Compulsory Licensing vs. the Three “Golden Oldies”: Property Rights, Contracts, and Markets

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From its inception in the U.S. in the early 20thcentury, compulsory licensing has been seen as ameans of making intellectual works available byreducing some of the transaction costs associatedwith obtaining permission to use copyrightedmaterial. There are now increasing calls for compulsorylicensing for digitized works on theInternet, particularly music.

Conceptually, a compulsory license falls midwaybetween granting full copyright, which givesowners broad control, and denying copyright protectionaltogether.

Rather than allowing musicians, artists, andother copyright owners to negotiate licensingterms for use of their works, a compulsory licenseforces copyright owners to allow use of theirworks under legislatively set prices and restrictionson use.

When warring groups sound the alarm overexcessive control via copyright on the one hand andinsufficient incentives to create on the other, compulsorylicensing seems a reasonable compromise.Compulsory licensing seems to pay off big in theshort term by reducing the need for individual buyersto locate, negotiate with, and pay individual sellers.Compulsory licensing supposedly addresses the"market failure" of high transaction costs.

But markets for digitized works do not sufferfrom market failures. Furthermore, the Internethas reduced the transaction costs that once servedas a key rationale for compulsory licensing. Recentdevelopments suggest that fears of excessive controlof digital content are overblown. Withoutenhancing compulsory licensing, the digital landscapeis diverse, as the case of music demonstrates.There is free music, temporarily free music, andlow-cost music online. Offline, music companiesare lowering the prices of CDs.

The influence costs associated with compulsorylicensing schemes make them a more expensivemechanism for setting prices. Private negotiationsare much cheaper and more flexible overthe long term.

In the digital realm, we have not yet abandonedthe basic building blocks of all creativeendeavors--property rights, contracts, and voluntarymarkets--and we therefore retain the preconditionsfor future growth and diversification.

Robert P. Merges

Robert P. Merges is a professor at the University of California-Berkeley School of Law and the University of California-Davis School of Law.