Circulation Title: An Information Framework for the Planning and Design of "Information Highways" Dr. W. Curtiss Priest Center for Information, Technology, and Society 466 Pleasant Street Melrose, MA 02176 617-662-4044

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Circulation Title: An Information Framework for the Planning and

Design of "Information Highways"

Dr. W. Curtiss Priest

Center for Information, Technology, and Society

466 Pleasant Street

Melrose, MA 02176



NOTE: This is a seminal work for the design of the National

Information Infrastructure (NII). Contained in the

14 characteristics of information are the seeds of how

to build better information systems. In particular,

the 8 characteristics related to market failure provide

the ration
al for non
profit and government involvement.

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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

(c) Center for Information, Technology & Society, 1985, 1994

Parts may be copied in derivative works with full attribution

under the Doctrine of Fair Use.


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


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 Inappropriability 12 Non
depletability 13

2.2.2 Externalities


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



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


Appendix A

Bibliography 46


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


Definitions and Introduction to Fourteen

Characteristics of Information

As a Commodity:

1. Intrinsic Co

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

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


failure Related Characteristics:

5. Public Good

The same information can be used by many consumers without



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



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


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


Historically, information distribution such as telegraph,

telephone, radio, and television have exhibited suf

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

because of appropriability problems. This leads to

consumption of information due to problems of search.

11. Intangibility

The character of the value of some information to be

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.

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


14. Intrinsic Relationship to Freedom and Privacy


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.


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


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

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

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

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).


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<


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
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


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


where choice, selection, and discrimination is called


At the recent Elsevier Symposium on Information Policy a

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

n and which are not."


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

on. Manten & Timman, similarly, reject the external economic


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



<*> 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


producer of a response to something other than itself).


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

positive outcome. (If I sense that the actions of a co

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


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

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

or listener.


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


As indicated above, what makes information valuable is how it

changes my efficiency in achieving an outcome. Thus, what is v

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



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

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


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

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

Information is not typically the object of consumption as are

apples, coal or umbrellas. In contrast, information has an instrumental


it aids in attaining desired outcomes. We thus refer to

information as an intrinsic co
Information inherently is a

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

There are many classes of commodities that are co

While we do consume pencils as they wear down, the pencil is a co

of the written word. Cosmetics are co
producers of romance and cars are

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

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

depletable resource such as solar power is a closer analogy to


Cleveland (1982, p. 36.) describes two characteristics of

information that are directly related to intrinsic co

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


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

omes. Thus there is a need to manage information to keep it relevant

and make it efficiently co

Secondly, Cleveland refers to the substitutability of information

(Cleveland, 1982, p. 37). "It can replace capital, labor, or physical

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

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.


2.1.2 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:

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.



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.

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,

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

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.


2.1.4 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


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

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

In summary, we can define the variable
relevance of information



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

But because of the variability in prior information, it encourages

product differentiation

ormation can be packaged and repackaged to

fit the particular circumstance of the consumer. (Computer

instruction, with the ability to branch as required by the student, is a

good example.)

But product differentiation is problematic to es

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.


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

since a major role of government is to provide what the market


In the early part of the twentieth century, market

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

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

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


Allocating resources to their most valuable use

(also called allocative

Pareto Optimality

The condition where all resources are

allocated to their most valuable use


a change in allocation that increases the net

value to society


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



Something bought and sold

Consumptive Good

A good that is a
cquired mainly to be


Instrumental Good

A good that is acquired mainly for its

productive capacity


the last unit of production or consumption

Marginal Cost Pricing


a firm operates where:

marginal cost (the cost of producing the last unit) equals

the market price for that good

(Stated as MC=P)


Marginal Utility

The utility derived from the last unit of

a good


the income (or benefit) derived from an


(Typically expressed as a percentage of the original


Information as a commodity is subject to many forms of market

failure. The recognition of some of these in economics date back to the

1920's when Pigou (1924), and Marshall before him, recognized that

knowledge provided benefits
to society as well as to the purchaser (cf.


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,


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
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

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
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

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.


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


Before exploring the relationship of this characteristic to

property, it will help to explore two closely related characteristics

inappropriability and non
depletability. 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


typically by selling it at the

market price.

Inappropriability is the difficulty in taking possession of the worth of


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

production and under

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


with ease
sharing and transportability are discussed in Section 2.3

market characteristics). Non

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

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:

depletability of Information

Information does not

dissipate with use. Producers must compete with past

producers but society benefits with an accumulation of


In relation to property and property rights,

the public

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

good nature of information.

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

provision of the copyright law generally assures that exclusion will not

occur. (For a most comprehensive

discussion of fair
use and

failure see Gordon [1982]).

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


2.2 Externalities

If there is an effect associated with a good

positive or


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.


some way to have the firm more fully account for such effects. A set

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


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


1. Intellectual and cultural values of science

2. The utility of basic research as the found

of all technological development

3. Research as an essential component of graduate


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 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.,


Nordhaus found very high positive externalities to agricultural research.

Mansfield (1977) performed an empirical study on social and

rates of return from industrial innovation. For seventeen

innovations the median private rate
return was 25% (before taxes) and

the social rate
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
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

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

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.


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


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

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



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

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


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


concentrating power and increasing revenues." As of 1980 the 25 largest

multiple system owners (MSO's) controlled over 60% of all U.S.



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


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%


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


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


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

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
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

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

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

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
case basis (Peyton, 1981, p. 80, 84).

Supporters of these types of changes point out that

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

protection is

only useful once the property exists.



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

(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

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

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


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

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.


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

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


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

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

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
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

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



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

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


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
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

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:


First, middlemen could package programs for basic cable

systems and program suppliers just as they now package

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

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

ts, contracts would have to be established under common law. This

process would be far more tedious and time consuming.


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

mation its two non
market characteristics.

To cover non
market characteristics it is necessary to shift to a

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

defined here for reference<*>:


An individual displays choice when he produces one

particular action from a set of possible actions.

Courses of Action

structurally different behaviors (different

al actions involving different objects, etc.) of an

individual whose behaviors have one or more common functions

(i.e. toward accomplishing the same ends).


an instrument is co
productive when it

ilitates the achievement of an outcome. (Instruments are

rarely valued for themselves, but for their co



the product of an individual's or system's action


the degree of success in achieving an outcome


inferences drawn from past and present perceptions


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


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



<*> 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.


(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.


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


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


change in component 1:

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.


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

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

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

l. With those it is possible to know whether and by how much

some information increases understanding

by changes in the degree of


In summary, the intrinsic relation of information to human welfare

can be defined as:

rinsic Relation of Information to Human Welfare


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

wisdom hierarchy" as a process where information


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

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.


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

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.

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

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

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.


Property rights are conducive
to privacy. A property right gives

an individual the power to withhold and, thereby, achieve privacy.


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

can be conside
red in two ways. The strict economic definition can be

defined as:


The sum of the input factors of production

excluding all purchases of materials and services from other


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

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

added, to be more complete:

Full Value

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

contribution to the product or service.

But like the economic definition of the value of information

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

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
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.



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>


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


One technique to
attempt a quantifiable measure has been the use

of willingness
pay (cf. Griffiths, 1982, p. 274). In

pay, the individual is being asked to quantify in dollars,

the perceived value of the information. I.e., he is being asked to


the incremental increase in expected value into dollars.

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

added) calls the individual and says there is a free $5.00 ticket

to the same dance club waiting for him. The individual's

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


What is the willingness
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
pay is an unreliable measure

of value

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

(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).


Taylor (1982b, p. 345) notes that products generally are

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

1 shows the numbers of producers in 64

classes of products and services.

Taylor (1982, p. 342) developed a value


. This appears as:





classifying selecting


matching goals

relating analysing options


formatting comparing advantages


g interpreting disadvantages










Source: Taylor (1982, p.342)

Taylor suggests that products are situated to the left side of the

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.

added is thus identified in terms of what is done to the


made accessible, enhanced, etc. For example, King and

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


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

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


o Retrieval. How easily can data be recalled via a particular


Table 3

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


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)



Service (P)

Product Source: Cuadra, 1980, p.



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


o Translation into Action. Does a component permit statements

about the actual use of the data once its relevance is


o Feedback. Does the component permit feedback from the user

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

processes in abstracting and indexing services (1984a) He notes th

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

Porat (1977) has developed the most comprehensive study of

added in the economic sense. While the study provides little sens

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


firms" (Vol. 1, p. 4).

For the primary sector, he presents value
added (VA) by two

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

added at the two digit level. For example, VA in 1967 for all of


$8,115 Million; for all of Manufacturing


Million; and for Agriculture, Forestry, and Fishe

$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

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


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)

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


Table 3

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

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

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

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

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

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

a particular sub
ject or of a particular form of information.

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

of ways and approaches of working dynamically with the data/information in



Table 3
2 (Continued)

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

to users.

Interfacing (Mediation) (Ease of Use): the means used to assist users i

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

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

a body of subject matter by some form of gross ordering such as

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

finding exactly what he wa

Reliability (Quality): the value added by the trust a system inspires in

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

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

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.

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


the degree to which data or information presented to users can be judged



presentation are changed such as in publishing.

There are several issues in relation to property. In the case of

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

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


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 basis, however, since

there are no clearcut ways of predicting the affect of bundling on

industry structure.


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

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


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

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

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).


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

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

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


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

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

market process that ensures these outcome

the production of

poetry, kindness, charity, human growth, and science.

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

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


e efficiency of the choice of action to achieve the outcome and the


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

pecuniary rewards. Copyright gives possession and increases

(monetary) appropriability. Copyright actually reduces non

ewards by restricting circulation. What the author is concerned about in

terms of non
pecuniary rewards is that he be cited and recognized


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

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


o Honors

o Prizes

o Placed on Board of Editors of a Journal

o Fellowships

o Name Cited in Journals and Other Sources


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

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

o Loans


increased availability



lower interest


some "forgiveable"

o Provide Information Resources

. 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

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

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.


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


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


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


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


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


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
and not

Libraries, some of the abstracting and indexing services, the OCLC (Online

Catalogue of the Library of Congress), are not
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


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

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

certain levels of demand at a particular price. The government could also

directly contract with the for
profit to produce the good on a

fee basis. Government contracting with major aerospace

firms for the production of planes and

armaments falls into this category.


Holmes (1983) discusses intellectual property developed both

internally to the firm and from outside resources. Funding flows are

summarized as follows:

o Intra

internally financed de

o Research Consultants

funding of external invention

o Acquiring Externally Developed Intellectual Property



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

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


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.


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

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

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.

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
monopoly thesis,

the monopoly
profit thesis, and the exchange
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


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

opportunity by enveloping him in property rights enforced by


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

France, the extent and distribution of property rights becomes one of the

central issues in a major political and social revolution. Even at su

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

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

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.


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

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


Alternatives to the assignment of rights include various forms of

subsidies and tax incentives from government (and other sources)


example, t
he support of science through grants; research through tax

credits. When the producer is motivated from mainly 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?