About the Characteristics

Notice that imitators are competitors, so that the imitation that causes the incentive problem also tends to offset the tendency toward monopoly that comes from the non-homogenous nature of information products and from their high fixed costs. Conversely, intellectual property laws can reinforce the tendency toward monopoly, at the same time as they reduce the incentive problem.

High fixed costs and the incentive problem are more extreme when the costs of media are lower by comparison with the costs of originating information products. For example, before the invention of printing, books could only be reproduced by hand transcription. Since this cost almost as much as originating a book, there was little profit in imitating books written by others. But by the same token, books were so expensive that there were very few books to be had. With the invention of printing, it became possible to imitate books cheaply and sell them to a mass audience, at a profit. Books became cheaper and more common, and imitation of information products emerged as a problem. It seems that one major trend of modern technological progress has been to make media cheaper by comparison with the costs of origination of information products, so that imitation or "pirating" has become more and more profitable, and the incentive problem has become more and more acute.

In general, the characteristics of information products differ in important ways from those of goods traded in "perfect" (p-competitive) markets. Since modern economics associates "perfect" markets with efficient allocation of resources, the question arises whether "enough" resources (for efficiency) will be allocated to the production of information products in the absence of government intervention. The incentive problem suggests that "too little" resources may be allocated to the production of information products, in the absence of some special provision. But "intellectual property" is a special provision designed to respond to the incentive problem. Let us take a more detailed look at a specific, well-established form of intellectual property: patent rights.

Economics of Patents