INFORMATION

ECONOMICS
AND POLICY
Information Economics and Policy 17 (2005) 471494
www.elsevier.com/locate/iep

Does decrease in copying cost support

copyright term extension?
Michael Y. Yuan *

Gabelli School of Business, Roger Williams University, Bristol, RI 02809, USA

Received 1 May 2004; received in revised form 8 February 2005; accepted 8 February 2005
Available online 12 March 2005

Abstract

Copyright duration has been or is being extended in many countries. Technological and
demographical changes were cited by a US Senate report to argue for US copyright term
extension. This paper analyzes the validity of the arguments. Simulation of a model of the
information product market indicates that a decrease in copying cost of information products
due to digital technologies calls for a reduction of copyright duration. Partial support is found
for the argument that longer life expectancy and delayed child-bearing may support copyright
term extension. Furthermore, an increase in demand for information products is found to call
for reduction in copyright duration.

2005 Elsevier B.V. All rights reserved.

JEL classication: K39; L86

Keywords: Copyright duration; Copying and distribution cost; Longer life expectancy and delayed child-
bearing; Increased demand for information products; Modeling and simulation

*
Tel.: +1 401 254 3079; fax: +1 401 254 3545.
E-mail address: myuan@rwu.edu.

0167-6245/$ - see front matter
2005 Elsevier B.V. All rights reserved.
doi:10.1016/j.infoecopol.2005.02.004
472 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

1. Introduction

This paper simulates the eects of new computer and communication technologies
and longer life expectancy and delayed child-bearing on the optimal duration of
copyright protection. Copyright duration is a key parameter of the copyright system.
According to the US copyright law, for a limited period of time, creators of original
works of authorship have exclusive rights of reproduction, distribution, public per-
formance, public display, and derivative preparation over their works, once the
works are xed in any tangible medium of expression.
The 1998 Sonny Bono Copyright Term Extension Act extends US copyright dura-
tion for 20 years.1 The Senate Report accompanying Senate bill S. 483 of copyright
term extension cited technological, demographical, and international changes in sup-
porting the extension (Senate Report, 1996). The report argues that new media tech-
nologies enhance the marketable life of informational products, which in turn
requires longer copyright duration. It further argues that longer life expectancy
and delayed child-bearing of authors and their descendents requires longer copyright
duration to aord adequate protection for the creators and their heirs. There has
been a heated debate on the wisdom of copyright term extension (e.g., Akerlof
et al., 2002; Bard and Kurlantzick, 1999; Hamilton, 1996; Karjala, 1997; Lavigne,
1996; Ochoa, 2002; Rappaport, 1998; Reichman, 1996; Walterscheid, 2000). And
there are detailed analyses on the international argument by Bard and Kurlantzick
(1999) and Karjala (1997) and excellent discussions about the demographic argu-
ment by Karjala (1997). This paper adds an analysis on the technological argument
and contributes to the discussion about the demographic argument from a modeling
approach.
This paper also simulates the eect of higher demand for information products on
copyright duration. As the economy becomes more information-based and society
becomes richer, demand for information products has increased. Based on a unique
model, Landes and Posner (1989) suggest that the eect of higher demand may be
longer copyright duration. This paper analyzes this eect with a dierent model.
This paper analyzes the eects of the above factors by developing and simulating
a model of the information product market. The model captures the unique structure
of high creation cost and low reproduction cost of information products and the ba-
sic trade-o between encouraging creation and reducing restriction on consumption
in designing the copyright system.
The main dierence of the model from other models in the literature on economics
of copyright and intellectual property is in its way of describing the competition in
both the creation sector and the product market of information goods. Information
creators may compete with each other on the product market by oering legal,
dierentiated, and competing products. They compete in creation by making

1
Before the Act, copyrights lasted for the life of the author plus 50 years in the case of individual author,
or the life of the author who last dies plus 50 years in the case of a joint work by two or more authors, or
75 years from publication in the case of works of corporate authorship. The Act adds 20 years to each of
these terms.
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 473

competitive decisions about creation, such as what and how many original works to
create. They compete both in creation and on the product market and compete in
creation through competition in the product market.
Considering the competition in creation and in production may be important in
designing the copyright and intellectual property systems. Lichtenberg and Philipson
(2002) found that competition among patents in the same drug class is at least as
important as the competition from imitators of the same drug. Imitation is legal after
a patent expires. Competition among dierent patents is legal before patents expire.
Competition among dierent patents means that competition in both invention and
production. Yoo (2004) stresses the importance of competition between dierenti-
ated information products for the copyright system.
The economic literature on copyright and intellectual property can be divided into
three categories. The rst asks whether copyright is necessary by comparing copy-
right with systems where there is no copyright. Breyer (1970), Boldrin and David
(2002), Hurt and Schuchmann (1966), and Plant (1934) belong to this category.
The second category studies the eects on owner behavior and social welfare of vio-
lation of copyright law, such as private copying, and studies the design of optimal
enforcement of existing copyright and intellectual property laws. Examples in this
category include Besen and Kirby (1989), Johnson (1985), Liebowitz (1985), Novos
and Waldman (1984), and Yoon (2002). The third category of the literature studies
the optimal copyright and intellectual property laws. This paper falls into the third
category.
The third category, the literature on optimal intellectual property laws, can fur-
ther be classied into four sub-categories, according to whether the study considers
competition in the product market and competition in the creation sector. The rst
sub-category considers no competition in either creation or on the product market.
In such models, a single creator invests in creation and monopolizes the product
market when the creators products are within the duration of protection. It includes
the earliest models in intellectual property: Nordhaus (1969, 1972) and Scherer
(1972). Gans and King (2004), Gilbert and Shapiro (1990), Landes and Posner
(1989), and Takalo (2001) are more recent examples in this sub-category. Most of
these models capture the essential trade-o between encouraging creation and reduc-
ing restrictions on utilization in designing optimal intellectual property laws. The
model in Landes and Posner (1989) is unique in that it captures the trade-o between
the incentive for creation through increasing demand for the copyright owner by
controlling copiers supply and the disincentive of increasing creative cost by copy-
right protection. Landes and Posner (1989) discussed many creators. Each creator
creates a single work. However, there is no interaction between the creators. There-
fore, it is equivalent to a single creator who creates many works.
The second sub-category models competition in creation but considers no compe-
tition on the product market. Much of the patent race literature, where the winner of
the inventing race takes all in the production stage, belongs to this sub-category.
Examples include Denicolo (1996, 1999, 2000) and Judd and Schmedders (2002).
The third sub-category considers competition on the product market but does not
consider competition in creation. This sub-category study issues like competition
474 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

from imitators, optimal licensing, and optimal scope of protection. Examples are
Gallini (1992), Klemperer (1990), Tandon (1982), and Wright (1999).
The fourth sub-category considers competition in creation and competition on the
product market. ODonoghue (1998), Veall (1992), Waterson (1990), and Yuan and
Roehrig (1996) belong to this sub-category.
This paper falls in the fourth sub-category, modeling competition in creation and
on the product market. The paper resembles most papers of the rst sub-category in
their balancing the incentive for creation and restriction on utilization. It extends
them from the single creator and monopoly production case to a case of competitive
creation and competitive production.
This paper diers from the extant papers in the fourth sub-category in the
specic description of decisions in creation and production. In Veall (1992),
creators make no creative decision other than entry with a single product. In
Yuan and Roehrig (1996), entry decision is not endogenous. In ODonoghue
(1998), innovators decide whether or not to incur a xed cost for random quality
improvement. Products compete by replacing lower quality products. Waterson
(1990) considers a two-rm competition in patenting, entry, and location. In this
paper, creators make entry decision and decide how many rst-copy products to
create and make pricing decisions in the selling copies of their products in a
monopolistically competitive product market. These decisions are richer and they
better represent the decisions in creation and production in the actual ordinary
information market.
The paper is organized as follows. Section 2 sets up the model. Section 3 presents
the results of the simulation. Section 4 concludes the paper.

2. The model

2.1. The operation of the information product market

This section qualitatively describes the operation of the information market. In

this market, creators develop rst-copy information products and reproduce and sell
copies of them to users. During copyright protection, creators are the sole sellers of
their respective products. However, the creator of an information product competes
with creators of similar products. Therefore, there is monopolistic competition
among creators.
Under monopolistic competition, creators price above marginal cost of reproduc-
tion and distribution during copyright protection to maximize prots. Prots above
marginal costs are used to cover cost of developing rst-copy products and produce
net prots. Above-marginal-cost pricing causes loss in consumer surplus. The dier-
ence between the loss in consumer surplus and the gain in creators prots is the
deadweight loss of social welfare.
After copyright expires, anyone is free to reproduce and distribute the products.
Competition will drive prices to marginal costs. Creators make the least prot above
variable cost of reproducing and distributing products they create. At the same time,
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 475

consumers enjoy maximum possible surplus from the information products. Dead-
weight losses are avoided.
Creators also decide how many rst-copy products to create. The decision de-
pends on the marginal cost of creation and the marginal prot from reproducing
and selling copies of expanded rst-copy products at the above-marginal-cost pricing
within copyright duration. On the margin, the cost of creation equals the prot from
above-marginal-cost pricing. Note that the marginal prot depends on the number
of rst-copy products already on the market.
Creators further choose whether or not to enter the information market. In gen-
eral, if there are prots to be made, new creators will enter. Assuming that informa-
tion products are substitutes on average, new entrants reduce the demand for the
products of current creators and the protability of further entry. Entry continues
until economic prot of marginal entrant becomes zero. Note that there are many
cases where information products are complements. For example, good movie re-
views may drive up box oce sales of movies; Adobe Acrobat reader software drives
up sale of Acrobat creator software. However, on overall average, information prod-
ucts should be substitutes.
The legislature chooses the duration of copyright to maximize social welfare.
Longer copyright duration increases creators ability to make prots and induces
more creators and rst-copy products into the market. Increase in the number of
rst-copy products brings higher surplus to consumers. Additional rst-copy prod-
ucts partially substitute existing products and draw prots away from their creators.
Longer copyright protection also increases the deadweight loss for existing products.
With a welfare-maximizing legislature, the three eects of changing copyright dura-
tion cancel out on the margin.

2.2. Simplifying assumptions

The information market described above is simple because of the following

assumptions. First, creators enter the market and create the rst-copy products in-
stantly at the beginning of time. Afterwards, they reproduce and sell copies of the
products. There is a single generation of information products and no interaction
among generations. In reality, older information products may be used in the crea-
tion of newer information; older products may generate demand for newer products
or compete with them. However, considering interactions among multiple genera-
tions would much complicate the model.
Second, there is a single category of information products. In reality, there are
many categories. Information products of dierent categories may dier in cost of
creation, reproduction and distribution, demand, and substitutability, etc. However,
if interaction among the categories is weak, considering a single category can be rep-
resentative of the entire information industry. If the results of the model hold for one
category, it can hold for each category; then it could hold for all categories, that is,
the entire information industry.
Third, all rst-copy products are of the same quality. In reality, creators choose
both quality and number of rst-copy products. To a degree, quality and quantity
476 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

of the rst-products are interchangeable in the creation of information products.

They both require more resources and increase demand. This assumption xes qual-
ity and reduces the two variables into one single variable. Note also that quality dif-
ference in rst-copy products is not the same as product dierentiation. The products
may not be dierentiated vertically, that is, they are of the same quality. However,
all rst-copy information products can still be dierentiated horizontally, there-
fore, dierent from each other.
Fourth, ordering does not exist among rst-copy information products. Each
rst-copy product is dierent from every other product in the same way. If there
is no quality dierence among rst-copy products, this assumption may be natural.
Fifth, all copies made by the creators and copiers are of the same quality. This
assumption is plausible for digital information products. Note that quality of copy-
ing is dierent from the quality of creation.
Sixth, each creator sets one price for all its information products at a given point
of time. A creator does not price dierentiate across its rst-copy products, but com-
petes with products of other creators. If there is no quality dierence or ordering
among rst-copy products, this assumption is reasonable. Note that the price could
still change over time. This assumption also means that price discrimination across
customers is not considered. In reality, price discrimination across customers exists
and aects optimal copyright policy such as public performance rights, derivative
rights, and importation rights (Meurer, 2001). What is assumed here is that the eect
of price discrimination on optimal duration does not change with the parameters of
cost of reproduction, discount rate, level of demand for information, etc.
Seventh, copyright protection is perfectly enforced within copyright duration. In
reality, enforcement is imperfect. Falling reproduction cost makes it easier to copy
and may make it harder to enforce copyright. On the other hand, new development
of technologies in trusted computing-based digital rights management may enable
total control of usage of information products by copyright owners and near-perfect
protection of copyright (Anderson, 2003). This paper focuses on copyright duration
by assuming that copyright enforcement is perfect or is maintained at a xed level.
Note also that imperfect copyright protection may be partially treated by amending
the demand function for information products to reect the increased demand due to
users ability to copy.
Finally, the eect of changes in availability of information due to changes in copy-
right duration on further creation of information products discussed in Landes and
Posner (1989) is not considered. Creators are considered as part of the consumers
when creators are users of information. The eect of changes in availability of infor-
mation on further creation is partially included in consumer surplus.

2.3. The model

The following notations are used in the model: n, number of creators in the mar-
ket; si, number of rst-copy products of creator i, i = 1, 2, . . ., n; s
i, vector of num-
bers of rst-copy products of creator other than i; pit, price per copy (or per use)
of each product of creator i at time t; p
it, vector of prices per copy of products
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 477

of creators other than i at time t; Dit (si, pit, s
i, p
it, t), the rate of demand per unit
time for products of creators i at time t; ci(si), the cost of rst-copy development of si;
b, the cost of reproducing and distributing a copy of an information product, as-
sumed uniform among all information products and among all creators and consum-
ers; c, the discount rate of consumer surplus and creator prots; and T, duration of
copyright protection.
The problem of optimal duration is to choose T to maximize social welfare:
Xn Z 1
Z 1 
L Dit si ; p; s
i ; p
it ; t dp e
ct dt
i1 0 b

X
n Z T
Z pit 

Dit si ; p; s
i ; p
it ; t dp e
ct dt
i1 0 b
n Z
X T X
n
Dit si ; pit ; s
i ; p
it ; tpit
be
ct dt
ci si : 1
i1 0 i1

Subject to
o
Dit si ; pit ; s
i ; p
it ; tpit
b 0; i 1; 2; . . . ; n; 2
opit
Z T 
o
ct
Dit si ; pit ; s
i ; p
it ; tpit
be dt
ci si 0; i 1; 2; . . . ; n; 3
osi 0

and
Z T
Dit si ; pit ; s
i ; p
it ; tpit
be
ct dt
ci si 0; i n; 4
0

where pit is the price determined by (2).

The rst term in the social welfare function (1) is the maximum possible consumer
surplus by developing si, i = 1, 2, . . ., n. The inner integration over p gives the rate of
consumer surplus from the products of creator i at time t. The outer integration adds
the consumer surplus per unit time from products of creator i over time with a time
discount rate of c. Then, the consumer surpluses from products of all creators are
added together.
The second term is the loss of consumer surplus during copyright protection.
There are integrations and summation similar to those in the rst term. The integra-
tions dier in ranges of price and time. The ranges reect that the loss is within time
0T of copyright protection and due to the price raised from marginal cost b to pit at
time within 0T.
The third term is the total revenue of all creators above their copying and distri-
bution costs during copyright protection from time 0 and T. The dierence between
the second term and the third term is the deadweight loss. The fourth term is the to-
tal cost of all creators in creating si, i = 1, 2,. . ., n.
The rst and second terms in (1) together are the consumer surplus from all prod-
ucts of all creators. The third and the fourth terms together are producer surplus.
478 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

The sum of consumer surplus and producer surplus is the standard measure of social
welfare. This measure weights consumer surplus and producer surplus equally and
does not account for the distribution of prots among creators and surplus among
consumers.
Constraints (2) represent the pricing decision of each creator in selling copies of its
products at time t during copyright protection. The price maximizes the rms prot
at each point of time t. Constraints (3) indicate that each creator chooses the number
of rst-copy products to maximize its total prot, accounting for development cost.
The constraint (4) represents the marginal creators entry condition of zero economic
prot. If all creators have the same creating technologies, this condition holds for all
creators i = 1, 2, . . ., n.

3. Numeric simulation

3.1. Specications of demand and cost

Specic functions for demand Dit(si, pit, s
i, p
it, t) and cost ci(si) are needed to
solve the model. Assume:
, ! !a
Xn X
n Y b=n
1
Di si ; pit ; s
i ; p
it ; t D0 si sj sj p
d
i pj gt; 5
j1 j1 j6i

where

1
Tt0 if t < T 0 1
h;
gt 6
h; otherwise;

ci s c0 asq 8i; 7

where 0 < a < 1, d > 1, b > 0, 0 6 h < 1, q > 1, and D0, T0, c0, and a are positive
constants.
The demand function (5) is created to reect how demand for a creators products
changes with its price, the prices of its competitors, and number of its rst-copy
products
Pn a
and number of rst-copy products of its competitors. The factor
j1 sj in demand function (5) and 0 < a < 1 mean that the total demand for
information increases with the total number of rst-copy information products.
The parameter a is the percentage increase in demand from a percentage increase
in the number of rst-copy products. The parameter a reects the degree of dieren-
tiation of rst-copy information products and the consumers preference for variety
of information. The bigger the a, the more dierentiated the rst-copy products or
the stronger the preference of consumers for variety. 0 < a < 1 means that rst-copy
products are assumed to be substitutes. a = 0 would indicate that all products are
perfect substitutes; a = 1 would mean rst-copy products are not substitutes or com-
plements. In this case, the total demand for information products of all creators,
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 479

which is the sum of (5) over creators, increases linearly with the total number of rst-
copy products. a > 1 would mean products are complements. Individual information
products can be complements to each other. However, on average, information
products are most likely substitutes within a product category. Thus, the parameter
a is assumed toQ be b=n
1
between 0 and 1.
The factor j6i pj and positive b mean that demand for products of a creator
increases with the prices of products of other creators, further reecting the assump-
tion that information products are substitutes on average. b is the cross-price
elasticity. Pn
The factor si = j1 sj in (5) implies that total demand for information is distrib-
uted among creators in proportion to their numbers of rst-copy products, other
things being equal.
Positive d means that demand for a creators products decreases with its price. The
parameter d is the price elasticity of demand for a creators products. The condition
of d > 1 is necessary for consumer surplus to be nite. Note that demand Di in (5)
depends on pit only through the factor p
d it . From (5) and constraints (2), one can
derive:
d
p b: 8
d
1
The factor g(t) represents the change in the demand level for copies of given infor-
mation products over time. The specic form (6) assumes that the demand decreases
linearly over time until the demand reduces to h at time T0(1
h) and then stays con-
stant at that level thereafter.
In (5), all rst-copy products are related to demand in the same way, reecting the
assumption that there is no order among rst-copy products. In cost function (7),
parameter c0 represents the xed cost of information creation; parameter a is related
to per-product development cost; and q > 1 means that there are decreasing returns
to scale in creation.
The above specications assume that creators are symmetric: creators have iden-
tical creation, reproduction, and distribution costs and symmetric demand functions.
Thus, in equilibrium, one can expect that each creator has the same size and charges
the same price.

3.2. Simulation results

Based on the above specic demand and cost functions, an explicit analytical
solution is not found. Numerical methods are used to compute the values for opti-
mal duration T, number of products per creator s, number of creators on the mar-
ket n, and social welfare L for given values of the market parameters D0, a, d, b,
b, T0, h, c, c0, a, and q. The eects of changes in the parameters are then
simulated.
Assume the following parameter values:

D0 ; a; d; b; b; T 0 ; h; c; c0 ; a; q 107 ; 0:3; 2; 0:5; 5; 100; 0:001; 0:05; 3  105 ; 104 ; 1:2:

480 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

Note that b = 5 is the per-copy cost of reproduction and distribution; c = 0.05 is the
discount rate; D0 = 107 represents the general level of demand; T0 = 100 and
h = 0.001 indicate that demand decreases linearly to one thousandth of the initial de-
mand in 99.9 years and then stay at that level thereafter; price elasticity d is 2, and
cross-price elasticity b is 0.5; and a = 0.3 represents dierent information products
are assumed to be substitutes on average. These parameter values are not selected
to represent an actual information market. Rather, the intention is to see whether
same results could be obtained at any parameter value, which is done later through
sensitive analysis.
With these parameter values, solving the model results in T = 14, n = 130,
s = 63, p = 10, and L = 1.06 109; that is, the optimal copyright duration is 14
years; under 14 years of copyright protection, there are 130 creators on the market;
each creates 63 rst-copy products; there are 8213 distinctive rst-copy products on
the market; each creator makes zero prot; price of the product will be $10 per
copy and 63 million copies of their products will be sold during the 14 years of
copyright duration. The solution shows the socially optimal copyright duration un-
der which creators operate optimally to their best individual interests and collec-
tively bring maximal benet to consumers. The optimality can further be seen as
follows. First, each creator makes maximal prot when it creates 63 rst-copy
products. The maximal prot at optimal size of 63 is zero because of the compet-
itive nature and free entry in the creative sector. A creator would incur a net loss if
the creator creates fewer or more than 63 rst-copy products. For example, if a
creator creates 62 or 53 rst-copy products, the creator would lose $46 and
$4774, respectively; if it creates 64 or 73 rst-copy products, it would lose $46
and $4406, respectively, given that there is no collusion and other creators stay
at their optimal size of 63 rst-copy products.
Second, given the information market described by the given parameter values,
social welfare is maximal at 14 years of copyright protection. Setting longer copy-
right duration would monotonically induce more creators and rst-copy products
to the market. If copyright duration is shorter than 14 years, there would be
fewer than optimal numbers of creators and rst-copy products into the market;
this is under-protection and causes under-investment in creation. If copyright
duration is longer than 14 years, there would be more than optimal numbers
of creators and rst-copy products; this is over-protection and causes over-invest-
ment in creation. But both cause losses in social welfare. For example, if copy-
right duration is set at [5, 10, or 13] years, shorter than the optimal 14 years,
the number of creators on the market will be [45, 91, 119]; and number of
rst-copy products will be [2726, 5711, 7519]; social welfare are [0.94, 1.04,
1.06] $billion, respectively; all below their respective optimal number. If copyright
duration is set at [15, 20, 100, 200] years, longer than the optimal 14 years,
number of creators on the market will be [134, 168, 265, 265]; and number of
rst-copy products will be [851, 1073, 1703, 1703]; both higher than their respective
optimal numbers; and social welfare are [1.06, 1.05, 0.94, and. 94] $billion, lower than
optimal social welfare. Note that over-protection can occur because it leads to exces-
sive deadweight losses and because it induces too many additional products, which
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 481

reduce demand for other products, given that, on average, dierent information
products are substitutes. Also note that changing copyright duration from 100 to
200 years makes little dierence on the number of creators, number of rst-copy
products, and social welfare. This is because prots and deadweight loss 100 or
200 years later have little in present value due to time discount and partially because
the demand for the information products after 100 years is much reduced in the rst
place.

3.2.1. The eect of decrease in reproduction and distribution cost on optimal copyright
duration
The decrease in reproduction and distribution cost may be the most signicant
change in the information market. In the model, the parameter b represents the
reproduction and distribution cost. Selecting dierent values for b and recalculating
the model lead to the result shown in Fig. 1.
The decrease of reproduction and distribution cost does not lead to an increase in
the optimal copyright duration. To the contrary, it leads to shorter optimal copy-
right protection. If reproduction and distribution cost b drops from $3000 to $0.1,
the optimal duration decreases from 17 to 14 years. $3000 may be considered as
the copying cost before the invention of the printing press and $0.1 may be consid-
ered the copying cost of digital information products.
One may think of three individual eects of reduction in reproduction and
distribution cost on optimal copyright duration. First, lower reproduction and

17

16.5
Optimal Copyright Duration

16

15.5

15

14.5

14
0 500 1000 1500 2000 2500 3000
Copying Cost

Fig. 1. Eect of copying cost on optimal duration.

482 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

distribution cost means higher net value of information products to society. There-
fore, more information products and more incentive for their creation are desirable.
This calls for longer copyright protection. Second, lower reproduction and distribu-
tion cost may also mean better protability for creators during protection. That is,
lower reproduction and distribution cost provides stronger incentive for creation of
rst-copy products. This reduces the need for longer copyright protection. Third,
lower cost of reproduction and distribution means larger deadweight loss caused
by copyright protection. This calls for shorter copyright protection. The net eect
of decrease in reproduction and distribution cost on copyright duration is the com-
bination of these three eects.
The result means that the eect on optimal duration of increased incentive for cre-
ation and the eect of larger deadweight loss more than oset the eect of higher
desirability of information products. This may be seen from the sharp increases in
the numbers of creators and rst-copy products accompanying the decrease in repro-
duction and distribution cost. As cost of reproduction and distribution decreases
from $5 to $0.1, the number of creators increase from 130 to 2660; the number of
rst-copy products per creator increases from 63 to 65; and total number of rst-
copy products in the market increases from 8213 to 134,276. Better prot opportu-
nities for creators brought by the lower copying cost induce a larger number of
creators of larger sizes and more rst-copy products to the market. In addition,
prices of information products drops from $10 per copy to $0.2 per copy; informa-
tion consumption in the rst 14 years increases from 63 million to 52 billion copies;
and social welfare increases from $1.06 billion to $17.33 billion.
Note that the increases in the numbers of creators and rst-copy products occur
when the shortened optimal copyright protection is enforced. If copyright protection
is not shortened, there would be even more creators and more rst-copy products in
the market, leading to over-creation of information products and sub-optimal
welfare.
Overall, this result does not support the argument that new media technologies
require longer copyright protection through decreasing copying and distribution cost
and increasing the marketable life of information products. To the contrary, they call
for reduction in copyright duration.

3.2.2. The eect of longer life expectancy on optimal copyright duration

Another change in the information market is the longer life expectancy and de-
layed child-bearing of creators and consumers of information products. Longer life
expectancy and delayed child-bearing can be represented as a lower discount rate in
calculating present values of future prots and surpluses. Assume that creators care
about values delivered to themselves and to a limited number of generations of their
immediate descendents more than values delivered to more distant descendents.
Longer life expectancy and delayed child-bearing mean that the period within which
values are more highly weighted is extended. This can be approximated as creators
having a lower discount rate for future prots. However, not only creators but also
consumers live longer and delay child-bearing. Therefore, the lower discount rate ap-
plies to creators future prots, consumer future surplus, and future deadweight loss.
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 483

Note that longer life expectancy and delayed child-bearing may have some eects on
demand for information products, which in turn may aect copyright duration. Be-
cause the US Senate Report for copyright term extension focuses on the need to pro-
tect the ability to collect revenue in the extended lifetime of creators and their heirs,
the eect of longer life expectancy and delayed child-bearing on copyright duration is
estimated through a lowered discount rate. Changing the discount rate c and recal-
culating the model lead to the result shown in Fig. 2.
Lower discount rate calls for longer copyright duration. If the discount rate de-
creases from 10% to 2%, optimal duration increases from 8 years to 24 years.
A lower discount rate has three individual eects on the optimal duration, similar
to those of decreases in the copying and distribution cost. First, information prod-
ucts have a larger present value. Thus, more information products should be created.
Therefore, longer copyright duration is desirable to induce more creators to create
more information products. Second, a lower discount rate increases the present value
of creators prots during copyright protection. That is, a lower discount rate in-
creases the incentive for creation. This reduces the need for longer copyright protec-
tion. Third, a lower discount rate also increases the present value of deadweight loss

26

24

22

20
Optimal Duration

18

16

14

12

10

8
2 3 4 5 6 7 8 9 10
Discount Rate (%)

Fig. 2. Eect of discount rate on optimal duration.

484 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

caused by copyright protection. This calls for shorter copyright protection. The net
result is the combination of the three individual eects.
Although the three individual eects of a lower discount rate are similar to those
of lower reproduction and distribution cost, their net eects are dierent. This dier-
ence may be due to the following. A decrease in reproduction and distribution cost
and a decrease in discount rate both raise the present values of the social value of
information products, creators prots, and deadweight losses. The social value of
information products, which is the basic reason for copyright protection, incurs dur-
ing copyright protection and also after copyright expires. Creators prots and con-
sumer deadweight losses, which tend to reduce copyright duration, incur only within
copyright protection. Because values in the more distant future are more heavily dis-
counted, a decrease in the discount rate increases the present social value of the prod-
ucts more than it increases the present value of creators prots and deadweight
losses, relative to a decrease in reproduction and distribution cost. Therefore, it is
possible that decrease in discount rate leads to longer optimal copyright duration
while decrease in reproduction and distribution cost shortens optimal copyright
duration.
Note that lowering discount rate may over-estimate the eect of longer life expec-
tancy and delayed child-bearing. The reason is that creators and consumers may
concern the welfare of themselves and a limited number of generations of immediate
descendents more than the welfare of more distant descendents. Discount rate is low-
ered only for the extended period of time of the lives of creators and consumers and
lives of the limited number of generations of their descendents, not for periods there-
after. Therefore, using a single lowered discount rate for all future prots and surplus
over-estimates the eect of longer life expectancy and delayed child-bearing.

3.2.3. The eect of higher demand for information on optimal duration

The demand for information has increased for several reasons. The economy is
bigger, consumer income is higher, and larger proportion of the income is spent
on information products. The demand level for information is represented by the
parameter D0 in the model. Changing the parameter D0 and recalculating the model
lead to the results shown in Fig. 3.
A higher demand level is not found to lead to longer optimal copyright duration.
To the contrary, a higher demand level calls for shorter copyright protection. As de-
mand level parameter D0 increases from 105 to 2 107, the optimal duration de-
creases from 73 to 14 years. This is contrary to what is suggested in Landes and
Posner (1989).
A higher demand for information has three individual eects on optimal duration
of copyright protection. First, a higher demand means that more information prod-
ucts should be created and, therefore, longer protection may be needed to induce
their creation. Second, a higher demand also provides higher protability for
creators during copyright protection. This higher protability reduces the need for
longer copyright protection. Third, a higher demand increases deadweight losses
due to copyright protection, which suggests shorter protection. The net eect of
higher demand is the combination of the above three eects.
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 485

80

70

60
Optimal Duration

50

40

30

20

10
0 2 4 6 8 10 12 14 16 18 20
Level of Demand for Information (million)

Fig. 3. Eect of demand level on optimal duration.

The result indicates that the eect of stronger incentive for creation and the eect
of larger deadweight loss from higher demand more than oset the enhanced desir-
ability of rst-copy products due to higher demand level. Better prot opportunities
for creators brought by higher demand induce a larger number of creators of larger
size and more rst-copy products to the market. As demand level increases from 105
to 2 107, the number of creators increases from 1 to 343; the number of rst-copy
products per creator increases from 9 to 64; the total number of rst-copy products
increases from 11 to 22,105; information consumption in the rst 14 years increases
from 84,123 copies to 166 million copies; and social welfare increases from $1.04 mil-
lion to $2.85 billion.
Note that the above increases in the number of creators and in the number of rst-
copy products occur when the shortened optimal copyright protection is used. If
copyright protection is not shortened, there would be even more creators and
rst-copy products in the market, leading to over-creation of information products.

3.2.4. Eects of other factors on optimal duration

Consider parameters reecting the development cost of rst-copy products rst.
Development cost may change because new tools are used to develop rst-copy
products. These tools include word processors, digital animation tools, digital cam-
eras, audio and video editing tools, etc. The Internet, search technology, and data
486 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

management technologies also change the cost of searching for and using existing
information products for the development of new rst-copy products. These technol-
ogies may change the xed cost, per-product development cost, and the economies of
scale in rst-copy development. For example, the Internet makes it possible for any-
one to be a publisher. This represents a reduction in the xed cost. Note that xed
cost in creation and xed cost of publishing is combined in c0 in the model. On the
other hand, if new digital tools become a necessity for creators to compete in the
information market, the tools may represent an increase in the xed cost of creation.
If the tools make creative work easier, they may reduce the per-product development
cost. The eect on the economies of scale in development is also possible, though its
direction is less clear.
Development cost may also change because information products may become
inherently more dicult to develop. The simpler products may have already devel-
oped. New marketable products may be more complicated and more dicult to de-
velop. The reported decreases in software development productivity (Anselmo and
Ledgard, 2004) may be indicative of this change.
Parameters c0, a, and q in the model, respectively, represent the xed cost, the per-
product development cost, and returns to development scale in rst-copy develop-
ment. Changing the value of one of the parameters at a time and recalculating the
models led to the following results: If xed cost c0 changes from $50,000 to $10 mil-
lion, the optimal duration increases from 14 to 15 years; if the parameter a, which
reects the per-product development cost, increases $1000 from $1.3 million, optimal
duration increases from 14.4 to 14.5 years; if the parameter q increases from 1 to 4,
the optimal duration decreases from 14.7 to 14.4 years. Therefore, both higher xed
cost and higher per-product development cost seem to lead to longer optimal copy-
right duration; whereas more severe diseconomies in rst-copy development seem to
call for shorter copyright duration. Note that the sizes of the three eects seem to be
rather marginal.
A higher xed cost and a higher per-product development cost each has two ef-
fects on optimal duration. First, they mean that information products are less
desirable to society as a whole, which calls for lower incentive for creation and
shorter copyright duration. Second, they mean lower prots for creators. That
is, higher xed cost and higher per-product development cost are disincentives
for creators, which reduce the need for shortening copyright protection. The
result suggests these two opposite eects tend to cancel each other out. Therefore,
the net eects are rather marginal. The results also indicate that creators
over-react to the disincentive of increases in the xed cost and the per-product
development cost; the disincentive over-balances the decreased desirability of infor-
mation products. Therefore, slightly longer copyright is needed to correct the
over-reaction.
Higher xed cost or higher per-product development cost leads to fewer creators
and fewer rst-copy products in the market. As xed cost increases from $50,000 to
$10 million, the number of creators decreases from 864 to 5; the total rst-copy prod-
ucts decrease from 12,581 to 3609, while rst-copy products per creator increase
from 14 to 697; and social welfare decreases from $1.20 to $0.81 billion. If the
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 487

parameter a increases from $1000 to $106, the number of creators drops from 291
to 28; rst-copy products reduces from 127,330 to 34; products-per-creator decrease
from 438 to 1; and social welfare decreases from $2.41 to $0.20 billion. Note that the
eect of increase in development costs on the number of creators, the number of rst
copy products, and social welfare are substantial, unlike its marginal eects on opti-
mal duration.
Note that the decreases in numbers of rst-copy products and creators occur
when the longer optimal duration of protection is enforced. If longer protection is
not enforced, the number of rst-copy products would be even smaller, representing
an under-creation of information products.
If the parameter q increases from 1 to 4, rst-copy products per creator decrease
from 1201 to 1; the number of creators increases from 29 to 236; the total rst-copy
products decrease from 34,520 to 411; and welfare decreases from $1.62 to $0.43 bil-
lion. These changes occur when the shorter optimal duration of copyright is en-
forced. Increased diseconomy in rst-copy development is a disincentive to
creation. The shorter optimal duration indicates that creators under-react to this dis-
incentive from the social point of view.
Why might creators over-react to increases in xed development cost and per-
product development cost but under-react to change in diseconomy of development?
It may be because xed development cost and per-product development cost equally
aect creators decisions about all rst-copy products. In contrast, diseconomy of
scale aects more the decision of the marginal rst-copy product.
Now consider the parameters representing price elasticity, cross price elasticity,
product dierentiation, and change of demand over time. Changing these parameters
one at a time and recalculating the models led to following results:
First, the eect of price elasticity on optimal duration is not linear. As shown in
Fig. 4, at low elasticity, increase in elasticity calls for shorter copyright protection; at
high elasticity, increase in elasticity calls for longer protection. Increase in elasticity
leads to smaller and fewer creators and fewer rst-copy products on the market.
When elasticity is lower and there are large numbers of creators and rst-copy prod-
ucts on the market, the reaction of creators to downsize and exit in response to
increasing elasticity is not adequate; shorter protection is called for. However, when
elasticity is high and there are few creators and rst-copy products on the market,
further downsizing and exiting by creators represent an over-reaction and lead to un-
der-creation; longer protection is called for.
Second, the more cross-elastic are the information products, the shorter is the
optimal duration. Higher cross-elasticity means that the information products are
closer substitutes. The need for variety in rst-copy products is reduced because of
closer substitution. Therefore, shorter protection is needed. Similarly, the smaller
the parameter a, i.e., the less dierentiated the products, the shorter the optimal
protection.
Finally, the more slowly the demand for an information product dissipates over
time, represented by a larger T0, or the larger the residual demand, represented by
a larger h, the longer the optimal duration. This is as expected. Interestingly,
even if demand for information products does not decrease over time, the optimal
488 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

32

30

28

26
Optimal Duration

24

22

20

18

16

14

12
1 1.5 2 2.5 3 3.5 4 4.5
Price Elasticity

Fig. 4. Eect of price elasticity on optimal duration.

duration can still be nite. As T0 increase to innity or h approaches 1, xing the

values of other parameters, the optimal duration converges to 18 years.

3.2.5. Sensitivity analysis

Sensitivity analysis is done by repeating the above simulation at dierent values of
the other parameters and changing the function form of g(t), which describe how the
demand of products change over time. The results are found to be robust to these
changes. For example, use the following baseline parameter values:

D0 ; a; d; b; b; T 0 ; h; c; c0 ; a; q 108 ; 0:4; 2:5; 0:7; 10; 50; 0:0001; 0:1; 106 ; 5000; 1:5:

Changing the value of b, D0, and r, respectively, and recalculating the model lead to
the following qualitatively same results. Optimal duration decreases with a decrease
in reproduction and distribution cost b. For reproduction and distribution cost of
[1996, 1950, 450, 0.1] dollars per copy, the corresponding optimal duration is [1,
33, 11, 11] years. Note that the optimal copyright duration can be innity. For all
reproduction and distribution costs larger than $1996 per copy, the optimal copy-
right protection is perpetual.
Also, optimal duration decreases with higher demand for information. For
demand level D0 of [1.4455, 1.4456, 2, 5, 200] 106, corresponding optimal duration
is [1, 48, 17, 11, 11] years. And the optimal duration increases with decreases in
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 489

discount rate. For discount rates of [0.05, 0.10, 0.15, 0.20], the corresponding opti-
mal duration is [16, 11, 8, 6] years.
Changing g(t) from the linear form to the exponential form gt e
t=T 0 , then re-
doing the simulation, one gets qualitatively the same results. For example, using the
original values of the other parameters, when the copying cost decreases from $3000
to $5, the optimal copyright duration decreases from 18 to 15 years; if demand level
parameter D0 increases from 105 to 2 107, optimal copyright duration decreases
from 62 to 15 years; if the discount rate changes from 10% to 1%, the optimal dura-
tion increases from 8 years to 46 years.

4. Conclusion

This paper presents a new model of the copyright market. Like many models in
the literature, this model reects the unique feature of high creative cost and low
reproduction cost of information products and captures the basic trade-o of the
copyright system between encouraging creation and reducing restriction on con-
sumption. Unlike existing models, this model describes richer decisions of creative
investment, entry, and product pricing for competition in both creation and
production.
The model is used to simulate the eects of changes in the information market on
optimal copyright duration. It is found that a decrease in reproduction and distribu-
tion cost and an increase in demand for information products may call for shorter
copyright duration. The results do not support the argument that technological
changes, which decrease copying and distribution cost and extend the marketable life
of information products, require copyright term extension. The results are also in
contrast to the suggestion in the literature that higher demand for information prod-
ucts calls for longer copyright protection. Partial support is found for the notion that
longer life expectancy and delayed child-bearing may support longer duration of
copyright. Changes in xed rst-copy creation cost and per-product creation cost
are found to have marginal eects on optimal copyright duration. Eects of hypo-
thetical changes in price elasticity and product dierentiation on copyright duration
are also obtained.
In future research, the model may be used to calculate the combined eect of
simultaneous changes in copying cost, demand, demographics of consumers and cre-
ators, and creation costs, when measures of such changes and estimates of real mar-
ket parameters are obtained. The model may also be extended to include features
such as price discrimination and to describe competition among generations of
rst-copy products.

Acknowledgment

This research was supported in part by an award from the Roger Williams Uni-
versity Research Foundation 2004-2005 Fund-Based Research Grant.
490 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

Appendix A. Mathematical procedures for solving the model

The problem of optimal copyright duration is

Xn Z 1
Z 1 
max L Dit si ; p; s
i ; p
it ; t dp e
ct dt
T 0 b
i1
n Z
X T
Z pit 

Dit si ; p; s
i ; p
it ; t dp e
ct dt
i1 0 b
n Z
X T X
n
Dit si ; pit ; s
i ; p
it ; tpit
be
ct dt
ci si : A:1
i1 0 i1
S.t.
o
Dit si ; pit ; s
i ; p
it ; tpit
b 0; i 1; 2; . . . ; n; A:2
opit
Z T 
o
ct
Dit si ; pit ; s
i ; p
it ; tpit
be dt
ci si 0; i 1; 2; . . . ; n;
osi 0

A:3
and
Z T
pi  Dit si ; pit ; s
i ; p
it ; tpit
be
ct dt
ci si 0; i n: A:4
0

Assume
, ! !a
Xn X
n Y b=n
1
Di pit ; p
it ; si ; s
i ; t D0 si sj sj p
d
it pjt gt; A:5
j1 j1 j6i


1
Tt0 if t < T 0 1
h;
gt A:6
h; otherwise;

ci s c0 asq : A:7
By symmetry in (A.5) and (A.7), the zero prot condition (A.4) holds for all creators
i = 1, 2,. . ., n. Plugging (A.4) into (A.1) results in
X n Z 1
Z 1 
max L Dit si ; p; s
i ; p
it ; t dp e
ct dt
T 0 b
i1
X
n Z T
Z pit 

Dit si ; p; s
i ; p
it ; t dp e
ct dt A:8
i1 0 b

The social welfare function becomes consumer surplus.

Note demand Di depends on pit only through the factor p
d
it in (A.5). From (A.2)
and (A.5), one gets
d
pit p  b: A:9
d
1
 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494 491

Plugging (A.5) and (A.9) into (A.8) gives

b1
d 1
max L D0 na sa pb G1
D0 na sa pb b1
d
p1
d GT ; A:10
T d
1 d
1
RT
where GT  0 gte
kt dt.
By (A.9), demand function (A.5) becomes
!a
1
X
n
Dit D0 si sj pb
d gt: A:11
j1

By (A.11) and symmetry of the creators, zero prot condition becomes

!a
1
X
n
pi D0 si sj pb
d p
bGT
ci si 0; i 1; 2; . . . ; n: A:12
j1

By (A.11) and (A.12), and (A.3), one can derive:


1 1
a
1 Pn csi
c0i si 0: A:13
si i1 s i

And by symmetry of the creators, si = s for "i. (A.13) becomes


1 a
1
cs
c0 s 0 A:14
s ns

and (A.12) becomes

a
1 b
d
pi D0 sns p p
bGT
cs 0: A:15

The problem can be re-written as

b1
d 1
max L D0 na sa pb G1
D0 na sa pb b1
d
p1
d GT A:16
T d
1 d
1
RT
subject to (A.14) and (A.15) and where GT  0 gte
kt dt.
From (A.14), one gets
1
a
n 0
s
: A:17
1
ccs s

From (A.15), one has

a
1 b cs
D0 sns p GT : A:18
p
bp
d
492 M.Y. Yuan / Information Economics and Policy 17 (2005) 471494

Plugging (A.17) and (A.18) to (A.16), one gets

!a
1
a b1
d 1
a b1
d
p1
d cs
max L D0 0 s sa p b G1
c0 s
:
T 1
c
s d
1 1
s d
1 p
bp
d
cs cs

A:19
This function (A.19) only depends on s. The problem of choosing T to maximize
(A.16) is mathematically equivalent to choosing s to maximize (A.19). One can solve
(A.19) for s by the standard rst-order condition. After one gets s, one can get the
optimal duration from s by solving (A.18). And n, L, and D can be trivially calcu-
lated from (A.17), (A.19), and (A.5).
The rst-order condition of (A.19) with respect to s is
b1
d on b1
d
D0 ana
1 sa pb G1
D0 ana sa
1 pb G1
d
1 os d
1
1 cs on

b1
d
p1
d
d
1 p
bp
d os
n c0 s

b1
d
p1
d 0; A:20
d
1 p
bp
d
where n depends on s by (A.17) and on/os depends on s by
!
2
on 1
a c00 c0 c0
 2 s
2 s : A:21
os 1
c0 s c c c
c

The analytical solution for Eq. (A.20) is not found but the equation can be solved
numerically by using the standard Newtons method.

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