrained Consumption of Information 7
2.1.3 High Investment to Reproduction Cost Ratios
for Information 7
2.1.4 Relevance of Information More Variable
Across Consumers 8
2.2 Market
-
failure Related Characteristics of Information 10
2.2.1 Public Good Characteristics 11
2.1.1.1 Inappropriability 12
2.1.1.2 Non
-
depletability 13
2.2.2 Externalities
13
2.2.3 Indivisibilities (of supply) 15
2.2.4 Economies of Scale and Scope 16
2.2.5 Inherent Uncertainty and Risk in Information
Production 17
2.2.6 Information/Knowledge About the Information 19
2.2.7 Intangibility 19
2.2.8 Transaction Costs and Information
21
Page
2.3 Non
-
market Related Characteristics of Information 23
2.3.1 High Intrinsic Relationship to Human Welfare 24
2.3.2 High Intrinsic Relationship to Freedom and
Privacy 26
3. Relationship of Information to Products and Services 28
4. Rewards, Incentives, and Funding Sources f
or the
Creation of Intellectual Property 36
4.1 Rewards, Incentives, and Funding for Science 36
4.2 Rewards, Incentives, and Funding for Culture 39
4.3 Rewards, Incentives, an
d Funding for Products
and Services 40
5. Structural Role of Intellectual Property in Maintaining a
Viable Economy 43
6. Summary
45
Appendix A
-
Bibliography 46
EXECUTIVE SUMMARY
To comment on issues concerning intellectual property it is useful
to identify
what distinguishes information from other forms of property.
Fourteen distinguishing characteristics of information are identified and
discussed in relation to property rights.
These characteristics, however, are not only useful for
considering is
sues concerning intellectual property but for more generally
inquiring into the nature and purpose of information in society.
Summarized below are brief definitions of the fourteen characteristics and
introductory remarks about the general importance of th
e distinguishing
characteristic.
Definitions and Introduction to Fourteen
Characteristics of Information
As a Commodity:
1. Intrinsic Co
-
production
The character of information to be instrumental in achieving other
goods and outcomes. This character makes information inherently
more valuable than goods that are not instrumental in character.
2. Time Constrained Consumption
The character of information to occupy more consumer time per
dollar expenditure than other commodities. This characteristic
combined with the relatively low reproduction cost characteristic
(3) has long run employment implications.
3. High Investment to Reproduction Cost Ratios
The cre
ation costs of information divided by the cost of
reporducing one unit of the good. The implications of this
characteristic are economies of scale and scope, and resulting
market structure.
4. Relevance, More Variable Across Con
sumers
The character of particular information be be acquired usually
only once. The results is high variability in consumption by each
consumer. This characteristic tends to work in the opposite
direction of low reproduct
ion costs, since it implies that
information will become more and more customized and
particularlized.
Market
-
failure Related Characteristics:
5. Public Good
The same information can be used by many consumers without
interference.
Inappropriability
The difficulty in receiving full market compensation for
the creation of infor mation due to the problem of
exclusion. The result is under
-
production and
under
-
compensation.
Non
-
depletability
Information does not dissipate with use. Producers must
compete with past producers but society benefits with an
accumulation of knowledge.
Goods with substantial public good characteristics such as
national defense, recreational parks, and safety facilities such
as lighthouses are usually supplied by the government to reduce
the "free rider problem" associated wit
h inappropriability.
6. Externalities
The effects of information, usually positive, that are not
accounted for in its price. The effects of information,
especially as education, have considerable positive externalities
in terms of reducing unemployment and increasing general social
welfare.
7. Indivisibilities (of supply)
Information must be purchased in lumps; these lumps may be vastly
greater than the information actually sought. Thi
s characteristic
along with the variable relevance characteristic will contribute
to utilization of information technology that reduce
indivisibilities and permit customization.
8. Economies of Scale and Scope
1) Decreas
ing unit costs when the scale of operation is
increased; and 2) decreasing costs associated with joint
production.
Historically, information distribution such as telegraph,
telephone, radio, and television have exhibited suf
ficient
economies of scale and scope as to require government regulation
to reduce problems associated with natural monopolies.
9. Uncertainty and Risk in Production
The inability of firms to produce information when risks and
uncertainties are present. A problem, in particular, in the
generation of basic knowledge that requires substantial investment
in research.
10. Information/Knowledge
Information about information is less likely to be avai
lable
because of appropriability problems. This leads to
under
-
consumption of information due to problems of search.
11. Intangibility
The character of the value of some information to be
non
-
monetizable. Information
is the basis of education,
communication, and other activities which are difficult to value
because the contribution of these activities to the welfare of
society is largely intangible.
12. Transaction Costs
The additiona
l costs incurred by the producer in appropriating the
value of information. [Transaction costs, in the economic sense,
are those costs associated with negotiation, contracting, and
enforcement, and does not refer to the the
general costs related
to distributing or transmitting information.] Transaction costs
are a major contribution to indivisibilities in the supply of
information since contracting and enforcement costs are difficult
to reduc
e below a certain minimum.
Non
-
market Related Characteristics:
13. Intrinsic Relationship to Human Welfare
Human welfare is a product of individuals and groups achieving
desired outcomes. Thus, information is intrinsically related to
human welfare in that it inherently facilitates the achievement of
outcomes.
14. Intrinsic Relationship to Freedom and Privacy
Freedom
--
Information affects the range of choices available to
the individual. Freedom is a la
ck of restriction on choices.
Thus information leads to greater freedom.
Privacy
--
Incomplete information may result in defamation of
character. Therefore, information must be selectively made
private to reduce the probab
ility of defamation.
The Character of Information
Characteristics and Properties
of Information Related to Issues Concerning
Intellectual Property
1. An
Operational Definition of Information
The common
-
use definition of information refers to the act of
informing or the condition of being informed. But how can we really judge
if some arrangement of bits, words, etc. really does inform? To answer
that we should look at what it means to inform
--
we should see what is
different about a person after information has been communicated to him or
her.
1.1 The Function of Information in Achieving Outcomes
As the section title implies, it is usefu
l to think in terms of
the function of information to define it. Indeed, the common
-
use
definition states a function
--
"the act of informing." Once "informed",
what is different about the person? The choices that a person might make
are different. For
example, if I inform a shopkeeper that it may rain,
the shopkeeper may choose to cover
-
up outside merchandise or may choose to
close the shop's windows. By informing the shopkeeper I have provided
"... a basis for choice
--
that is, a belief in the
greater efficiency of
one choice compared to another" (Ackoff, 1972, p. 153). The concept of
"efficiency" is a very key one. It is tied with a fundamental purpose of
information and human activity.
Nearly all human activity is directed toward ach
ieving outcomes.
Outcomes include getting to the bank on time, relaxing, getting an A in a
course, and cheering a friend. These outcomes can be achieved with more
or less efficiency. Now there are two basic attributes about a person
that affect the effic
iency of achieving an outcome
--
1) The ability to
choose among alternative ways of achieving the outcome, and 2) The
capability to make sure the choice succeeds. Returning to the shopkeeper,
the outcome is keeping rain off the merchandise. Informing t
he shopkeeper
of the possibility of rain changes his choices
--
he can now know to
protect the merchandise before it rains. But having chosen to, say, cover
an outside table with plastic, his capability to keep the plastic in place
(using lead weights or
whatever) also determines the efficiency of
achieving the outcome. For if the plastic were to blow away the
efficiency of protecting the outside merchandise has gone to zero. If
information affects the basis for choice, what affects the capability of
ens
uring success? Success comes from practice, instruction, and other
activities that affect capability.<*>
---------------------
<*> In accounting for the shopkeeper's actions we said, as a result of the
information about rain, he could now "know" to
protect the merchandise.
The literature on information often refers to the related term knowledge.
Indeed, Macklup's general term in his writings is the word knowledge
rather than the word information (Macklup; 1962, 1980, 1984). Also,
Lamberton's antholo
gy of writings was on "economics of information and
knowledge" (Boulding, 1971, etc.). With the concepts introduced so far we
can relate information and knowledge.
A person's "degree of knowledge" is his efficiency in achieving an outcome
by making choice
s
--
i.e. his ability to make good choices. Information
--
by informing the person of possible choices and their relative
potential for achieving outcomes
--
improves a person's degree of
knowledge (cf. Ackoff, 1972, p. 48).
-
2
-
Thus the fundamental function of information in human activity is
to affect the efficiency of achieving outcomes. The effect need not
always be positive for if I am poorly informed, I will make less efficient
choices and my efficiency
will decline.
By defining information in terms of outcomes, the value of
information follows immediately. Take the expected value (EV) related to
achieving an outcome
--
this is the sum of the probability of each
particular choice, times the
efficiency of each choice, times the relative
value of the outcome (cf. 2.3 for relative value). Considering the
expected value (EV>1<) without the information and the expected value
(EV>2<) with the information, the value of the information (EV<i>) is:
EV>i< = EV>2<
-
EV>1<
In economic terms, EV>i< = P (price), but only:
1) When there are no market imperfections, and
2) For those consumers where the marginal utility (the utility of
the last unit) equals the marke
t price.
Examples of where the price is not a proxy for value include
situations where the information provides benefits to other than the
purchaser (a positive externality) or where the purchaser would have paid
more than the market price. In the
latter case, with no market
imperfections, we know that the value to the purchaser is at least the
market price and we could attempt to use a "willingness
-
to
-
pay" measure
(how much the person says or indicates he might pay) for the information
as a better
proxy for its value (cf. discussion in 3).
This choice based approach to the value of information differs
from Machlup's approach where he uses the opportunity cost of the
productive factors as a shadow price for the value of information
(Machlup,
1980, p. 208). The approach is more like Hall's
--
"[the] value
of a specific message is equal to the utility gained from shifting to a
better choice among terminal actions" (Hall, 1981, p. 161) and Taylor's
description of information value in decision c
ontexts (Taylor, 1985).
We can now define information as:
Information: A communication that produces a change in the
tendencies to choose certain actions over other actions
(where a change in tendency can be observed by noting
changes in the probabilities of choice). (cf. Ackoff, 1972,
p. 144).
Mackaay (1982, p. 107) states, "[i]nformation is the essential
ingredient in choice..." Cherr
y (1966, p. 170) states, "Information can
be received only where there is doubt; and doubt implies the existence of
alternatives
--
where choice, selection, and discrimination is called
for."
At the recent Elsevier Symposium on Information Policy a
nd
Scientific Research, Manten and Timman examine "external" and "internal"
definitions of information. An external definition of information
presented by Vinken (Manten & Timman, 1983, p. 154) defines information as
something someone is willing to pay fo
r. Internal definitions of
information are typically: "Information consists of data, that change the
world view of the receiver" (Manten & Timman, 1983, p. 7). The internal
definition is rejected because "it is impossible to say which data are
informatio
n and which are not."
-
3
-
The above definition, however, is not an internal definition but a
different and more fundamental external definition. The problem with the
strictly economic external definition is
that it excludes all information
for which pecuniary (monetary) measures are inapplicable and all
information which a person wouldn't pay for. For example, if I inform my
daughter that she must stay in at night, I doubt she would pay me for that
informati
on. Manten & Timman, similarly, reject the external economic
definition.
We can also define communication as:
Communication: A message between sender and receiver that
affects 1) the choices of the receiver (information, as
above), 2) capabilities of the receiver (instruction),
and/or 3) affects the receiver's values (motivation).<*>
1.2 Information as Intellectual Property
To what extent is intellectual property a piece of information?
We shoul
d investigate some particular forms of intellectual property and
see how they meet the definition. Some forms are:
An invention
--
An invention is the embodiment of many new
choices. The invention combines parts and processes in new
combinations to produce the desired effect. A description of the
invention, such as a patent, or the invention itself in practice
is informing since it conveys to others how a desired effect can
be attained with new choices or d
ifferent combinations of choices.
For example, to create a letter printer, the invention may relate
to spraying ink rather than transfering ink by impact. (The idea
of spraying ink, per se, cannot be patented, rather the embodiment
of the idea in a specified set of choices for making the printer
is what is patentable.) Thus, invention clearly is information.
A song
--
The music and score are copyrightable under law. Songs
can evoke past feelings an
d evoke new feelings by providing a
vicarious experience and stirring empathy as well. They can be
symbols and images to identify with and emulate. A sense of
catharsis is common as difficult situations are experienced
at
-
a
-
distance.
---------------------
<*> This, like the definition of information, is an "idealized"
definition. We determine whether communication took place by whether
behavior changes. The difficulty in actually observing changes is a
secondary issue.
Also, communication may have occurred but not resulted
in an observable behavior change. This is also a secondary issue since we
could construct a situation for the individual to test for changes in
choices that would reveal whether communication took pl
ace. The advantage
of the approach is that it distinguishes between communication and noise
--
if a message is heard but does not result in behavioral change the
message was noise rather than communication. Similarly, a message is said
to contain
information only if there are resulting changes in choices,
otherwise there was no information, only noise.
A message is a set of one or more signs intended by its producer to
produce a response in the receiver (where a sign is anything that is a
potential
producer of a response to something other than itself).
-
4
-
Since much of the effect of a song is affective (affecting
feelings) the relationship among feelings, outcomes, and
information s
hould be identified. A feeling is the sense of
satisfaction or dissatisfaction associated with a particular
outcome or potential outcome. For example, the feeling of anxiety
is a sense of dissatisfaction with the uncertainty of a
potential
positive outcome. (If I sense that the actions of a co
-
worker
will jeopardize my getting a promotion, I will feel anxious about
my job.) Thus, feeling is an evaluation associated with an
outcome (cf. Ackoff, 1972
, p. 100).
A song provides the listener with a synthesized experience that
temporarily replaces (or becomes) "reality." The experience can
be mainly vicarious, mainly empathetic, or both. If it is
vicarious, the experience
substitutes for one's own; if it is one
of empathy, the experience becomes like a close relationship to
another. There are two behavioral effects of these experiences 1)
The positive and negative feelings can be "consumed", for example,
a stirring piece of music can evoke exhilaration and that can
simply be felt, and 2) The feelings evoked can influence future
choices. Feelings influence c
hoices mainly by becoming attitudes.
For example, marching music can be used to build up strong
attitudes of nationalism. A strong nationalistic attitude will
then result in loyalty to country and other forms of patriotism.
Thus a song is partly information but not obviously so. A song,
by creating synthesized experiences, creates feelings and
attitudes that influence choices to achieve outcomes and is,
therefore, by definition information. Songs al
so are motivational
(i.e. produce changes in a person's values) and are consumptive
goods
--
to be enjoyed for the immediate sensate.
A Textbook
--
Textbooks are subject to copyright. The material in
the textbook directly
changes the reader's available choices
through the knowledge that it brings the reader. For example, if
the reader needs to show a correlation between crop growth and
rainfall there are varying degrees of efficiency he can achieve
in
obtaining the outcome
--
a statement of the correlation. He might
have no notion about how to go about making this statement. A
textbook on statistics would provide information about the
technique of regression analysis
and the R<2> term that expresses
correlation as a number from 0 to 1. With this new information,
the reader would choose that analysis and his efficiency would
significantly increase. (His capability may still be low and
require practice and instruction to be very efficient in achieving
a correct outcome.)
Thus, a textbook squarely fits the definition of information.
In summary, while most intellectual property is mainly
information, there
are exceptions. In particular, music, movies, and
similar products that create synthesized experiences are part
informational, part motivational, and part consumptive. Further, the
proportion of these three components depends on the response of the viewe
r
or listener.
-
5
-
What remains is the question of what is it that intellectual
property rights are really given for. As technology continues to change
the medium of expression, it is important to distill what
is fundamentally
being protected by patent law, copyright law, etc.
It is commonly stated that what is being protected are not these
ideas but the form of expression. While this loosely pins things down, it
is too vague to apply to many new situa
tions resulting from technological
change. Let us consider the textbook again.
Paul Samuelson's Economics is an excellent textbook. Why do I say
that? Because it is comprehensible, anticipatory, progresses logically,
is well illustrated, and is
comprehensive. These features make it easier
for me to improve my knowledge. This comes back to a notion of
efficiency.
As indicated above, what makes information valuable is how it
changes my efficiency in achieving an outcome. Thus, what is v
aluable
about a piece of intellectual property is how effective it is in changing
my efficiency. The list of positive features on Samuelson's textbook all
relate to how effective it is in changing my efficiency. It is this
aspect of the work that is uniq
ue and can be protected.
As a short cut, however, copyright protects the work by preventing
copying. Of course, a good copy would have the same efficiency
characteristics as the original, and by preventing copying the work is
"protected." Can we,
however, generalize the notion of efficiency to get
a more fundamental protection approach? Particularly when "bits and
pieces" of various works can be combined on wordprocessors, in film
editors, etc. problems of copyright and royalties become difficult
.
To accomplish this, the concept of efficiency would have to be
generalized to include not only information but motivation and consumption
so we can account for synthesized experiences. With these in place, we
could deal with issues of imitations
, replicas, and partial copies. As a
guide, it would be useful to compare court decisions on copyright and
patent infringement with the evolving theory.
1.3 Conclusion
The definition of information permits us to identify the extent
that informati
on is embodied in intellectual property. The value of
information follows readily from the definition. The definition, by tying
messages to outcomes, is not suceptible to the problems associated with
definitions of information that are defined in terms
of bits. The
definition is also a reasonable extention of the common use meaning of the
word.
-
6
-
2. Characteristics and Properties of Information
in Commerce and Transactions
Information in commerce ha
s different characteristics from most
economic commodities. In a society whose commerce is based increasingly
on buying and selling information these characteristics will have
increasing significance. Also, there are inherent characteristics of
informati
on that relate to non
-
economic transactions such as the role of
information in maintaining human relationships. Fourteen different
characteristics of information are identified and their implications to
commerce, transactions, and intellectual property ar
e described.
The characteristics are grouped in three categories. The first
category, "market related," pertains to commodity characteristics that set
information apart from other goods in market activities. The second
category, "market
-
failure r
elated," pertains to characteristics of
information as a commodity that cause markets to behave inefficiently (or
not at all). The third category, "non
-
market related," pertains to
characteristics of information in non
-
economic transactions
--
primarily
those comprised of human relationships.
2.1 Market Related Characteristics of Information as a Commodity
Drawing on the definition of information in Section 1, information
as a commodity can be examined. Fundamentally, producers of information
ar
e in the business of increasing the efficiency of choices made by the
purchaser of information. Their products are the instruments by which the
purchasers increase their efficiency by "consuming" the product.
2.1.1 Characteristic I
--
Intrinsic Co
-
produc
tion
Information is not typically the object of consumption as are
apples, coal or umbrellas. In contrast, information has an instrumental
value
--
it aids in attaining desired outcomes. We thus refer to
information as an intrinsic co
-
producer.
Information inherently is a
co
-
producer of outcomes. New information works in tandem with the
knowledge already possessed by the person and with the capabilities of the
person to achieve outcomes. The same applies to groups, families, firms,
and other or
ganizations.
There are many classes of commodities that are co
-
producers.
While we do consume pencils as they wear down, the pencil is a co
-
producer
of the written word. Cosmetics are co
-
producers of romance and cars are
co
-
producers of transporta
tion. But all of these co
-
producers are
dissipated as we use them. Perhaps the closest parallel to information is
the chemical catalyst. The catalyst is not consumed in the reaction and
yet accelerates the process. But even most catalysts become
contaminated
after a while and need to be replaced.
Some writers have termed information a resource (Levitan; 1980,
1982, Cleveland, 1982). A resource is something that can be drawn on for
help. Most resources are depleted with use
--
oil, iron o
re, etc. A
non
-
depletable resource such as solar power is a closer analogy to
information.
Cleveland (1982, p. 36.) describes two characteristics of
information that are directly related to intrinsic co
-
production.
Cleveland refers to the "expanda
bility" of information. "[I]nformation
expands as it is used." Information is co
-
productive of more information
--
knowledge builds upon existing knowledge and news often repackages
-
7
-
older information with newer i
nformation. The proliferation of
information has been referred to as the information explosion and has
resulted in "information overload." Indeed, the production of information
for information's sake is not necessarily co
-
productive of other desired
outc
omes. Thus there is a need to manage information to keep it relevant
and make it efficiently co
-
productive.
Secondly, Cleveland refers to the substitutability of information
(Cleveland, 1982, p. 37). "It can replace capital, labor, or physical
ma
terials." This primarily emphasizes the co
-
productive capacity of
information through invention. As information contributes to the
transformation and automation of manufacturing, capital will further
substitute for labor. To refer to this as information
replacing labor is
perhaps euphemistic.
In summary, we can define the intrinsic co
-
productive capacity of
information as:
Intrinsic Co
-
production
--
The character of information to
be instrumental in achieving other goods and o
utcomes. This
character makes information inherently valuable.
Since information is inherently valuable it is significant whether
the information can be held as property. Property rights will enable the
owner to gain some return from i
ts creation (cf. 2.1.1.1
--
Appropriability).
2.1.2 Time Constrained Consumption of Information
For a message to be information it must affect the choices of an
individual (see def. Section 1.) To affect choices, the receiver must
take time to as
simulate the information. This process involves reception,
memorization, thinking, and reflecting. (Even the process of synthesized
experiences, such as watching a movie, takes considerable time.)
In relation to many other goods, more consumer ti
me is occupied by
information than most other goods per dollar of expenditure. For example,
$2.00 of beef can be consumed in ten minutes while a $2.00 movie can last
two hours (and $2.00 of basic cable service can occupy days of time).
The economi
c significance of this characteristic of information
has not been specifically studied. In general, it would operate to reduce
the demand for information. Reduced demand would work against the
potential for economies of scale (cf. 2.1.4).
In summary, we can define the time
-
constrained consumption of
information as:
Time
-
Constrained Consumption
--
The character of information
to occupy more consumer time per dollar expenditure than
other commodities.
Reduced demand would result in reduced prices, making the value of
information as property less valuable to its owner.
2.1.3 High Investment to Reproduction Cost Ratios for Information
The initial costs for creating information are high rela
tive to
the costs of reproduction. This contrasts sharply to most other goods
where the production of multiple units of a good require considerable
factor inputs of capital, labor, and materials.
-
8
-
Returning
to the definition of information, the reason for this
large difference relates to the necessary facilities needed to affect the
choices in behavior. The informing process is mainly one of
communication. Communication primarily consists of transferring a
udio and
visual images. For the written word printed paper is quite effective and
very low in cost. For motion picture images, the VCR cassette is less
than $5.00 plus recording or pre
-
recording costs.
Equipment for accessing information such as VCR's, television
monitors, computer terminals, and communication lines are not low in cost.
If one amortizes the costs of these devices over the media costs, the
reproduction costs are noticeably higher
for some types of information.
For example, the cost of a basic VCR over five years would be around $700
including maintenance and the cost of capital. Allocated over a film
library (and rentals) of 200 tapes, this would add another $3.50 per tape.
While
appreciable, the additional cost is not large.
The literature abounds with accounts of dropping prices for
terminals, minicomputers, and other hardware. Though this is not expected
to continue to drop as steeply in future years, even the costs of
the more
expensive devices will probably not swamp the situation. Nonetheless,
there is still considerable room for improvement in picture resolution,
3
-
dimensional display, and the instant accessibility of large quantities
of information. The question r
emains, how much more effective would the
communication be with these types of enhancements and what will be the
costs of these improvements?
High investment costs put pressure on the industries to search for
the means to reduce these costs. The d
evelopment of information is labor
intensive. Some film footage can cost $2000 a second to produce. Because
of the skill and intellect required to produce information, these costs
are not likely to drop soon. Thus the investment/reproduction ratio is
li
kely to remain high.
In summary, we can define the investment to reproduction cost
ratio of information as:
Investment/Reproduction Cost
--
The creation costs of
information divided by the cost of reproducing one unit of
the good.
The implications to issues of intellectual property are important
and one of the main problems today. Since investment costs are high and
it is so relatively costless to reproduce the product, it is extremely
important to prot
ect the owners of the investment (cf. 2.1.1.1
--
Appropriability).
2.1.4 Relevance of Information More Variable Across Consumers
There are various factors that determine the relevance of a good
to a consumer. The most common factor is the consume
r's preferences (or
values). Consumer goods that are purchased out of preference are
generally consumed again and again. Further, while many goods are
slightly differentiated by styling, the demand for many basic goods is
consistent across consumers. Co
mbs, pencils, shovels, lumber, etc. are
demanded consistently by many consumers.
Information, by contrast, is peculiarly different. The basic
goods of information, such as the alphabet, vocabulary, etc. need only be
consumed "once." The consumer
does not generally go back for a second
helping of learning arithmetic. He does go on to learning more
-
9
-
arithmetic. Thus at any time, each consumer of information has a stock of
knowledge that he or she is adding
to and makes selections for more
information based on an assessment of what further information is useful.
Only when "memory fails" might the consumer go back and then usually to a
familiar reference already on the shelf.
The "synthesized experienc
es" (cf. Section 1), if they are
consumed again and again (like seeing a movie many times), become less and
less information each time and more a simple consumptive good like food.
Thus, a second factor that determines the relevance of a good is
it
s utility in building up a stock of knowledge. If the person reads
something that is completely redundant to what he or she already knows,
the material is not information at all
--
for there will be no changes in
the future choices of the individual as a
result of the message. If the
person persists in re
-
reading it we can only assume there is a consumptive
value in doing so.
This characteristic of relevancy produces high variability in the
"consumption" of information as a commodity. What I requ
ire for
information today I will probably not require tomorrow. Only if we look
at information in the aggregate, over time, does its variability
substantially decrease. Everyone will learn the alphabet at some time;
everyone will probably read Romeo and
Juliet.
In summary, we can define the variable
-
relevance of information
as:
Variable
-
relevance
--
The character of particular
information to be acquired usually only once. The result is
high variability in consumption by each consumer.
The implication of this to property is striking. Basically a
producer of information gets "one shot" at his consumer. The market
segments for information as a commodity are much more ti
ghtly drawn than
for other goods. The success of a "reader" for five year
-
olds is very
dependent on previous learning environments and the age
-
group.
But because of the variability in prior information, it encourages
product differentiation
--
inf
ormation can be packaged and repackaged to
fit the particular circumstance of the consumer. (Computer
-
assisted
instruction, with the ability to branch as required by the student, is a
good example.)
But product differentiation is problematic to es
tablishing
property rights. I must continue to copyright each variant to try to
protect it and if someone else produces a variant for a slightly different
market segment, that producer might be able to take most of my product
without compensating me.
-
10
-
2.2 Market
-
Failure Related Characteristics of Information
The failure of markets has been a subject of public finance study
for many decades. Market
-
failure and the role of government are closely
entwined
since a major role of government is to provide what the market
cannot.
In the early part of the twentieth century, market
-
failure
problems associated with transportation (railroads, trucking and
airlines), communications (telephone, radio, and even
tually television),
public utilities (water, gas, etc.), and food, drugs, and cosmetics were
closely studied and the associated industries were subjected to "economic
regulation." In the mid
-
part of the twentieth century market
-
failure
problems associated
with health, safety and the environment were addressed
with "social regulation."
Economics, as a discipline, primarily concerns the operation of
markets. Market
-
failure, therefore, represents exceptions to the rules of
the discipline. The basic
concepts of Pareto optimality and cost/benefit
analysis, however, transcend market operation and are thus useful economic
concepts in the analysis of market
-
failure. (But even these concepts
seldom address the form of market
-
failure associated with the di
stribution
of wealth.)
In a short space it is not possible to describe all of the
economic concepts related to markets and market
-
failure. To provide some
common reference, however, the following terms are germaine:
Allocating Resources
--
Using labor, raw materials and capital
in production
Efficiency
--
Allocating resources to their most valuable use
(also called allocative
-
efficiency)
Pareto Optimality
--
The condition where all resources are
allocated to their most valuable use
Pareto
-
move
--
a change in allocation that increases the net
value to society
Market
-
failure
--
a situat
ion where the operation of markets
will not result in pareto
-
optimality or the fair
distribution of wealth
Perfect Competition
--
many producers and many buyers, where no
individual producer or buyer can aff
ect price; the absence
of market
-
failure in a competing market
Imperfect Competition
--
competition under forms of
market
-
failure
Good
--
Something bought and sold
Consumptive Good
--
A good that is a
cquired mainly to be
consumed
Instrumental Good
--
A good that is acquired mainly for its
co
-
productive capacity
Marginal
--
the last unit of production or consumption
Marginal Cost Pricing
--
Usually
a firm operates where:
marginal cost (the cost of producing the last unit) equals
the market price for that good
(Stated as MC=P)
-
11
-
Marginal Utility
--
The utility derived from the last unit of
a good
Rate
-
of
-
Return
--
the income (or benefit) derived from an
investment
(Typically expressed as a percentage of the original
investment)
Information as a commodity is subject to many forms of market
failure. The recognition of some of these in economics date back to the
mid
-
1920's when Pigou (1924), and Marshall before him, recognized that
knowledge provided benefits
to society as well as to the purchaser (cf.
2.2.2
--
externalities). The recognition of externalities of information
and knowledge was continued by Viner (1931), Meade (1952), Scitovsky
(1954), and Bator (1958).
In 1962, Arrow (1962) wrote a semin
al piece "Economic Welfare and
the Allocation of Resources for Invention," in which he recognized three
forms of market
-
failure associated with information: indivisibilities,
inappropriability, and uncertainty. This was one of the first treatments
of "inf
ormation as a commodity." Others who have addressed information as
a commodity and the subject of market
-
failure include Braunstein (1976,
1981), Levitan (1982), Mackaay (1982), Cooper (1983), and Priest (1984a,
1984b).
2.2.1 Public Good Characteristics
Public goods include goods like national defense, parks, and
lighthouses. They are goods that multiple consumers can enjoy at the same
time (sometimes referred to as jointness
-
of
-
consumption). Information has
the characteristic of a public good
-
-
the use by one consumer does not
prevent the use by others.
Public goods are often provided by government. Since consumers
cannot be excluded from enjoying the benefits of a public good, use of
tax
-
payer money to supply the good can be often jus
tified. Economists and
public administrators are quick to point out that government is not
obligated to provide all public goods
--
there are situations where the
waste and distortion of government in trying to counteract the market
failure results in mor
e inefficiency than the original inefficiency (cf.
Machlup, 1984, p. 157).
The market failure associated with public goods relates to the
concept of marginal
-
cost
-
pricing described above. For maximum profit and
maximum social efficiency, the firm
should set the price of the good equal
to the cost of producing the last unit (P=MC). But for a pure public good
the cost of the last unit is zero and the firm should charge nothing at
all. Thus for public goods social efficiency and private efficiency
d
iverge. Pareto
-
optimality would be achieved only if the good were given
away but then no firm could stay in business to produce it. (Baumol and
Ordover suggest that the analysis is not this simple. "Resource
allocation may benefit by the imposition of po
sitive prices for public
goods in cases where such prices are collectable" [1975, p. 1]). One
common prescription for the situation is to have government subsidize the
firm to an amount equal to the cost of creating the information. Another
is to have
government supply the good.
-
12
-
In summary, we can define the public good characteristic of
information as:
Public Good Characteristic of Information
--
The same
information can be used by
many consumers without
interference.
Before exploring the relationship of this characteristic to
property, it will help to explore two closely related characteristics
--
inappropriability and non
-
depletability.
2.2.1.1 Inappropriability
The term inappropriability is from the word appropriate. To
appropriate something is to take possession for use by oneself. In the
economic sense, it means to be able to take possession of the worth of
something
--
typically by selling it at the
market price.
Inappropriability is the difficulty in taking possession of the worth of
something.
As indicated in the public good discussion, there is difficulty
in excluding people from using information who have not paid for it. This
occurs in
two basic ways:
Exclusion 1
--
Materials such as books and films are often
passed along. This is particularly the case when they are
provided by libraries or rentals. Fifty percent of computer
software is copied (Frazier, 1985).
Exclusion 2
--
The information contained in any one material
often represents the embodiment of prior work. For example,
while I give credit to those writers from whom I have dr
awn for
this piece, I have not financially compensated them.
The major result of inappropriability is under
-
production of
information. If the producer of information cannot appropriate its full
market value the producer will only produc
e information where he can
recover costs and make a profit. This results in fewer books, movies,
information systems, etc. than is socially efficient (all other things
being equal). Further, the types of information that are produced are
distorted toward
those types that can be subject to exclusion.
In summary, we can define the inappropriability characteristic of
information as:
Inappropriability of Information
--
The difficulty in
receiving full market compensation for the cr
eation of
information due to the problem of exclusion. The result is
under
-
production and under
-
compensation.
Problems of appropriability have been recognized by Arrow (1962,
1971), Boulding (1971), Braunstein
(1976, 1981), Cleveland (1982), Gordon
(1982), Hall (1981), Macklup (1962, 1984), O'Brien (1980), and Priest
(1984a, 1984b), and in inventive activity by Dutton (1984), Nordhaus
(1969), Mansfield (1977), and Scherer (1977).
Cleveland (1982) refers
to information as diffusive, easily
shared, and transportable. He relates Colin Cherry's comment that
information by nature cannot give rise to exchange transactions, only to
sharing transactions (p. 37). Some of the positive effects associated
-
13
-
with ease
-
of
-
sharing and transportability are discussed in Section 2.3
(Non
-
market characteristics).
2.2.1.2 Non
-
depletability
Information is a very durable good. It does not dissipate with
use. It may become l
ess valuable when "better" information is generated
but the original information is still present.
Information and knowledge can therefore accumulate over centuries
and millennia. From society's standpoint this is a very positive
characteristic bu
t from a firm's standpoint this is a negative
characteristic. A producer of information must not only compete with
other present producers of information but also with all past producers.
During periods like the twentieth century this is not an insurmount
able
problem because of the enormous increase in scientific and technological
information, and the significant changes in media technology.<*>
In summary, we can define the non
-
depletability characteristic of
information as:
Non
-
depletability of Information
--
Information does not
dissipate with use. Producers must compete with past
producers but society benefits with an accumulation of
knowledge.
In relation to property and property rights,
the public
-
good
nature of information makes holding information as property very
difficult. Thus the assignment of rights in the form of patents,
copyrights, trade marks, and mask works, directly addresses the
public
-
good nature of information.
A
ppropriability is a serious problem for the producers of
information. The 1976 Copyright Act tackled Exclusion 1 (above) by
establishing the Copyright Clearance Center to collect royalties for
photocopies (McDonald, 1983, p. 19). Also, the Act establishe
d the
Copyright Royalty Tribunal to collect payments from cable operators for
the importation of distant signals. Valenti (1982) notes how low these
royalties are in relation to other income. Besen (1978) points out that
royalties set by a tribunal are u
nlikely to resemble real market
valuations and will result in social inefficiency.
Solutions to Exclusion 2 are more difficult. The fair
-
use
provision of the copyright law generally assures that exclusion will not
occur. (For a most comprehensive
discussion of fair
-
use and
market
-
failure see Gordon [1982]).
Non
-
depletability can result in dwindling markets for information,
particularly if new information cannot be readily generated. It is
generally believed that extending the seventeen ye
ars of patent protection
will not provide the inventor significantly more return on the invention's
value. Within seventeen years newer inventions tend to take the older's
place, but with notable exceptions such as xerography and the instant
camera.<*>
2.
2.2 Externalities
If there is an effect associated with a good
--
positive or
negative
--
that is not accounted for in its price, there is an
externality present. For example, the polluting of a stream by a pulp and
paper mill represents a negati
ve externality. The production negatively
affects others and the good is more cheaply produced than if the pollution
were controlled. We refer to internalizing the externality if there is
------------------
<*> Patent life extensions have been suggested
for products where
government regulation delays the product's entry. FDA requirements can
hold back a new drug or device for up to ten years.
-
14
-
some way to have the firm more fully account for such effects. A set
of
water quality standards could be established that the mill must meet by
law. The presence of negative externalities was a major impetus for
health, safety, and environmental legislation.
Information, in contrast, has few negative externalities, but
significant positive externalities. The non
-
depletability character of
information leads to positive externalities that extend for generations
--
the "wealth of knowledge" that has accu
mulated over time.
To determine the value of a positive externality we can turn to
cost/benefit analysis. Cooper (1983) reviews a number of C/B studies
which include assessments of various information science activities. A
study by Goddard assess
es the benefits of public and school libraries.
These libraries are seen as promoting education and therefore resulting in
externalities in education
--
the benefit to more than just the person
being educated.
The positive externalities of fine art
s has been a subject of
congressional debate for decades. For example, in introducing a bill in
1953 to establish a National War Memorial Arts Commission, Charles Howell
of New Jersey said, "There is a philosophical difference in viewpoint
which must be c
onsidered in the evolution of the measure I have sponsored.
The debate is between the proponents of the belief that the arts are
living and must be encouraged with every resource at hand, and those who
regard the arts basically as the product of a past age
, which must be
preserved rather than encouraged" (Larson, 1983).
The positive externalities of science have been recognized in the
massive support the government provides for it. Alvin Weinberg commented,
"society expects science somehow to serve
certain social goals outside
science itself. It applies criteria from without science
--
broadly,
criteria concerned with human values
--
when it assesses the proper role
of science as a whole relative to other activities" (Reagan, 1969, p. 34).
Reagan r
eviewed congressional hearings, journals, and other sources and
found five basic reasons for support of science (four of them
externalities):
1. Intellectual and cultural values of science
2. The utility of basic research as the found
ation
of all technological development
3. Research as an essential component of graduate
education
4. The high costs of scientific research, and the
unlikelihood of adequate private financing
(appropriability, risk, uncertainty)
5. The political values of science, especially in
international affairs.
Positive externalities and appropriability are closely tied
concepts. Whatever the producer of in
formation cannot appropriate will
be, by definition, a positive externality. The appropriability of
invention (see 2.2.1.1) has been a subject of considerable research.
Nordhaus (1969, 1985) estimated the ratio of marginal social
product to margi
nal private product using data on American agriculture.
He calculated ratios of 12.7 for 1949 and 8.5 for 1959. These ratios
imply very high social rates of return on research and verify earlier work
by Griliches
on the magnitude of the rate of return on hybrid corn. I.e.,
-
15
-
Nordhaus found very high positive externalities to agricultural research.
Mansfield (1977) performed an empirical study on social and
private
rates of return from industrial innovation. For seventeen
innovations the median private rate
-
of
-
return was 25% (before taxes) and
the social rate
-
of
-
return was 56%. Mansfield's ratio of social to private
return was 2.2. The highest social return was 30
7% for a "thread
innovation" (private return of 27%) and the highest private return was
2l4% for a "household cleaning device" (social return of 209%).
Calculations of positive externalities, at best, are fraught with
methodological difficulties.
Thus these data should be considered
suggestive of the possible externalities associated with information.
In summary, we can define externalities associated with
information as:
Externalities of Information
--
The effects of information
,
usually positive, that are not accounted for in its price.
Externalities refers to the non
-
property aspect of information.
Higher economic efficiency can be achieved by internalizing externalities,
i.e., providing the producer of infor
mation greater appropriation. This
can be achieved by the creation of property rights and corresponding
payments to owners.
For information, however, the transaction costs (see 2.2.8) of
"keeping book" (adding up who owes what to whom) are likely
to be high,
thwarting attempts at increasing the appropriability. Perhaps in the era
of the information utility, where computer information systems can keep
track of many minor transactions, full accounting will be possible.
Before that, we must struggle
with clearinghouses and tribunals to attempt
a solution.
2.2.3 Indivisibilities (of supply)
Information users are confronted with an all
-
or
-
nothing option:
they may either acquire the whole amount of information available at the
prevailing price o
r buy no information at all (Pethig, 1983). At some
level, all information is indivisible. Four years at college, a year, or
a course can be purchased, but not a particular lecture. To have the
editoral page of the New York Times the entire paper must b
e purchased.
To have the telephone numbers of those I want to call, I have books mainly
filled with the numbers of people I do not want to call.
The problem of indivisibility relates to the organization of
information and knowledge. To obtain new
information I must continually
pour over old information in search for new. So not only do I incur the
cost of purchase but also the opportunity cost of search.
In summary, we can define indivisibilities associated with the
supply of information a
s:
Indivisibilities (of supply)
--
Information must be
purchased in lumps; these lumps may be vastly greater than
the information actually sought.
In terms of property, it is easier to provide legal protection for
a
large lump of information than many small pieces. This tendency will
help perpetuate the generation of larger lumps. This is not socially
efficient since the consumer is forced to purchase unwanted information.
-
16
-
2.2.4 Economies of Scale and Scope
For some goods, increasing a scale of operations results in
decreasing costs per unit. This condition is called economies of scale
and explains why so many of the goods we buy are produced by large
companies.
As an example, Braunstein (1981) notes that daily newspapers have
high set
-
up costs and low costs associated with the production of each
copy printed. As a result, the vast majority of daily newspapers have no
competing daily newspaper published in
the same city.
Economies of scale are usually associated with production
involving high set
-
up or fixed costs, decreasing unit costs, or both. If
economies of scale are substantially present when the output of the
producer is equal to the total ma
rket demand, there is the condition of
"natural monopoly." A monopoly in these cases can be more socially
efficient than competing producers. Unfortunately, the monopoly can make
higher profits by under
-
producing and thereby inflating prices (Samuelson,
1973). Public policy towards this situation has been to permit the
monopoly to exist but to regulate rates so that price equals average costs
plus some reasonable return on investment for the stockholders. Typical
regulated monopolies are local gas and e
lectricity distribution companies
and local telephone companies. (Regulated monopolies have also been
criticised for being socially inefficient because 1) They have little
incentive to minimize costs, and 2) They often display lower innovative
capacity fo
r new inventions, features, etc.)
Economies of scope arise when it costs less to produce several
different products by the same firm. This can occur when one product
utilizes a by
-
product of another or when both products draw from the same
interme
diate product. "Information, because it can be packaged in so many
ways, is often produced or distributed under conditions of economies of
scope (Braunstein, 1981, p. 59).
The presence of economies of scale and scope is often indicated by
industry
concentration
--
the presence of fewer, larger producers. Homet
(1984) finds the electronic information
-
delivery sector increasingly
characterized by concentration. He notes that in 1980, fewer than 100
corporations controlled a majority share of each o
f the mass media: daily
newspapers, periodicals, books, records and tapes, radio and television
distribution and sponsorship, and movie distribution. "Cross
-
ownership
trends among these media drew the net even tighter: Time, Inc., with book
publishing an
d cable (not to mention HBO), Times
-
Mirror with TV and cable
and videotex, CBS with book publishing and records and magazines" (Homet,
1984, p. 14).
Dertouzos and Wildman (1981) made a historical study of
concentration in the recording industry.
They found that the percentage
of sales controlled by the top 4 firms declined from 1947 to 1972 from 79%
to 48%. In 1972 a full 15% of sales were made by firms smaller than the
largest fifty. But concentration in distribution and marketing of
recordings
has occurred as the major recording companies have increasingly
been relied on by independent recording firms for distribution.
Valenti (1982, p. 75) agrees with Homet about concentration in the
cable area, [t]he 'Giants' are taking over the cable
industry,
concentrating power and increasing revenues." As of 1980 the 25 largest
multiple system owners (MSO's) controlled over 60% of all U.S.
subscribers.
-
17
-
Concentration and monopoly in telecommunicati
ons is not
unexpected. Telephone was recognized as a monopoly and regulated in the
first part of this century. The recent attempts to increase competition
in telecommunications may be working against the condition of natural
monopoly.
In summary,
we can define economy of scale and scope with regard
to the production of information as:
Economies of Scale and Scope
--
1) decreasing unit costs
when the scale of operation is increased; and 2) decreasing
costs associated with joint production.
In relation to property, economies of scale and scope appear to
mainly affect the distribution portion of the value
-
added process of
information production. In those cases where property rights ar
e given to
independents and distribution occurs by "majors" there is little
additional concentration effect. However, in vertically integrated firms
that own both information creation and distribution processes, providing
strengthened property rights will
increase their monopoly.
2.2.5 Inherent Uncertainty and Risk in Information Production
(particularly basic knowledge such as science and technology)
A producer of information takes inputs such as capital and labor
(e.g. medical instrument
s and physician
-
researchers) with some expectation
of an output (e.g. a medical advance). In some cases, when there is
sufficient prior experience, the producer knows that a particular
percentage of the projects will be unsuccessful. This percentage is a
statement of risk, e.g., 80% of the research projects will be
unsuccessful. Using statistics, the producer can then determine how many
projects must be supported to produce a success, say with a 95%
confidence.
This approach to risk employs the s
tandard theory of portfolio
selection to decrease the riskiness of investments by diversifying among
projects with statistical independence (where the success of one is not
dependent on the likely success of another).
Risk has been termed a "mild uncertainty" (Nordhaus, 1969). We
are uncertain about which project will succeed, but we are fairly
confident that some will succeed. In some areas, however, there is not
even sufficient experience to judge the probab
ility of success. These are
cases of full uncertainty. Cancer research and interstellar
communications are subject to large uncertainties.
If the risks and uncertainties are small, private investors will
continue to produce. What they appropriat
e for the successful projects
must cover not only the costs of the successful projects but also the
costs of the unsuccessful projects. The costs of unsuccessful projects
are part of the costs of doing business. When risks increase to the point
that the
producer lacks the ability to diversify enough to assure a
success, the producer will withdraw. When there are sizable uncertainties
the producer will also withdraw because there is insufficient information
to justify the activity to stockholders or other
investors.
Under these conditions of risk and uncertainty, information will
be under
-
produced. The problem is exacerbated when the size of firms in
the industry is small. Smaller firms have less capacity to handle risk
and uncertainty. In contr
ast, firms like IBM and AT&T can "afford" some
-
18
-
ventures that a smaller firm could not. Unfortunately, larger firms also
tend to be more risk averse than smaller firms
--
that is, they require
greater potential
return to risky ventures than a smaller firm does.
Whether the degree of risk averseness of the larger firm negates its
greater capacity to absorb risks is a point of current debate.
If individual firms cannot bear risks or uncertainty, in some
cas
es it is socially efficient that society do so. "In operational terms
this implies that the government do all R&D or that the government have
R&D done by firms or individuals on cost plus contracts" (McFetridge,
1977, p. 16). Other mechanisms include par
tial subsidies and forgivable
loans where the state bears part of the risk associated with a given
project. Finally, some projects are too risky or uncertain even for
society to undertake.
The public policy response to risk and uncertainty is frau
ght with
unknowns and debate. The social rate
-
of
-
return must be sufficient to
justify the risk and uncertainty. Thus, government tends to support basic
science and R&D to a lesser extent. The greater the potential
"co
-
productive capacity" of the resulti
ng information (cf. 2.1.1) the more
government involvement can be justified.
In summary, we define the risks and uncertainties in information
production as:
Inherent Uncertainty and Risk in Information Production
--
The inabilit
y of firms to produce information when risks and
uncertainties are present. A problem, in particular, in the
generation of basic knowledge.
For an extensive treatment of uncertainty in the production of
information see Arrow
(1962,1971).
The issue of property and uncertainty and risk relates to the
interesting area of debate on property and government funding. Until
recently, depending on the enabling legislation of the various federal
agencies, patent rights are ofte
n assigned to the government. This
follows from the argument that if the government pays for the information,
the government (the tax payers) should own the information, not the
private contractor. With the 1980 amendments to the Patent and Trademark
Law
s, universities and small firms were given rights to patents provided
they would be developed; large businesses' patent rights must be reviewed
on a case
-
by
-
case basis (Peyton, 1981, p. 80, 84).
Supporters of these types of changes point out that
government
ownership of patents is not socially efficient. Since a major purpose in
assigning property rights is to encourage invention and exploitation of
the invention, government ownership greatly reduces the development of
invention. This is particul
arly true when the government cannot issue an
exclusive license.
Providing property rights for information does not solve the
problem of under
-
production under conditions of uncertainty and risk.
This is because, for the property right to be useful
, the invention, etc.
must be forthcoming. But it is the very uncertainty in whether there will
be property at all that is the source of market
-
failure
--
protection is
only useful once the property exists.
-
19
-
2.2.6
Information/Knowledge About the Information
Arrow noted a fundamental paradox in the determination of demand
for information, "its value for the purchaser is not known until he has
the information, but then he has in effect acquired it without co
st"
(Arrow, 1971, p. 148). If the seller could maintain property rights to
the information this would not be a problem, but given problems of
appropriability, "the potential buyer will base his decision to purchase
information on less than optimal criteri
a (p. 148).
The problems of "search" is a well known related topic in
economics (cf. Kwon, 1982; Stigler, 1971). Perfect competition presumes
the presence of perfect information
--
that all buyers are aware of all
sellers, their products, their qu
ality, and their prices. Perfect
information does not typically exist and the result is potentially
inefficient: some products may be purchased at too high a price for their
level of quality, performance, service, etc.
Information is subject to th
e problems of search but the problem
is compounded by the appropriability problem discussed by Arrow. A
producer of information will hide information to the extent that it is not
appropriable. But hiding information greatly increases the problem of
searc
h. The less the buyer knows about a product, the less likely the
buyer is to purchase it, or to purchase it at the "correct" price (the
price under perfect competition).
To counteract this problem, producers of information rely on
"brand
recognition." Producers of information develop a reputation for
the value of their information. For example, Standard & Poor is respected
for its appraisals of the stability of firms and bond offerings.
This tendency raises again the issues of mo
nopoly and
concentration addressed in 2.2.2. It is difficult for a new entrant (a
firm that attempts to sell in the new market) to succeed. Thus
information about information leads to "barriers to entry" and industry
concentration.
In summary, we
can define the problem of information about
information as:
Information/Knowledge About Information
--
Information about
information is less likely to be available because of
appropriability problems. This leads to under
-
con
sumption
of information due to problems of search.
With regard to property, the more property rights the producer has
the less a problem information about information will be. Property rights
will enable the producer to attain higher ap
propriability and thus will
encourage the producer to provide more information about information.
However, to the extent that property rights cannot be enforced, this form
of market
-
failure will still be present.
2.2.7 Intangibility
Thus far we ha
ve referred to the market price of information as
some reflection of the marginal utility of information to the consumer.
For simple consumptive goods (cf. definitions at 2.2) the price of a good
is a reasonable proxy for its marginal utility. For
instrumental goods,
such as information and knowledge, the price of the good may have little
resemblance to its marginal utility.
-
20
-
This problem has been referred to as the inability to monetize
(set a monet
ary value on) a particular good. For example, what is the
monetary value of good health? Good Health is the co
-
producer of many
desired outcomes
--
it permits thinking, locomotion, stamina, etc. The
impact of an acute illness, an illness of three months
or less, may in
some circumstances be monetized but the impact of chronic illness cannot
be monetized (Priest, 1981).
What is the monetary value of education, libraries, guidance
counseling, or church attendance? All of these activities involve
s
ubstantial levels of information.
Boulding (1971, p. 23) interprets the problem of intangibility as
one of the problem of information measurement. "One longs, indeed, for a
unit of knowledge, which perhaps might be called a 'wit', analogous to the
'bit' as used in information theory; but up to now no practical unit has
emerged."
The problem of intangibility and measurement relates back to the
definition of information. Information derives its utility by changing
the efficiency of achieving
outcomes by changing choices. An activity
such as education involves millions of changes in potential choices.
"Education produces possibilities." To faithfully arrive at the utility
of education then I would have to consider two situations, the attainm
ent
of all outcomes without the education and the attainment of all outcomes
with the education. I would have to measure the efficiency with which
each outcome was achieved under the two conditions, and sum the
efficiencies to attain a single value of mer
it. Further, I should perform
this exercise, not after the impact of the education has been seen (ex
post), but before (ex ante), because this is the circumstance in making
the purchase. This means forecasting the efficiencies and outcomes under
the two
situations.
When a consumer is faced with purchasing education, however, it is
exactly this calculation he must make to make the correct buying decision.
But this is not how education is "sold." The U.S. adopted compulsory
education for grades 1
-
1
2 because the value of the education was believed
to be at least worth the cost (and effort). Much college education is
purchased with the faith that the value of college education is at least
worth the cost. (Occasionally this wisdom is questioned.)
In summary, there are many forms of information, such as
education, that affect a great many potential outcomes and are, therefore,
largely non
-
monetizable. We can define intangibility of information as:
Intangibility of Information
--
The c
haracter of information
to be non
-
monetizable.
Intangibility and property are antithetical terms. Property is
usually concrete and well defined. But something that is intangible is
not. Specific components of education such as
textbooks, film strips, and
study guides can be copyrighted. But it is difficult to assess the value
of these components, since they contribute to the "building process" of
education. What is the value of a primer on the alphabet? What if
another primer
costs twice as much
--
is it worth it? These questions
have faced educators and others who have dealt with the intangibility of
information.
-
21
-
2.2.8 Transaction Costs and Information
Besen (1977, p. 87) n
otes, "[i]t is unfortunate that, in the
economics literature, the term "transaction cost" is used to describe two
quite different phenomena." In the first sense "... the term is applied
to the costs involved when agreement must be reached among a large nu
mber
of parties in order to carry out an activity. Transaction costs are said
to be high in such situations because the free
-
rider problem raises the
cost of reaching an agreement. A second meaning of the term involves the
costs of negotiation, contracti
ng, and enforcement which exist even when
exchange is bilateral" [first emphasis added]. Sometimes the term is
misapplied to mean "the cost of transmitting information which has already
been produced" (cf. O'Brien, 1980, p. 452).
In this discussion we refer to the second meaning of the term. In
this sense, transaction costs and indivisibilities (cf. 2.2.3) are
related. As we attempt to reduce indivisibilities by breaking information
into pieces, we increase transaction co
sts as we attempt to appropriate
its value.
In summary, we can define transaction cost and information as:
Transaction Cost of Information
--
The additional costs
incurred by the producer in appropriating the value of
information.
The reduction of transaction costs was the explicit goal of the
compulsory licensing of distant signals by cable television operators.
According to Ladd (1982, p. 946) in congressional testimony:
... it would be impractical
and unduly burdensome to require
every cable system to negotiate with every copyright owner
whose work was retransmitted by a cable system.
Accordingly, the [House] Committee [on the Judiciary] has
determined to ...
establish a compulsory copyright license
for the retransmission of those over
-
the
-
air broadcast
signals that a cable system is authorized to carry pursuant
to the rules and regulations of the FCC.
Further testimony of Monroe
M. Rifkin agreed:
There are 4,350 cable systems, each carrying an average of
five distant signals, (2 networks, 2 independents and 1
educational) each with a minimum of 6
-
17 hours of
programming per day. Although it would be impossible to
estimate the number of transactions that would be necessary,
it is clear the the simple multiplication of 4,350 cable
systems times 1,000 program suppliers ser
iously
underestimates the probable number. While most program
suppliers offer several programs, the number of contacts
required to program five channels, 17 hours per day, 365
days a year would be enormous.
In contrast, Valenti (1982, p. 86) argued that transaction costs
are not sufficiently high to warrant compulsory licensing. In 1976, many
cable operators were independents and there had not been the full scale
use of "packagers" for pay TV. Valenti desc
ribes the marketplace for
cable's licensing of its own programs as:
-
22
-
First, middlemen could package programs for basic cable
systems and program suppliers just as they now package
p
rograms for existing cable origination services. The
Satellite Program Network, a service of Southern Satellite
Systems, is already providing such a program service to over
300 cable systems. The marketplace would quickly adjust to
the new procedures.
Packagers of cable programs would license programming
material, take it to a satellite, and make a variety of
programming ava
ilable to cable systems. By catalogues and
price lists, based upon a per subscriber rate, the packager
would beam to the cable system whatever programming that
system owner has chosen. Paperwork would be at a minimum.
There would be no need for a forest of bureaucratic filings.
Second, advertiser
-
supported programs, purchased by basic
cable systems, are growing in number and revenue. It is one
of the hottest phenomena in an industry t
hat is full of
tremendous changes... This will be a boon to the cable
operator and will provide an additional source of large
revenue without relying on an increase in subscriber costs.
Today there are at least 35 "
cable networks," ranging from
Cable News Network to Home Box Office ... These networks
include both "pay TV" operations such as HBO and
advertiser
-
supported operations such as the Modern Satellite
Network and the Sat
ellite Program Network.
Third, direct negotiations between program suppliers and
cable operators. Right now, as noted earlier, 25 MSO's
control some 60% of all cable subscribers. This
concentration will grow even faster in the future, as large
companies merge and/or buy out smaller operators. This
concentration will simplify direct negotiations between
program suppliers and cable systems.
The attempt to reduce transaction costs through compulsory
licensing is claimed to reduce the income to the property of the movie
producers. Yet if transaction costs are "prohibitive ... exclusivity of
property rights may ... reduce rather than increase
the efficiency of a
resource use (R. Posner in Gordon, 1982, p. 1608). Clearly a difficult
balancing is required.
The granting of property rights such as copyright reduces
transaction costs (cf. Gordon, 1982, p. 1613). Without such explicit
righ
ts, contracts would have to be established under common law. This
process would be far more tedious and time consuming.
-
23
-
2.3 Non
-
market Related Characteristics of Information
As the discussion on intangibles implied, information has dominant
uses in non
-
market situations as well as market situations. Writers such
as Boulding (1971), Priest (1972), and Cleveland (1982) have described the
qualities of information for wis
dom, reduced conflict, encouraging sharing
relations, employment, and welfare. As the discussion in 1.1 showed,
information is integrally tied to a person's efficiency in achieving
outcomes. It is this integral link to achieving outcomes that gives
infor
mation its two non
-
market characteristics.
To cover non
-
market characteristics it is necessary to shift to a
non
-
market set of concepts. Again, it is necessary to work with a few
basic terms which may be unfamiliar to the reader. These are briefl
y
defined here for reference<*>:
Choice
--
An individual displays choice when he produces one
particular action from a set of possible actions.
Courses of Action
--
structurally different behaviors (different
physic
al actions involving different objects, etc.) of an
individual whose behaviors have one or more common functions
(i.e. toward accomplishing the same ends).
Co
-
productive
--
an instrument is co
-
productive when it
fac
ilitates the achievement of an outcome. (Instruments are
rarely valued for themselves, but for their co
-
productive
capacity.)
Outcome
--
the product of an individual's or system's action
Efficiency
--
the degree of success in achieving an outcome
Belief
--
inferences drawn from past and present perceptions
Value
--
Value is defined relatively. Relative value is
determined in an "intention situatio
n" as the probability that
the individual selects the course of action that has a maximum
efficiency for a particular outcome. (Where an intention
situation is one in which (1) there are the same number of
available
courses of action and outcomes, (2) each course of
action has maximum efficiency for one outcome and hence no
efficiency for any other, (3) each outcome has associated with
it one course of action that has maximum efficiency
for it, and
(4) the alternative courses of action are equally familiar,
known, and understood by the individual relative to the possible
outcomes.)
---------------------
<*> If the economist reader finds these behavioral a
nd management science
terms difficult, he or she should be reminded that, like the discipline of
economics, it is important to carefully define terminology in science, for
otherwise a discipline must be termed art.
-
24
-
(This particular definition requires considerable patience to
comprehend but (relative) value is a key concept.)
Capacity to Achieve
--
The efficiency with which an individual
achieves an outcome using a particular course of action.
(Proficiency)
2.3.1 High Intrinsic Relationship to Human Welfare
This concept is parallel to the High Co
-
productive Capacity
(2.1.1) for the market. We begin with the ba
sic behavioral science model
of human behavior (cf. Ackoff, 1972). A choice is made from various
courses of actions with an attendant outcome. Associated with an outcome
is a relative value
--
what the outcome is worth to the person, how well
or poorly t
he outcome will make the person feel. The individual "models"
the world by drawing on "beliefs" (inferences drawn from past and present
perceptions). Using the model the individual attempts to predict the
results of various choices. The individual is al
so guided by feelings and
attitudes, as these represent "evaluations" of past outcomes in similar
situations.
There are three basic components of behavior 1) Tendencies to
choose certain actions over other actions, 2) An efficiency to which a
particular course of action will achieve the outcome, and 3) The expected
value associated with the outcome. As we defined in 1.1, information
changes tendencies in choosing certain actions over other actions
--
a
change in component 1:
Informa
tion: A communication that produces a change in the
tendencies to choose certain actions over other actions
(where a change in tendency can be observed by noting
changes in the probabilities of choice).
One way inform
ation changes tendencies to choose is by modifying
the beliefs used to model the results of choices. Returning to the story
of the shopkeeper, information that it may rain changed his beliefs about
whether the merchandise should be left uncovered. While
there was a small
chance he would cover the table just to be safe without the information,
the information greatly increased the tendency to cover the table.
Nonetheless, the information did not make his covering the table an
absolute certainty since a fir
e could break out and the shopkeeper would
then do other things.
The linkage between human welfare and information can now be
drawn. Human welfare is a product of individuals and groups achieving
desired outcomes. Thus, information is intrinsical
ly related to human
welfare in that it inherently facilitates the achievement of outcomes.
Information contributes to knowledge and understanding. Knowledge
and understanding are venerated terms and by seeing how they are defined
we can better
understand why. These two terms can be defined in relation
to the concepts of outcomes, efficiency, and choice:
Degree of Knowledge: For a set of possible actions that can
be used to attain an outcome, degree of knowledge (of the
individual) is the efficiency with which the outcome is
attained by the individual choosing one action compared with
the efficiencies of all other choices.
-
25
-
Knowledge is an awareness of th
e efficiency of alternative subcourses of
action when the person's capacity to achieve the outcome by a particular
action is held constant. Understanding is responsiveness to whatever
affects efficiency. "If, for example, when a change occurs in the
env
ironment or the [individual] to reduce the efficiency of his behavior,
he modifies his behavior so as to increase his efficiency; then he is said
to understand what has happened." (Ackoff, 1972, p. 50) The response
consists of 1) changing his course of ac
tion to another, 2) changing the
capacity applied in the course of action, 3) or both. Understanding can
be defined as:
Degree of Understanding: For a set of possible actions and set
of different capacities that can be applied to the a
ctions,
degree of understanding (of the individual) is the probability
of an outcome compared with efficiencies of all other choices
and applied capacity.
These definitions are at first counter
-
intuitive. We tend to
think of knowledge and understanding in terms of something the individual
holds or possesses. Definitions of knowledge and understanding that are
based on a state of a person's perception are too internal
--
they provide
no external verification of the kn
owledge or understanding. Here,
however, knowledge can be ascertained by the appropriate choice of action
and understanding can be ascertained by the appropriate choices of action
and application of capacity. Furthermore, these definitions are
operationa
l. With those it is possible to know whether and by how much
some information increases understanding
--
by changes in the degree of
understanding.
In summary, the intrinsic relation of information to human welfare
can be defined as:
Int
rinsic Relation of Information to Human Welfare
--
Human
welfare is a product of individuals and groups achieving
desired outcomes. Thus, information is intrinsically
related to human welfare in that it inherently facilitates
the achievement of outcomes.
Cleveland (1982, p. 34) describes an intrinsic relation to human
welfare using a less structured approach. He describes an
"information
-
knowledge
-
wisdom hierarchy" as a process where information
accumulates
and results in more integrated knowledge. Cleveland notes
that information is shareable, that the same information can be used by
many at the same time in achieving human welfare.
Property rights for information with regard to human welfare are
i
ncompatible in a major way. While it may be necessary to provide
property right to spur the production of information, the holding of
information as property thwarts its free and easy use in achieving human
welfare. The fair
-
use provision of 1976 Copyrig
ht Act was in response to
this tension. It provided more emphasis towards human welfare and
weakened property rights.
-
26
-
The distinction drawn in 1.1 on information and "synthesized
experiences" is germaine.
Information is universally positive to human
welfare as an instrumental good. Thus, the instrumental goods should be
easily and freely accessible to the public. Synthesized experiences like
many "pop" movies are mainly consumptive goods. They lack uni
versality
and should not be accorded the same free accessibility (at least for
reasons of intrinsic welfare).
2.3.2 High Intrinsic Relationship to Issues of Freedom
and Privacy
The 1st Amendment provides guarantees of freedom of speech and
freedom of the press. What is the function of this right? Freedom and
choice are integrally tied
--
freedom is a lack of restriction on choice.
Since information changes the available
choices, information is
intrinsically related to freedom. Governments of societies that restrict
freedom find that they must restrict communication of information. They
are attempting to maintain a certain set of choices and exclude others.
Priv
acy is mainly a problem of information and understanding.
Perfectly upright citizens, who have "nothing to hide", insist that their
privacy be protected. Unprotected privacy has two results 1) Interference
due to unwanted publicity, etc., and 2) Interfere
nce due to
mis
-
understanding, mis
-
interpretation, etc. We will concentrate on the
second form of interference. Why does someone who has nothing to hide
insist on privacy?
--
because if there is 1) not full information about
his actions, and 2) not full u
nderstanding of his actions, his actions may
be misconstrued and the result may be defaming.
Thus a major issue with privacy is an "all or none problem." It
is not possible to give everyone enough information to properly judge,
therefore, informat
ion must be selectively made private to reduce the
probability of misjudgement.
In summary, the intrinsic relationship of information to 1st
amendment rights and privacy can be defined as:
Intrinsic Relationship of Information to Freedom
--
Information affects the range of choices available to the
individual. Freedom is a lack of restriction on choices.
Thus information leads to greater freedom.
Intrinsic Relationship of Information to Privacy
--
Incomplete information may result in defamation of
character. Therefore, information must be selectively made
private to reduce the probability of defamation.
Pool (1983) recognized the relationship between freedom a
nd
information in his Technologies of Freedom. In particular, Pool saw the
regulation of the channels of communication under the FCC as abridging
free speech.
Property rights for information and freedom can be in conflict or
in harmony. If the pr
operty right is used to withhold information,
freedom can be abridged. In contrast, if property rights encourage the
production of new information, freedom can be increased.
-
27
-
Property rights are conducive
to privacy. A property right gives
an individual the power to withhold and, thereby, achieve privacy.
-
28
-
3. Relationship of Information to Products and Services
Talking about information is like talking about a calorie, no one
buys a calorie, they buy food. To trace information as it becomes
embodied in products and services one must follow the life cycle of
information production.
A simple versio
n of the life
-
cycle model has the following steps:
Through the generation of information there is created an information
source; then through institutionalization of the source there is created
an information resource; then through maintenance & enhancemen
t there is
created information products & services; then through dissemination the
information becomes used (Levitan, 1982, p. 47). For example, a reporter
writes up a story; the story is sent to UPI; an editor picks up the story,
combines it with other i
nformation in the files; a newspaper article
appears; the newspaper is delivered to the front door.
More complex versions of the life
-
cycle model include various
additional stages or components of "value
-
added" activity. Value
-
added
can be conside
red in two ways. The strict economic definition can be
defined as:
Value
-
added
--
The sum of the input factors of production
excluding all purchases of materials and services from other
firms.
Returning to the example of the
reporter, the value added by the editor is
his labor, some percentage of management's labor, and depreciation on the
editor's word
-
processor. But as so defined, we have not included
"intermediate inputs" of the business such as telephone service, office
space, paper, etc.
This exclusion makes the economic definition of value
-
added
appropriate to avoid double counting in performing the "national
accounts"<*> but is not complete enough to give a sense of the full added
value. To remedy this proble
m we can define a second term, full
value
-
added, to be more complete:
Full Value
-
added
--
The sum of the input factors of
production excluding all purchases of materials and services
from other firms except intermediate inputs
.
This definition is reasonably workable. It provides the sense
that everything a producer adds to information is his value
-
added
contribution to the product or service.
But like the economic definition of the value of information
referre
d to in 1.1, even the full value
-
added (say stated in dollars) will
not reflect the actual value added to information when there are forms of
market
-
failure (cf. 2.2). Returning to the definition of the value of
information in 1.1, we can state what value
-
added is in terms of final
outcomes. The value
-
added is the increment of efficiency increase in
achieving outcomes due to changes the value
-
added activity makes in the
information. This can be defined as:
----------------
<*> The concept of
value
-
added was developed to avoid double counting
when the entire economy's activities are being tallied up
--
as the
U.S. Dept. of Commerce does for the National Accounts. For example,
if Firm A makes dough and Firm B makes bread, we must avoid counting
the dough again when we count the bread (cf. Samuelson, 1973, p. 183).
Intermediate inputs must also be excluded since these too will be
counted elsewhere.
-
29
-
Value
-
Added
--
There is an expected value (E
V) related to
achieving an outcome
--
this is the sum of the probability
of each particular choice, times the efficiency of each
choice, times the relative value of the outcome (cf. 2.3 for
relative value). Consider
ing the expected value (EV>1<)
without value added to the information and the expected
value (EV>2<) with value added to the information, the value
added to the information (EV<i>) is:
EV>va< = EV>
2<
-
EV>1<
In those cases where the value
-
added activity makes otherwise
unaccessible information available to the user, the value
-
added is at
least equal to the value of the information. The economic definition
defines value
-
added as an
accounting of inputs, regardless of outputs.
The behavioral and management science definition defines value
-
added as an
accounting of output, regardless of inputs. For example, by the economic
definition, there may be considerable value
-
added (labor, etc.
) but the
result, let us say, is confused, this added confusion would result in a
negative value
-
added by the second definition. The individual would be
better off consuming the information before the value
-
added step than
after.
One technique to
attempt a quantifiable measure has been the use
of willingness
-
to
-
pay (cf. Griffiths, 1982, p. 274). In
willingness
-
to
-
pay, the individual is being asked to quantify in dollars,
the perceived value of the information. I.e., he is being asked to
translate
the incremental increase in expected value into dollars.
Willingness
-
to
-
pay, as a measure is subject to large uncertainties but in
some situations provides useful data. Let us consider two extremes. The
individual is about to go to a $5.00 dance club.
A promotion service
(value
-
added) calls the individual and says there is a free $5.00 ticket
to the same dance club waiting for him. The individual's
willingness
-
to
-
pay for this information would be $5.00 (ceteris paribus).
In another situation, an indivi
dual is chronically depressed, irritable,
and angry. The individual is informed that central sleep apnea (a form of
sleep disorder) can cause these symptoms. Subsequently, the individual is
cured.
What is the willingness
-
to
-
pay of this individual? He
might have hocked
his soul. When intangibilities are high (cf. 2.2.7), there are
significant externalities (cf. 2.2.2), or there is poor information about
the information (cf. 2.2.6), willingness
-
to
-
pay is an unreliable measure
of value
-
added.
Products
and Services
Different types of value
-
added activities are associated with
products and services. It is useful to distinguish between product and
service, though as information technologies become more interactive, the
distinction becomes blurred.
We can define these as:
Information Product
--
An information product is usually a
tangible piece. It may be bought and sold, if an external
commodity, or it may be charged back, if internal within an
organzation
(Taylor, 1982b, p. 345).
Information Service
--
Services are intangible, they are
usually provided on demand, are a performance rather than a
product, are nearly inseparable from their production
(Stankard in Taylor
, 1982b, p. 345).
-
30
-
Taylor (1982b, p. 345) notes that products generally are
mass
-
produced, i.e. there is little or no variation. In contrast,
services are usually custom produced with large variation.
Cuadra (1980, p. 98) recently compiled a list of the primary
activities of 122 Information Industry Association members. In that list
he distinguishes producers of products from producers of services. Table
3
-
1 shows the numbers of producers in 64
classes of products and services.
Taylor (1982, p. 342) developed a value
-
added
spectrum
for
i
nformation
. This appears as:
DATA
----
|: INFORMATION
----
|: INFORMING
--
|: PRODUCTIVE
----
|: ACTION
KNOWLEDGE
KNOWLEDGE
grouping
classifying selecting
presenting
matching goals
relating analysing options
compromising
formatting comparing advantages
bargaining
signalin
g interpreting disadvantages
choosing
displaying
-------------
-------------
-------------
--------------
ORGANIZING SYNTHESIZING JUDGEMENTAL DECISION
PROCESSES PROCESSES
PROCESSES PROCESSES
Source: Taylor (1982, p.342)
Taylor suggests that products are situated to the left side of the
value
-
added spectrum. Services, being more unique and customized, are
located to th
e right since they are based principally on human
interpretion and intervention between system and client.
Value
-
added is thus identified in terms of what is done to the
information
--
made accessible, enhanced, etc. For example, King and
Zaltman
performed a value
-
added analysis of scientific and technical
information (STI) communications (1979, p. 17). They arrived at the
following list of dimensions of "value":
o Identification of User Needs. Does
--
or could
--
a
component provide insight into the kinds of information
desired by users or potential users?
o Creation/Production Data. Does a component stimulate the
development of new data and ideas? For example, symp
osia
might stimulate the creation of new STI.
o Creation of Awareness of Data. How many users become aware
of STI only as a result of a component? How much earlier is
awareness established among users as
a result of a component
such as preprints?
o Quality Control: Validity of Data. Does a component such as
refereed journals impact the quality of the data transmitted?
o Quality Control: Potential Usefulness
of Data. How helpful
is a component in enhancing the usefulness of data? Does a
component such as an abstract journal allow the practical
relevance of data to become evident?
o Storage. How valuable is a
component for warehousing
purposes?
o Retrieval. How easily can data be recalled via a particular
-
31
-
Table 3
-
1
Primary Activities of Information Industry Association Members
26 Document Acquisitions and Delivery 8 Cataloging Services (S)
(S) 8 Engineering Information (P)
26 Periodicals
-
publishers (P) 8 Envi
ronmental Information (P)
25 Publishing (P) 8 Legal Information (P)
22 Consulting Services (S) 8 Television Information (P)
22 Data Bases
-
Design and/or 7 Clearinghouse (S)
Management (S)
7 Library Automation Services (S)
22 Data Bases
-
Information (P) 7 Medical Literature (P)
(Publishers of Information About 7 Newsletters
-
Publishers (P)
Data Bases) 7 Typesetting Services (S)
20 Indexin
g Publishing (P) 6 ASIA (P)
19 Data Bases
-
Searching (S) (firms 6 Economics (P)
that carry out data base searches) 6 Electronics Information (P)
19 Information Systems
-
Design and 6 Forecasting Services (S)
Evaluation (S)
6 Microform System Design
Services (S)
19 Market Research Services (S) 6 Micrographic Services (S)
18 Business Information (P) 6 Records Management Services (S)
18 Micropublishing 6 Reprint
Publishers (P)
17 Current Awareness Services (S) 5 Accounting Information (P)
17 Data Bases
-
Vendors/Lessors (S) 5 Agriculture (P)
(Companies that Produce or Sell 5 Book Information (P)
the Use of Data Bases) 5 Bookselling Services (S)
17 Government Information (P) 5 Chemical Information (P)
17 Literature Searches (S) 5 Computers
-
Hardware (S)
16 Corporate Information (P) 5 Conferences
-
Information (P)
15 Directories (P) 5 Drug Information (P)
13 Abstracting Publishing (P) 5 Education (P)
13 Indexing Services (S) 5 Europe (P)
13 International Business Info. (S) 5 Financial Information
(Intl.)
(P)
12 Energy Information (P) 5 Information Industry (P)
11 Abstracting Services (S) 5 Looseleaf Services (P)
11 Financial Information (P) 5 Management Information (P)
10 Marketing Services (S)
5 Patent Information (P)
10 Software (S) 5 Product Development (S)
9 Scientific Literature (P) 5 Social Science Literature (P)
8 Audiovisual Materials (P) 5 Statistics (P)
-------------------------------
-------------------------------------------
-
(S)
--
Service (P)
--
Product Source: Cuadra, 1980, p.
98
-
32
-
component.
o Translation of Data into Implications. Does the na
ture of a
component permit a statement of the way in which the data are
important? Can bibliographics be retrieved on the basis of
implications?
o Translation into Action. Does a component permit statements
about the actual use of the data once its relevance is
determined?
o Feedback. Does the component permit feedback from the user
to
the disseminator and creator of the data? How many
journal channels must be altered to facilitate feedback?
Taylor recently completed a major work on the value
-
added
processes in abstracting and indexing services (1984a) He notes th
at
abstracting and indexing services do not alter input. The references,
papers, documents remain the same. What they do is provide a "whole
series of tangible signals and intangible values that make it easier for
customers to make choices (p. 131). Tay
lor identifies 24 specific ways
value is added by abstracting and indexing services. These are listed in
Table 3
-
2.
Porat (1977) has developed the most comprehensive study of
value
-
added in the economic sense. While the study provides little sens
e
of what particular value is being added, it spans the entire information
economy. (Recall also that intermediate inputs are not included.) He
divides the information economy into two major sectors: the primary
information sector
--
"includes those firms
which supply the bundle of
information goods and services exchanged in a market context" (Vol. 1, p.
4), and the second information sector
--
"includes all the information
services produced for internal consumption by government and
noninformation
firms" (Vol. 1, p. 4).
For the primary sector, he presents value
-
added (VA) by two
-
digit
SIC (Standard Industrial Classification) categories (Vol. 1, Table 4.8, p.
55). For example, VA in 1967 for Services: Motion Pictures is $1,525
Million; for
Service: Educational
-
$5,170 Million; and for Communication:
Radio Broadcasting and Television
-
$1,580 Million.
For the secondary sector, a similar table is presented but only at
the one
-
digit level (Vol. 1, Table 9.2, p. 155). A second table is
presented in the Appendices (Vol. 8, Table 10, p. 18
-
21) contains
value
-
added at the two digit level. For example, VA in 1967 for all of
Transportation
-
$8,115 Million; for all of Manufacturing
-
$57,880
Million; and for Agriculture, Forestry, and Fishe
ries
-
$467 Million.
For more detail, the value
-
added process in particular information
industries can be constructed from business books on the industry. While
these books are mainly focussed on how to get into and keep in business,
they cover th
e activities of business and from those activities the
value
-
added process can be constructed (cf. Gomery, 1982 p. 82). For
highly promoted products like soft drinks, cosmetics, and perfume the
information components include the development of image and a
market
niche, the use of advertisement and promotion, and the use of
"industrials" (film productions presented at sales conferences, etc.) to
motivate and coordinate the sales force.
In summary, value is added to information in two basic ways, 1)
By
adding greater accessibility, ease of use, etc., without changing the
basic information such as in abstracting, and 2) By writing, editing,
cutting, etc. where the basic content of the information and its
-
33
-
Table 3
-
2
Value
-
Added in Abstracting and Indexing Services
Access (Reducing Noise): the values added by the intellectual technologies
that provide the systematic means, based on subject matter, of narrowing
th
e
information universe to a set of data and information which have some
probability of containing material that is wanted or needed. Different
kinds of intellectual access provide different sets of the subject
universe.
Access I (Reducing Noise): the val
ue achieved by the identification of any
information chunk or discrete piece of data by systematic physical
description and location information.
Access II (Reducing Noise): the provision of a subject description through
access points such as index terms,
descriptors, names, etc.
Access III (Reducing Noise): the result of processes that assure error
-
free
transfer of data and information as it flows through the system and is
eventually displayed to a client.
Accuracy (Quality): the value added by system
processes that assure
error
-
free transfer of data and information as it flows through the system
and is eventually displayed to a client.
Browsing (Ease of Use): the capability of a system to allow a client to
scan
an information neighborhood, with the pr
obability that the client will
serendipitously find information of value.
Closeness to Problem (Adaptability): the value added by the activities of
the system, usually through human intervention, to meet the specific needs
of a person in a particular envi
ronment with a particular problem; this
implies knowledge of that person's style, bias, and idosyncracies, as well
as the politics and constraints of the context.
Comprehensiveness (Quality): value added by the completeness of coverage
of
a particular sub
ject or of a particular form of information.
Cost
-
Saving: the value achieved by conscious system design and operating
decisions that save dollars for the client.
Currency (Quality): the value added i) by the recency of the data acquired
by the system; an
d ii) by the capability of the system to reflect current
modes of thinking in its access vocabularies.
Flexibility (Adaptability): the capability of a system to provide a
variety
of ways and approaches of working dynamically with the data/information in
a
file.
-
34
-
Table 3
-
2 (Continued)
Value
-
Added in Abstracting and Indexing Services
Formatting (Ease of Use): the physical presentation and arrangement of
data/information in
ways that allow more efficient scanning and hence
extraction of items of interst from the store.
Interfacing (Ease of Use): the capability of the system to interpret
itself
to users.
Interfacing (Mediation) (Ease of Use): the means used to assist users i
n
getting answers from the system.
Interfacing (Orienting) (Ease of Use): the means used to help users
understand and to gain experience with the system and its complexities.
Linkage (Reducing Noise): the value added by providing pointers and links
to
items, sources, and systems external to the system in use, thus expanding
the client's information options.
Ordering (Ease of Use): the value added by initially dividing and
organizing
a body of subject matter by some form of gross ordering such as
alphab
etization, large groupings, etc.
Physical Accessibility (Ease of Use): the processes of making access to
information stores easier in a physical sense.
Precision (Reducing Noise): the capability of a system which aids a user
in
finding exactly what he wa
nts.
Reliability (Quality): the value added by the trust a system inspires in
its
clients by its consistency of quality performance over time.
Selectivity (Reducing Noise): the value added when choices are made at the
input point of the system, choices b
ased on the appropriateness and merit
of
information chunks to he client population served.
Simplicity (Adaptability): the value achieved by presenting the most clear
and lucid (explanation, data, hypothesis, method, etc.) among several
within
quality and
validity limits; not to be confused with 'simplistic'.
Stimulatory (Adaptability): those activities of an information system that
may not be directly supportive of its primary mission, but which assume
importance in establishing a presence in the
community or organization
served and which encourage use of the system and/or its staff expertise.
Time
-
Saving: the perceived value of a system based on the speed of its
response time.
Validity (Quality): the valued added when the system provides signals
about
the degree to which data or information presented to users can be judged
as
sound.
-
35
-
presentation are changed such as in publishing.
There are several issues in relation to property. In the case of
ab
stracting, the abstracter distills out the points of an article or book.
To the extent that abstract serves the user, rather than the original
piece, the property right has been weakened. But in other situations, the
property right can be enhanced such as
when a book is made into a movie.
The value
-
added activity of the movie increases the value of the book, and
the author benefits from the new contract royalties.
To the extent that "bare information" which is difficult to
appropriate becomes bundl
ed with a product or service, the appropriability
is increased. For example, say there are eight principles by which to
lead a good life. The value of these principles may be very great but
highly inappropriable. But, in adding value by placing the
principals
into context in stories or screenplays, the information becomes bundled
with synthesized experiences. These can be protected as property and the
value is more appropriable.
A trend in computer software is to bundle software with further
access to information. A user becomes a subscriber to hot
-
line advice,
further enhancements, and consulting. This bundling increases the
appropriability of the software since only registered users can be
subscribers.
Unfortunately, bundling is n
ot socially efficient from another
perspective. It forces the buyer to purchase more than he may otherwise
want, reducing allocative efficiency. It also can increase the monopoly
power of an industry and produce serious antitrust issues. IBM was forced
by the Justice Department not to bundle software with its hardware. The
securities industry was forced by the SEC not to bundle their information
services with the prices charged for stock transactions. Each form of
bundling will have to be reviewed on a
case
-
by
-
case basis, however, since
there are no clearcut ways of predicting the affect of bundling on
industry structure.
-
36
-
4. Rewards, Incentives, and Funding Sources for the
Creation of Intellectual Property
In the search for the best ways to provide incentives for the
development of intellectual property, it is important to have a picture of
what motivates the development of different types of intellectual proper
ty
and what sources fund the work. While there has been a fundamental shift,
with the advent of copyright, toward a market system approach for the
motivation and funding of intellectual property, other forms of motivation
and funding are still important s
uch as art patronage and private
endowment of colleges.
Copyright can overcome only some forms of market
-
failure described
in Section 2. It cannot overcome intangibility, risk and uncertainty,
externalities, economies of scale, and indivisibilitie
s. It contributes
substantially to overcoming problems of appropriability (where copyright
provides an enforceable right), and to a lesser extent aids in information
about information (by making the producer less likely to retain
information), and in redu
cing transaction costs (by providing clear
contract obligations). Copyright will actually exacerbate problems of
economies of scale and the existence of monopoly power and reduces social
efficiency by withholding intellectual property from the public.
This section treats three groups of intellectual property
--
science, culture (art, music, etc.), and products & services. The types
of rewards and incentives in each of these groups differ considerably.
The first two involve "internal motivation"
much more than the third. The
nature of funding for the three groups is also distinctive
--
patronage of
science and culture is still common today while products and services are
rarely funded outside of the market system.
4.1 Rewards, Incentives, and Fu
nding for Science
Intellectual property in science mainly consists of journal
articles, books, and some computerized databases on physics, chemistry,
etc. While scientists are paid salaries, the relationship between this
compensation and the incen
tives to create intellectual property is weak.
In science, there is a distinctly different set of rewards and incentives
operating.
Rewards and Incentives for Science
Gaston (1978) studied the reward system in British and American
Science. His fin
dings affirmed what generally has been believed that
scientists are rarely motivated by salary or other compensation. Merton
(1973) contributed substantially by describing the sociology of science
--
the networks, communications, and relationships among s
cientists.
Considerable motivation to produce can be traced to these linkages.
Science is an uncertain process that depends on data and information from
others. While scientists tend to work with some isolation, they are
dependent on others for informatio
n and critique. Associated with this
dependency has been a form of "work motivation"
--
scientists are pleased
to be cited in other articles, are pleased to be invited for a paper, and
particularly pleased when their work leads to a "break
-
through." "In
the
scientific world the highest value is for the research speciality or
parent discipline to develop through contribution of new data and
theoretical explanations to account for the data" (Gaston, 1978, p. 3).
-
37
-
Merton suggests that four basic norms consitute the "ethos" of
science and guide the behavior of scientists
--
universalism, organized
skepticism, communism, and disinterestedness. These norms help explain
the scientist's detachment from pecuniary
(monetary) rewards.
Disinterestedness requires that scientists do research for the "sake of
science." While there are those scientists who have cared only about
advancing their personal careers, most display disinterest and thus their
progress is detache
d from monetary gain as well. Communism encourages the
sharing of information among scientists. There are no "charges" for this
beyond occasional photocopy expenses, journal subscription fees, etc.
Thus, the scientist does not become involved in selling
information.
Motivation to Work
General theories on the motivation of work have been developed by
Abraham Maslow, Frederick Herzberg, D. Yankelovich. and E. H. Schein. A
recent MIT doctoral dissertation reviewed the literature in determining
incen
tives for engineers and scientists (Reece, 1981). A discourse on
motivation goes beyond this paper but a few comments can be made drawing
from the behavioral and management science concepts introduced in 2.3.
The generation of intellectual propert
y is a particular outcome
produced by an individual. To increase this production we should think in
terms of the parameters that lead to choice and success of an outcome.
This differs from our discussion about the function of information.
Information is
fairly neutral with respect to motivation for it affects
the choice of action (from a set of possible actions) to achieve an
already determined outcome. We defined motivation in Section 1 as "a
communication that produces a change in any of the relative v
alues the
receiver places on possible outcomes of his choice."
Pecuniary (monetary) rewards motivate the individual in two ways.
Money is instrumental in achieving many other desired outcomes. Thus the
individual often places a high relative value
on outcomes that produce
money
--
holding employment, winning the lottery, etc. Second, money
becomes a proxy for success. Success is a recognized outcome in our
society and the psychic rewards are high. This places an even higher
relative value on out
comes that produce money. It is this pair of
motivations that embraces the market system. It is also this pair of
motivations that are considered narrow, sterile and unredeeming. Why so?
This relates to other cultural values whose purpose is to
make
sure that human welfare flourishes. If all human welfare could be
produced by the market, there would be no tension, but because of
intangibilities, externalities, etc. they cannot; fortunately there is a
non
-
market process that ensures these outcome
s
--
the production of
poetry, kindness, charity, human growth, and science.
Non
-
pecuniary rewards to motivate are thus tied with this set of
other cultural values. These are values like "love of learning,"
"goodness to others," "courageousness,"
the "work ethic," etc. Through
the process of inculcation, these values become part of an individual's
values. The result is a high relative value placed on the generation of
intellectual property that represents "contributions to society." Since
these
values, like the value of success in business, are recognized by
society, the psychic rewards are high.
In addition to pecuniary and non
-
pecuniary motivations there is
one additional aspect that affects the production of intellectual property
--
th
e efficiency of the choice of action to achieve the outcome and the
-
38
-
efficiency of achieving the outcome by that particular action
(proficiency). The first efficiency is affected by information, and
instruction an
d practice affects proficiency (cf. Section 2.3).
Copyright is to pecuniary rewards what plagarism norms are to
non
-
pecuniary rewards. Copyright gives possession and increases
(monetary) appropriability. Copyright actually reduces non
-
pecuniary
r
ewards by restricting circulation. What the author is concerned about in
terms of non
-
pecuniary rewards is that he be cited and recognized
--
that
his ideas are recognized as his own. This is protected by the ethics
regarding plagarism and the responsibi
lity to acknowledge other's
contributions. Copying, with acknowledge, is a form of non
-
pecuniary
recognition. Thus copyright is a good tool to stimulate pecuniary
motivation but not for non
-
pecuniary motivation.
Incentives that have been useful for non
-
pecuniary motivation
include forms of recognition such as:
o Distinguished Titles at Universities
o Distinguished Levels of Membership of Professional
Associations
o Honors
o Prizes
o Placed on Board of Editors of a Journal
o Fellowships
o Name Cited in Journals and Other Sources
Funding
In earlier periods of science, in Greece, and later in Europe,
science was
funded through patronage. The scientist would appeal to a
wealthy citizen to support his work. Governments recognized problems of
appropriability and high positive externalities (benefits) associated with
science and adopted the role of funding science.
Arrow (1962, 1977) noted
that the economic relation of government support is very different than
that in the usual markets. Payment is independent of product; it is
governed by costs by the typical cost
-
plus fixed fee of contracts or costs
alone in the c
ase of grants. "This arrangement seems to fly in the face
of principles for encouraging efficiency, and doubtless it does lead to
abuses, but closer examination shows both mitigating factors..." (p. 157).
Abuse is curbed since the award of future grants a
nd contracts are
contingent on prior performance. But more importantly, the system works
because the incentive to produce is non
-
pecuniary.
Forms of government support and incentives tend to be either forms
of direct subsidy, or indirect subsidy
through tax policy. Support and
incentives include:
o Grants
--
for research
--
for education
o Contracts
o Fellowships
--
for research
--
for educati
on
o Loans
--
increased availability
-
39
-
--
lower interest
--
some "forgiveable"
o Provide Information Resources
(e.g
. MEDLARS for health research)
o Tax
--
option to "expense" research costs
--
accelerated depreciation for capital
--
25% tax credit for qualifying projects
--
10% tax credit for capital investments
--
deductions for charitable contributions
to universities
The implications of various funding and incentives from a
standpoint of economic efficien
cy is complex. An excellent treatment of
the relative efficiency of subsidy or tax measures is presented by
McFetridge (1977, p. 5). Some have commented that in some circumstances
government involvement produces more distortion than it reduces (cf. Eads
in McFetridge, 1977, p. 15 on government support of aircraft research).
4.2 Rewards, Incentives, and Funding for Culture
Many forms of intellectual property are considered an important
part of a society's culture. These include music, painting, t
heatre,
dance, poetry, and novels. The rewards and incentives for these are
similiar to science, however, the sources of funding are different.
Rewards and Incentives
The artist is usually highly "internally" motivated. Some artists
are like scie
ntists, described above, who thrive on recognition. Others
are producer
-
consumer
-
critic
--
in almost complete detachment from others.
Collingwood, the British philosopher, described art as a process by which
the artist grows and affectively experiences th
e world through his own
art. As such, art becomes an external product of an internal process.
Others who can identify with the internal process are said to "appreciate"
the art.
The above discussion on cultural values is most germaine to
understanding what causes the production of cultural forms of intellectual
product. To use the word property is perhaps too antagonistic, since the
purpose of most cultural products is for universal availability and use.
Incentives for production
of cultural products are integrally part
of the culture. Mechanisms such as copyright have little positive effect.
Attempts have been made to provide performing artists with performing
rights (cf. 1981 Judiciary Hearings on Copyright, e.g. Dertouzos, 1981
, p.
2). but this has met with no success.
Funding
Like science, cultural production has been classically funded by
patronage. There was a close linking of patrons and artists. Haskell
(1963, p.4) describes the process in Italy during the Baroque
Age:
The young painter would at first be found living quarters,
in a monastery perhaps, by a cardinal who had once been
papal legate in his native city. Through this benefactor he
would meet some influential Bologn
ese prelate who would
commission an altar painting for his titular church and
decorations for his family palace
--
in which the artist
would now be installed. The first would bring some measure
of public recognition
, and the second would introduce him to
-
40
-
other potential patrons within the circle of the cardinal's
friends. This was by far the more important step. For many
years the newly arrived painter would work almost entirely
for a limited group of clients, until at last a growing
number of altar
-
pieces had firmly established his reputation
with a wider public and he had sufficien
t income and
prestige to set up on his own and accept commissions from a
variety of sources. Once this had been achieved, he could
view the death of his patron or a change in regime with some
degree of equanimity.
The role of government funding has been mixed in the U.S. During
the depression, in 1936, the WPA arts project had more than 40,000 artists
on its roles. Representative Sirovich of New York hailed the activity as
bringing culture to the masses in
a way that no government had before
(Larson, 1983, p. 1). Unfortunately, art was increasingly viewed as
linked with subversion and boondoggle as the country came out of the
depression. For the next twenty years one bill after another failed to
produce s
ubstantial government support for culture. There were also those
on the side of art who were concerned about government intrusion. Even
with the passage of a bill that established the National Endowment for the
Arts, support was still low. The $2.5 mill
ion in program funds
appropriated in 1966 was not even a third of what the Ford Foundation had
spent on ballet alone the previous year and tiny compared with the $85
million symphony orchestra program announced by the Ford Foundation in
October (Larson,
1983, p. 230).
Thus, much of the support for culture comes from private
foundations, charitable contributions of corporations, church
contributions, and individual donations. For further documentation of
these activities consult Miller (1970) on p
rivate endowment of education,
Nielsen (1972) and Goulden (1971) on private foundation philanthropy, and
Goldin (1969) on the support of public broadcasting.
4.3 Rewards, Incentives, and Funding for Products & Services
Rewards and Incentives for P
roducts & Services are largely
pecuniary. Funding is mainly achieved by contracts from one firm to
another or within the firm by revenues produced by sales.
Rewards and Incentives
The major debate in incentives to creators of intellectual
property
is the extent that ownership in the product (service) is
important. Many creators of intellectual property are mainly salaried
--
newspaper writers, editors, movie script writers, engineers, etc. In most
businesses (as well as many universities) ownersh
ip of copyrights and
patents reside with the institution.
The argument is similar to the one regarding government ownership
of patents (cf. 2.2.5). Business funded development should be the
property of business. The argument is even stronger than
government
ownership, since the business has the resources to exploit ownership more
than the individual (economies of scale, information about markets, etc.)
the ownership should reside with the business.
On the other side, individual ownership w
ill increase the
individual's production of valuable intellectual property. For example,
employee stock ownership has been found to improve the productivity of
firms. All other things being equal, individual ownership would be
-
41
-
desirable. However, this interferes with business control and the policy
of many firms is to not provide ownership and to recognize important
contributions through either cash bonuses or stock bonuses. The stock
control this provides the individual would be too small to affect the
company's operations. (For details on corporate
-
employee agreements and
contracts regarding intellectual property cf. Gilburne, 1982).
We should distinguish between for
-
profits
and not
-
for
-
profits.
Libraries, some of the abstracting and indexing services, the OCLC (Online
Catalogue of the Library of Congress), are not
-
for
-
profits. With regard
to incentives, these firms behave much more like scientists as described
in 4.1. As Ta
ylor (1984a) noted, these tend to be people dedicated to
performing a socially valuable service.
Almost by definition, for
-
profits operate with pecuniary
incentives. Internally, a major task of management is to devise ways to
distribute the incent
ives to maximize output. Some segments of the firm
respond to pecuniary incentives more than others, for example, marketing
and sales forces have been traditionally targeted for varying compensation
keyed to sales. In attempting to accelerate the rate of
production,
incentives keyed to meeting deadlines have been sucessful. However, this
is not universal, as some production of intellectual property depends on
professionals with temperments unsuitable to such coarse persuasion.
One of the most powerful tools for generating intellectual
property, particularly invention, is equity. Members of a firm that hold
sizable equity positions in the firm can be literally worth millions
overnight in the right circumstances. Recall,
under the risk discussion,
that smaller firms tend to be less risk averse than larger firms. One
major reason is the potential for enormous gain if the stock price is bid
up quickly.
If property rights cannot be obtained or protected, the firm mu
st
still be able to appropriate a return on its investment. Sometimes this
is achieved by being first. If the new product or service is very
attractive, and if it takes some time to imitate, the firm can appropriate
its investment before others compete a
way the return. Also, sometimes it
is possible to keep some hidden aspect of the product or service a trade
secret. In such a case, the firm can appropriate a return without the
need for intellectual property protection.
If the return cannot be a
ppropriated from the consumer there is a
danger that an important intellectual product could go unproduced. If the
social return is high and especially if there are positive externalities,
it may be efficient for the government to create a market by guara
nteeing
certain levels of demand at a particular price. The government could also
directly contract with the for
-
profit to produce the good on a
cost
-
plus
-
fixed
-
fee basis. Government contracting with major aerospace
firms for the production of planes and
armaments falls into this category.
Funding
Holmes (1983) discusses intellectual property developed both
internally to the firm and from outside resources. Funding flows are
summarized as follows:
o Intra
-
firm
--
internally financed de
velopment
o Research Consultants
--
funding of external invention
o Acquiring Externally Developed Intellectual Property
-
42
-
--
Acquisitions as part of a complete business
or product line
--
As separate intellectual property assets
--
Exclusive versus non
-
exclusive acquisitions
o Joint Ventures to Develop Intellectual Property
o Pooling and Cross
-
Licensing Arrangements Involving
Intellectual Property
The last two forms of developing intellectual property are
potentially socially efficient and socially inefficient. They are
socially efficient because they solve problems of app
ropriability and can
achieve economies of scale. They can be socially inefficient if they lead
to collusion and other antitrust concerns. The Justice department has
eyed both forms of joint development with suspicion and firms have been
reluctant to be
sued for antitrust infringement because they are liable
for trebal damages. The current administration has sought to reduce these
concerns and change the antitrust law to encourage more joint development
(cf. Gellhorn, Antitrust Law and Economics, 1981).
In the publishing field, Crew (1984) discusses the efficiency of
different forms of contracts between author and publisher regarding
payment. The five types of contracts are:
o Standard Royalty
--
publisher pays author a percentage base
d
on sales, perhaps with a sliding scale
o Profit Sharing
--
author receives royalties based on
publisher's profits on the book
o Cost Sharing
--
some of the costs of production are incurred
by the author
o Author's Fixed Fee
--
fixed fee paid by the author to the
publisher
o Publisher's Fixed Fee
-
fixed fee paid by the publisher to
the author
In particular circumstances, contracts other than the standard royalty
form of payment are superior in establishing a fair contract between
author and publisher.
-
43
-
5. Structural Role of Intellectual Property in Maintaining a
Viable Economy
There are two traditional functions of property. The first is to
reduce the "tragedy of the commons." If a pasture is open to all herdsmen
in a village, each herdsman will try to keep as many cattle as possible on
the commons. When the land beco
mes overgrazed, the grass dies leaving
everyone in disaster. In contrast, if the land is held as property, the
owner will use the land wisely and only allow as many cattle to graze as
can be supported by the land. Property rights, by making it possible t
o
exclude others and their cattle, has increased the efficiency of
production of the land.
Pejovich (in Mackaay, 1982, p. 38) notes a second, dynamic
function of property. From the individual's point of view the
specification of property rights is
associated with his search for more
utility. For example, who would invest his time and effort in preparing
land and sowing if at harvest time anyone could come and take the crop?
For any investment to be worthwhile, the investor must rest assured that
h
e can exclude others from the fruits and trade only at terms acceptable
to him. There are internal motivations to ownership that has its owner
press it into service or sell it to someone who will.
Posner views the major function of law as to aid i
n attaining
general economic efficiency. "The Common law method is to allocate
responsibilities between people engaged in interacting activities in such
a way as to maximize the joint value, or, what amounts to the same thing,
minimize the joint cost of the activities" (Posner in Mackaay, 1982, p.
34). Thus, a major function of law is to assign property rights to the
extent efficiency is increased.
The economic function of property rights was recognized by A. T.
Hadley
in An Account of the Relations between Private Property and Public
Welfare (in Cross, 1981, p. 37). Hadley traces the historical development
of property rights and demonstrated that changes in economic structure,
such as from hunting to agrarian societies
, were accompanied in changes in
the property rights that were held.
Dutton (1984) documents the historical development of the patent
system in Europe. He states that patent rights were typically justified
by four arguments: the natural
-
law thesis
, the reward
-
by
-
monopoly thesis,
the monopoly
-
profit thesis, and the exchange
-
for
-
secrets thesis. The
gradual change in emphasis from the natural right thesis to the economic
efficiency thesis occurred over a period from 1790 to 1860. In 1791,
French pat
ent law enshrined the belief in natural property rights in
invention
--
that the use without some form of compensation amounted to
theft since the property was personal and exclusive. By the patent reform
campaign of the 1820s in England, J. R. McCulloch
referred to both natural
rights and the increase of the level of inventive activity that occurred.
But even at that time few others spoke of natural rights. "When the
Westminster Review brusquely announced that 'to talk of the natural rights
of an invent
or is to talk nonsense', it was condemning an idea already
widely discredited" (Dutton, 1984, p. 18).
In 1924, Commons (in Dugger, 1980, p. 47) said of "modern"
property rights, "[t]hey protect the individual in his pursuit of rightful
economic
opportunity by enveloping him in property rights enforced by
-
44
-
state sovereignty." "Natural rights of man are a myth, even though the
myth once helped free man from the divine right of kings ... such rights
as we h
ave proceed from national and other collective action, and are not
natural (p. 47).
In the Economic Council of Canada's study on intellectual and
industrial property it is stated, "[t]he extent of private rights in
property can have great political
and sociological significance, notably
at times when, as in seventeenth
-
century England and eighteenth
-
century
France, the extent and distribution of property rights becomes one of the
central issues in a major political and social revolution. Even at su
ch
junctures, however, the underlying struggle is more likely than not to
involve strong elements of out
-
right economic interest as well, and at
most times people appear to value the rights in property which the law
grants them primarily for their ability
to generate a stream of economic
satisfaction of "income", using that word in its broadest sense" (Economic
Council, 1971, p. 222). The report defends the notion of natural
-
rights
in one way though, "they have played and continue to play a highly
significant role in the evolution of human societies ... people who firmly
believe that they possess not just an interest in some objective, but a
basic 'natural right' in it, are likely to be more vigorous and
indefatigable in the pursuit of that objectiv
e" (Economic Council, 1971,
p. 225).
There is still one further issue of political economy. This
relates to the access or denial of access that granting property rights
creates to all "potential players" in economic/political activities. For
exam
ple, the National Broadcasting Corporation statement in hearings
before the Judiciary commented on performing rights. First they said that
performers can freely contract with producers to receive income.
Secondly, that copyright legislation was not remedi
al labor legislation
--
it was not to provide additional jobs for performers (U.S. Congress
Judiciary Hearings, 1979, p. 664). But the question returns to the
appropriability of the value
-
added by the performing artist. Is the
provision of copyright for
the author of a song sufficient to provide full
appropriability by the artist? Can the producer fully appropriate the
performing artist's contribution and pass that along to the artist? In
the hearings, it was noted that a few of the performing artists m
ade most
of the income and that royalties would only increase their wealth and not
that of the "struggling" performers. But we have progressive income
taxation to handle our concerns about excess distributions of wealth. So
the issue for performing artis
ts, and any other contributor to
intellectual property through "adding value" remains open.
-
45
-
6. Summary
This paper has shown that fourteen characteristics of information
make it necessary to treat
information different from other commodities.
In particular, there are many ways in which information will be
under
-
produced without legislation or government support.
The assignment of rights to intellectual property is one mechanism
to solve prob
lems of appropriability, transaction costs, and encourage
more information about information. However, the assignment of rights
exacerbates problems when there are high social returns to the easy and
free access to information. Further, problems of posit
ive externalities,
indivisibilities, and risk/uncertainty are not addressed by the rights
approach.
Alternatives to the assignment of rights include various forms of
subsidies and tax incentives from government (and other sources)
--
for
example, t
he support of science through grants; research through tax
credits. When the producer is motivated from mainly non
-
pecuniary
(non
-
monetary) rewards, the abuse of these systems can be low.
The development of an information product or service is par
t of an
information life
-
cycle. Information sources become information resources.
These are tapped in the creation of products and services, and the results
disseminated. Along this cycle, value is added to the original
information. The value
-
added data
from the Department of Commerce was
found to have limited application. More fruitful are industry level
studies of value
-
added activities.
Finally, little is still known about the political economy of the
information sector. What are the employm
ent effects? Are various
segments of the industry seriously concentrating? To what extent can and
should property rights be extended to those who add value to a basic piece
of information?
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