Private Copying, Appropriability, and Optimal Copying Royalties

Although private copying of intellectual property is presently widespread and is likely to become even more so in the future, its effects are poorly understood. The economic effects depend to an important extent on whether one assumes that the demand for the originals from which copies are made reflects the values that users place on these copies. When the demand for originals reflects the demand for copies, that is, when there is indirect appropriability, the interests of producers and consumers of intellectual property are generally congruent. However, these interests are likely to diverge when it is assumed that there is only direct appropriability, that is, that the demand for originals reflects only the value placed on them by their direct purchasers. Where there is indirect appropriability, the optimal royalty may be zero if originals and copies are perfect substitutes. Where either the cost of copying is low or originals are expensive to produce, the producer may be better off not imposing a royalty.