Digitization and Competition in Copyright Industries: One Step Forward and Two Steps Back?

How can copyright promote innovation in digital markets? Based on economic reasoning and empirical evidence, this paper provides an original perspective on this question. It focuses on two aspects of digitization – unauthorized copying and digital retailing – and how they affect two determinants of innovation – competition and appropriability in copyright industries. Unauthorized copying has ambiguous consequences: on the one hand, it affects the extent to which suppliers of reproducible creative works can appropriate the value of these intangible goods; on the other hand, unauthorized copying has increased competition between suppliers of creative works, and is associated with substantial productivity increases. Contrary to common expectations, our empirical evidence suggests that digital retailing is not associated with disintermediation and has not made the market for recorded music more contestable. Furthermore, the market power of Internet-based intermediaries can undermine the appropriability of creators, which has not yet been acknowledged in debates on copyright reforms. In this context, copyright policy that focuses on controlling unauthorized use can be ineffective. It needs to be complemented by regulation that limits the market power of digital retailers.