Macroeconomics

C a l i f o rn ia Ma n a g e m e n tReview S p r i n g 2 0 0 5 | V o l . 4 7 , N o . 3 | R E P R I N T S E R I E S

Defining Proper ty Rights: The Case of Knowledge-Based Resources

Ayse Olcay Costello Thomas G. Costello

© 2005 by The Regents of the University of California

CMR 314, 05/01/05

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

Defining Property Rights: THE CASE OF KNOWLEDGE- BASED RESOURCES

Ayse Olcay Costello Thomas G. Costello

G lobalization, advances in information technology, and increasing Internet usage are creating developments in property rights issues that need to be addressed by not only researchers, but also man- agers and public policy makers. For example, the tens of thou-

sands of computer programmers that make up the “Open Source” community built the famous Linux operating system, which is free, dependable, and owned by no one. Despite the fact that Linux is not the easiest software to use, it already commands a considerable share of the web server software market, and it is a credible competitor to Microsoft’s Windows operating system. According to technology research firm IDC, Linux grabbed a 26% share of the server operat- ing system market by 2001, and it is expected to increase its share to 30% of the market by 2007.1 In perhaps a more unexpected development, Linux also started to make inroads in the desktop PC operating systems market. Linux mar- ket share in PC operating systems rose to 3.2% (overtaking Apple’s Macintosh) and is expected to rise to 6% by year 2007.2 Similar to other firms, IBM is spending a considerable amount of resources ($1 billion in 2001) in order to develop projects that are based around Linux.3

On another front, Napster, which was successfully thwarted by big record companies, nevertheless started a trend of illegal music files sharing systems. Although record companies did manage to switch Napster from an illegal “free for all” type of operation to a “fee for files” format, they were not successful in converting many of the non-paying users of Napster into paying customers. Instead, the user traffic shifted from Napster to new file sharing networks, such as MusicCity, Kazaa, and Grokster;4 and, in the process, the record companies created a lot of ill will with consumers. It is estimated by entertainment industry

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Authors contributed equally to this work and their names are listed in alphabetical order.

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sources that the revenues lost to piracy are close to $10 billion a year (as of 2003).5 However, recently the entertainment industry started fighting back with new business models that try to take advantage of the Internet as opposed to working against it. One of these new models can be seen in GarageBand.com that uses its listeners’ ratings to pick promising bands among 200,000 or more independent musicians that use its site.6

Even Sony Corporation’s robot dog Aibo was not spared the property rights controversies that are created by information technology and Internet usage. According to Kageyama, a web site called AiboHack hacked Sony’s origi- nal Aibo software and created free programs (which were distributed from the web site) that teach the robot dogs new tricks.7 Sony Corporation saw the situa- tion as an encroachment upon its property rights and made the web site with- draw the free programs it had been offering—which, not surprisingly, disappointed the Aibo users.

The common thread in these examples is that they all raise questions related to the level of definition of property rights over knowledge-based resources, which can range from specific technical, functional, and creative skills

to secondary resources created via the use of such skills (e.g., software).8 These ques- tions include: How should property rights over knowledge-based resources be defined? How can companies, in their bid to protect their property rights, avoid alien- ating their customers? How can the cre- ation of knowledge-based resources be

stimulated (via assignment of well-defined property rights), while allowing for their efficient exploitation (which calls for less-well-defined property rights over the same resources)?9 Unlike most tangible resources and the limitations inher- ent in their distribution, many knowledge-based resources (e.g., digital movies, music, and software) are non-rivalrous in consumption and globally accessible.10

This article presents a theoretical framework that examines the determi- nants of the level of definition of property rights over resources. Property rights over any resource are subject to optimization and are defined to the extent that the benefits of definition exceed the costs of definition.11 There are five major cost-benefit components that can be used to predict the level of definition of property rights over a resource:

b capture costs and rent dissipation created by non-exclusivity;

b exchange and policing costs;

b costs of reduced investment created by non-exclusivity (includes realloca- tion and valuation costs);

b exchange value of resource; and

b social costs of exclusivity.

Resource specific factors influence the magnitude of each of these five compo- nents, affecting the final level of definition of property rights over a resource.

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Ayse Olcay Costello is Assistant Professor of Management at the Lumpkin College of Business and Applied Sciences at Eastern Illinois University.

Thomas G. Costello is Assistant Professor of Marketing at the Lumpkin College of Business and Applied Sciences at Eastern Illinois University.

This document is authorized for use only by Hameeda Lamb in Business & Economic Policy Graduate Online Fall 2018-2019 at Northwood University, 2018.

Building Upon and Extending the Property Rights Literature

Property Rights

According to Libecap, property rights are social institutions that define or delimit the range of privileges that are granted to individuals (or entities) regard- ing specific assets.12 Property rights institutions can range from formal arrange- ments (e.g., constitutional provisions, statutes, and judicial rulings) to informal norms and customs regarding the allocation and use of assets. These institutions assign ownership to valuable assets and designate who bears the rewards and costs of resource use, and therefore they have a significant impact on economic behavior and performance.13

Traditionally, economics literature has differentiated between two types of property rights: economic property rights and legal property rights.14 According to Barzel, economic property rights involve an individual’s ability to consume a good or service. Legal rights, on the other hand, are those that are recognized and enforced by the government. They enhance economic rights by making third-party adjudication possible; however, they are not necessary or even suffi- cient for the existence of economic rights, since economic rights can be based upon informal institutions.15

An interesting aspect of property rights systems is that they assign to indi- viduals the “authority” to select use for a resource, and they give the individuals some protection against other people’s use of their resource.16 This means that while others cannot interfere with the “owned” resources (in a way that affects the physical attributes or use of those resources), the “value” of the property (resource) is not immune from others’ actions.17 Alchian provides an example that illustrates this point. If an entrepreneur opens a restaurant on a given street corner, others do not have a right to burn down or physically harm this restau- rant in any way. However, other entrepreneurs can open another restaurant nearby that provides higher quality service at equivalent prices, thus reducing the value of the first restaurant considerably. While both actions (physically harming the restaurant and competing against it) can reduce the value of the existing restaurant, one is prohibited by law and custom while the other is per- fectly acceptable.

Perhaps most importantly, resources have multiple attributes and not all attributes of a resource need to be owned by the same person.18 The rights to attributes can be partitioned and reallocated on a temporary or permanent basis via contracts. Furthermore, the division of attributes can be cross-sectional where each owner has equal parts of all rights, or selective where different own- ers have different rights.19 For example, in a rental agreement, the renter gets the right to use the resource (the property) in certain ways. The owner, on the other hand, gives up some uses but still retains other uses of the resource (e.g., the ability to sell the property to gain from an increase in its value).

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Common-Pool Resources For some resources, the rights to use them are non-exclusive.20 For such

resources, the right to contract is absent since a contract is essentially the right to exclude.21 The absence of this right can create common-pool losses that can reduce the economic value of the resource.22 For example, if a piece of land is communally owned, “every person has the right to hunt, till, or mine the land. This form of ownership fails to concentrate the cost associated with any person’s exercise of his communal right on that person. If a person seeks to maximize the value of his communal rights, he will tend to overhunt and overwork the land because some of the costs of his doing so are borne by others. The stock of game and the richness of the soil will be diminished too quickly.”23

If the common-pool losses are high, individuals can establish property rights over a common-pool resource through a political process.24 However, the existence of common-pool losses does not necessarily mean that the society would be better off with well-defined property rights over that resource, since there are costs to defining property rights.25 Specifically, the level of definition of property rights is subject to optimization by the parties that are involved in the use of the resource. However, a complete definition of property rights over all the attributes of a resource can be prohibitively costly. Therefore, the property rights will be defined to the extent that the costs of doing so are equivalent to the benefits of doing so.26

Theoretical Framework

Whether or not a valuable resource can remain in the public domain (i.e., remain as a common-pool resource) depends on the costs versus the benefits of defining property rights. As noted there are five major components that drive the cost-benefit calculations: capture costs and rent dissipation; exchange and policing costs; costs of reduced investment; exchange value; and social costs.27

Capture Costs and Rent Dissipation Created by Non-Exclusivity

Capture costs and the dissipation of rents are two of the most thoroughly analyzed aspects of common-pool resources.28 Capture costs exist because com- mon ownership motivates individuals to overuse resources, as a result of which they obtain all the benefits of overuse while bearing only a part of the costs.29

For example, fishermen are motivated to overfish communally owned fishing grounds, because they capture all the benefits of overfishing while bearing only a fraction of the harm done to the fishing grounds. In addition, communal own- ers fail to take into full consideration the value of future income streams from the resource,30 thus dissipating the expected rents from the resource. For exam- ple, farmers who do not own the land that they cultivate are motivated to over- work the land without considering the harm done to the expected income streams of the future generations of farmers that will work the land. As the cap- ture costs and rent dissipation that result from the non-exclusivity of a resource increase, the motivation of the communal owners to define property rights over

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the resource increases. A better definition of rights creates considerable benefits in the form of reduced capture costs and rent dissipation.

Some resources, especially those that are knowledge-based, do not get destroyed or depleted with use.31 In other words, the use of such resources is non-competitive. For example, once a song or a movie is created, it can be lis- tened to or watched by all individuals that are interested in it without destroy- ing, depleting, or dissipating that song or movie. The same can be said for software—once it is created, its use is not limited by capture costs and the dissipation of rents.

Furthermore, many knowledge-based resources are subject to positive network externalities. In other words, such resources become more valuable to users as the number of consumers using them increases.32 This increase in value stems from benefits such as interchangeability of complementary products, ease of communication between parties using the same product, and cost savings via standardization. For example, as discussed by Cusumano, Mylonadis, and Rosenbloom, the outcome of the war between Betamax and VHS technologies in the VCR industry was significantly influenced by network externalities.33

During the initial phase of the industry formation, the VCR industry was faced with a global demand that far exceeded the production capacities of individual firms. In this initial phase, Sony with its Betamax technology was the technol- ogy leader, and JVC-Matsushita with its VHS technology was a follower. Sony did not want to share its technology with other competitors, whereas Matsushita was more willing to share its property rights over the VHS technology with a wide range of mass producers and distributors (via strategic alliances or licensing agreements). As a result, Sony had a limited capacity to produce and distribute Betamax recorders, whereas Matsushita and its allies had a higher capacity to produce and distribute VHS recorders. Thus, the VHS sales and installed base quickly started to outpace the Betamax sales and installed base. Due to positive network externalities, as more people started to use the VHS technology, the retail outlets that provided pre-recorded entertainment materials for use in VCRs (e.g., Blockbuster) adopted the VHS format. Finally, the availability of comple- mentary products increased the value of the VHS technology for consumers relative to the value of the Betamax technology, and the battle was won by the VHS technology and its backers.

As can be seen from this example, the property rights decisions that are made by the rival companies can have wide-reaching consequences. Marketers of new technologies, especially those that are knowledge-intensive, need to keep in mind the effects of positive network externalities, as well as non-competitive consumption. By making good property rights choices, they can improve their chances of success in the marketplace. For example, the marketers of a new software application can give away their product during the initial phases of the product’s introduction. As more people start using the software, its value increases because users begin to share the output more widely. After ensuring a widely installed base, the company can then start to charge for its product.

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In sum, the expected level of capture costs and rent dissipation that can result from having non-exclusive access to a resource is positively related to the level of definition of property rights over that resource. Knowledge-based resources are expected to have ill-defined property rights to the extent that the expected level of capture costs and rent dissipation that can result from having non-exclusive access to them is low.

Exchange and Policing Costs

Another component of the cost-benefit calculation of defining property rights is the costs involved in exchanging that resource.34 An example given by Barzel illustrates this point.35 Movie theatre owners place valuable resource attributes in the public domain by charging the same price for all types of seats, despite the fact that they are not by law prohibited from imposing marginal charges for the extra quality of some seats. They do so because they deem the returns from differential pricing to be less than the costs of defining and enforc- ing (i.e., metering and policing) their property rights over the differential quality attribute of some of the seats. The moviegoers capture the differential value between the better and worse seats by getting to the theatre early enough to occupy the better seats before others do.

Changes that lower the costs of measuring and policing resource attrib- utes stimulate better definition of property rights over resources.36 For example, the installation of parking meters makes it less costly for the owner of a parking lot to measure the use of parking spaces and to police the use of parking spaces (e.g., detect violators); therefore, it may lead the owner of the parking lot to ration parking spaces via market pricing.37 If parking meters were not available to reduce the costs of measuring and policing, then the owner of the lot might have found it to be more advantageous (due to prohibitive costs of using market pricing) to resort to other allocation methods, such as a first-come, first-served method.

It is not only hard to measure the usage of knowledge-based resources, but also hard to keep non-owners from obtaining access to them. Changes in information technology and increasing Internet usage make access to knowl- edge-based resources easier than ever; and once access is obtained, the resources can be shared effortlessly over the Internet with a vast network of individuals, without the consent of the resources’ original owners. New technologies, such as those that restrict the dissemination of digital music files via encryption, are being developed constantly.38 However, some of these technologies take away from the enjoyment of resources in question by their rightful owners in order to exclude the non-payers, thereby reducing the value of the resources for their rightful owners. Furthermore, countervailing technologies that negate the exist- ing enforcement technologies and increase enforcement costs are constantly being developed.

Perhaps the two highest profile industries that suffer from high policing costs and losses from resultant piracy of their resources are the American film and music production industries. According to the claims of the International

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Intellectual Property Association (IIPA), piracy of their resources has cost the American film industry $2.3 billion and the American music production industry $1.3 billion in 1995.39 The losses to the entertainment industry rose to $10 bil- lion a year by 2003.40 In addition, as of 2003, music sales were down 16% from their levels in 1999.41 To make matters worse, with increasing broadband Inter- net access and talented amateurs working alongside professional bootleggers, it is getting harder for owners of film and music products to protect their products.

One of the most striking recent examples of this situation is the fate of George Lucas’ 2002 installment of the Star Wars saga, “Star Wars Episode II: Attack of the Clones.” According to reports, approximately 1 million people watched pirated copies of the Star Wars movie in front of their computer screens well before the movie’s official release.42 Consequently, the film and music pro- duction industries must find ways to reduce policing costs without alienating their consumer base, or they must reduce production costs to be able to sup- port high levels of piracy. The music industry has recently tried to tighten the enforcement of its property rights by aggressively filing lawsuits against those that were very active in sharing music files. However, subsequent court rulings increased the difficulty of obtaining the identities of the file-sharing offenders from their Internet Service Providers,43 thus increasing the costs of enforcement of property rights via lawsuits. In addition to increased costs of obtaining identi- ties of file sharers, another factor that made lawsuits more costly as an enforce- ment mechanism was the consumer backlash and ill-will that the lawsuits created toward the entertainment industry.

As can be seen from the experiences of these two industries, the issue of policing costs is mainly related not to the existence of legally enforceable rights, but to whether the consumer base is willing to acknowledge these rights. Fur- ther complicating the issue is that consumers are becoming less willing to acknowledge companies’ intellectual property rights over an ever-widening range of products. For example, “purse parties” have become commonplace in middle-class homes, where women purchase counterfeit purses that are knock- offs of famous brand purses. Furthermore, when asked, the buyers of these purses don’t seem to think they are doing anything wrong.44 This means that managers, especially marketing managers, must play a role in reducing costs of enforcing their companies’ property rights by trying to change the attitudes of the consumer base. They can also help reduce policing costs by implementing strategies that lower the incentives of consumers to cheat. For example, they can design promotions, such as tie-ins and give-aways, that can only be taken advantage of with a purchase of the product. They can also undercut the pirates, as two distributors of movies have done in the Mexican market. Videomax SA and Quality Films slashed their prices for movies by more than 50% and are selling legitimate versions of their products in the barrios and public places, side by side with the counterfeits; and they are having success winning customers over to the legitimate copies.45

In sum, the expected level of exchange and policing costs related to enforcing property rights over a resource is negatively related to the level of

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definition of property rights over that resource. Knowledge-based resources are expected to have ill-defined property rights to the extent that the expected level of exchange and policing costs related to enforcing property rights over them is high.

Costs of Reduced Investment Created by Non-Exclusivity

Another type of cost created by non-exclusivity over resources is under- investment. When there are no property rights over a resource, the resource cannot be traded in the open markets and the price mechanism cannot be used to indicate its value. Prices serve as indicators of the desirability of resources, and the exchangeability at these prices provides incentives to invest in the produc- tion of the most desirable resources. When a resource is non-exclusive, the total social benefits derived from it cannot be measured and the producers cannot be motivated to invest in its production. As a result, too little of the resource is provided.46

In addition, non-exclusive resources that are used in the production of other resources increase the difficulty of policing the results of private invest- ments and, therefore, may lead to inefficient investment decisions.47 Cheung provides an example.48 If a parcel of land is owned communally, the populace in that community may forgo the production of fruit trees in favor of cattle raising, even though the expected revenues from cattle raising may be lower. The reason is that policing trees that grow on public land may be more costly than policing cattle that can be driven home at night.

Information technology, especially the networking capabilities provided by Internet usage, is changing some of the dynamics of investment for knowl- edge-based resources. One example is how tens of thousands of computer pro- grammers dispersed all over the world were able to create Linux. If costly fixed-asset investments (such as R&D labs) had been required to create Linux or if all of the programmers that worked on its production had to have been housed under one roof (due to a lack of networking technology such as the Internet), then the investment required to create Linux would have to have been undertaken by a single firm.49 Such a firm would not have developed Linux unless property rights over the software were exclusive. Since the existing state of technology allowed Linux to be created by numerous independent indi- viduals, their investment costs were much less (mostly their time). The benefits of having unlimited access to Linux and also the non-pecuniary benefits associ- ated with creating a rival to Microsoft’s Windows operating system were enough motivation to undertake investment in the creation of a non-exclusive resource.

For many knowledge-based resources, there may be costs of reduced “follow-on” investment if property rights are defined too well. For example, biotechnology is an industry in which the costs of creating new products are very high and the costs of reverse-engineering a product once it is created are relatively low. Therefore, in biotechnology, high levels of definition of property rights (via patents) are needed to induce companies to invest in creating new products.50 While the need for some patent protection is not disputed, there is

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a great deal of debate regarding the level of definition of property rights that should exist in this industry. For example, the U.S. Patent and Trademark Office gives biotechnology companies broad patents that cover all the potential prod- ucts that can be developed from the use of a critical research tool that is devel- oped for one drug but that could be used in developing a wide range of other products.51 As critics point out, such a broad assignment of property rights can curb creativity and competition and lead to high costs from reduced “follow-on” investments and lack of competition.

Another example of reduced “follow-on” investments is the broad patents assigned to basic business methods. For example, the U.S. Patent and Trademark Office awarded patent protection to Amazon.com’s “one-click” ordering system and the Priceline.com’s system for customers to propose transaction prices.52 The critics of such patents argue that these patents are of little public benefit since the underlying products covered by the patents are based on ideas that date back hundreds if not thousands of years (i.e., these patents are not given to innova- tion). This makes it unnecessarily harder for other companies to compete with the patent holders. As a result, such patents could curb creativity and competi- tion and could lead to high costs from reduced “follow-on” investments and lack of competition.

In sum, the expected level of costs of reduced investment created by the non-exclusivity of a resource is positively related to the level of definition of property rights over that resource. Knowledge-based resources are expected to have ill-defined property rights to the extent that the costs of reduced invest- ment created by their non-exclusivity is low and the expected level of costs of reduced “follow-on” investment created by their exclusivity is high.

Exchange Value of Resource

An important motivation for individuals to create property rights over a resource is its value to those that can be excluded from its use. In other words, if a resource becomes more valuable (e.g., due to the opening of a new market for its use), the communal owners of the resource may find it more beneficial to define property rights over that resource.53

Unlike the other cost-benefit components, exchange value affects all types of resources—including knowledge-based resources—in the same way. However, the final level of definition of property rights over a resource cannot be solely determined by its exchange value. Rather, the level of definition ulti- mately depends on the net benefits vs. costs that can be obtained.

In sum, the expected level of exchange value of a resource is positively related to the level of definition of property rights over that resource. Knowl- edge-based resources are expected to have well-defined property rights to the extent that the expected level of their exchange value is high.

Social Costs of Exclusivity

The hardest to measure are the social costs of making a resource exclu- sive. For example, once a pharmaceutical company invents a drug (e.g., a new

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cancer treatment), patent rights give the company a monopoly over the drug. However, by not allowing generic copies of it to be made by competitors, the company may be putting the drug out of the reach of millions of users who could potentially benefit from it. In such cases, the social costs can be devastat- ing to those segments of the population that are excluded. Social costs are espe- cially high for knowledge-based resources. Once the knowledge is created,54

society can benefit from its free usage because: what is known can be used more widely and distributed faster; and additional knowledge can be built upon what is created in a more efficient manner.55

For example, the big players in the plant varieties industry are agribusi- ness and agrochemical companies, as well as universities and public research institutes. These industry players develop new plant varieties that have higher yields or better disease resistance through biotechnological and genetic research. Similar to the situation in the pharmaceutical industry, once a new product is developed by one industry participant, others can appropriate the new knowl- edge relatively easily.56 Therefore, some form of property rights protection (e.g., patent protection) is necessary to create incentives for investment. As described by Maskus, new plant varieties have traditionally been protected by plant breed- ers’ rights, which combine patent-like protection with limitations on the scope of rights.57 These rights include allowing farmers, after initial purchase, to retain sufficient quantities of seed for the following years’ crops and allowing compet- ing breeders to use new varieties freely in developing their own new strains. Despite this protection, the U.S. patents on plant varieties have recently ceased to provide for these limitations.58 This raises serious concerns over the costly social consequences that may accompany such protection. It is believed that high levels of protection may create hardship for farmers in poor nations, because the farmers cannot afford these new agricultural inputs and will become less competitive.

There has been controversy created by the genetic mapping of different strains of rice (i.e., the Indica and Japonica strains).59 As described by The Times, the genetic map of the Indica strain of rice was decoded and the map was subse- quently made freely available by a public-sector consortium supported by China and the United States.60 Meanwhile, the Japonica strain was decoded by Syn- genta, a Swiss agrochemical company, at a cost of £21 million. As a result, Syn- genta wanted to control all access (even by academicians) to the genetic map, so that it could prevent its competitors from benefiting from the fruits of its invest- ment. As soon as Syngenta’s plans became clear, there was a public outcry against the strict controls. Many prominent scientists argued that due to the importance of the genetic maps of the rice strains in the fight against world hunger and malnutrition, the social costs of preventing even academic access would be unbearable. Under pressure, Syngenta decided to make the genetic map of the Japonica strain freely available to academic researchers (and allow the researchers to freely market their related discoveries) as long as those researchers did not have any commercial ties. As a result, the company was

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not able to maintain the strictest level of definition of property rights over its investment.

Interestingly, a somewhat similar turn of events accompanied the decod- ing of the human genetic map a few years earlier. As described by the Chicago Sun-Times and The Washington Post,61 a non-profit collaboration (the Human Genome Project) sponsored by the U.S. and British governments initially started to decode the human genetic map with the intention of making the map fully accessible to the public. The Human Genome Project’s goal was to complete the decoding by year 2005, at the latest. However, in 1998, a private company formed by star scientists (Celera Genomics Corp.) started its own decoding work, using an innovative and speedy process, as well as the data that was being made available by the Human Genome Project. Celera’s intention was to finish the decoding much sooner than the Human Genome Project and to sell access to the map to drug companies and universities. Celera’s plans led to a widespread pub- lic reaction, and both the U.S. and the British governments reached an agree- ment that basic genetic code should be accessible to all, since the social costs of limited access would be too high. In addition, the U.S. Patent and Trademark Office decided that it would not grant patents to individual genes, but only to new products developed by using the genetic information. As a result, Celera had to forgo the hopes of obtaining property rights over its genetic mapping efforts.

In the cases of both Celera and Syngenta, the efforts of the companies to enforce strict property rights regarding the fruits of their investments resulted in significant public outcry. As a result, these companies’ images got tarnished. Marketing managers can play an important role in reducing the negative impact of their companies’ property rights enforcement efforts by trying to change the attitudes of the society towards the property rights of their companies. In cases where changing attitudes may not be possible, marketing managers should fore- warn the top executives of their companies of the potential negative impact of property rights enforcement efforts.

In sum, the expected level of social costs of exclusivity related to a resource is negatively related to the level of definition of property rights over that resource. Knowledge-based resources are expected to have ill-defined prop- erty rights to the extent that the expected level of social costs of exclusivity related to them are high.

Conclusion

Our framework provides a tool that can help managers anticipate the consequences of the property rights enforcement efforts of their companies. They may decide that stricter enforcement of property rights may not be in the best interest of the company—especially, if the consequences of property rights enforcement efforts seem to be detrimental to the overall strategy of the com- pany. In other circumstances, managers may conclude that making adjustments

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to their companies’ strategies will help combat some of the negative conse- quences of property rights enforcement efforts.

Knowledge-based resources are quite different from other types of resources. Many knowledge-based resources do not get depleted by use, the social costs of making them exclusive can be very high, and exclusivity can even reduce subsequent investments in such resources. Therefore, cost components such as “capture costs created by non-exclusivity” or “costs of reduced invest- ment created by non-exclusivity,” which normally create a need for better defin- ition of property rights over resources, become less compelling with regard to knowledge-based resources.

Notes

1. J. Fontana, “Linux Marches On: Microsoft Marshals Forces to Try to Stem Open Source Momentum,” Network World, August 4, 2003, p. 1.

2. S. Hamm, S. Ante, and D. Fairlamb, “Linux Moves in on the Desktop,” BusinessWeek, Febru- ary 23, 2004, pp. 106-108.

3. S. Ante, “Big Blue’s Big Bet on Free Software,” BusinessWeek, December 10, 2001, pp. 78-79. 4. The Economist, “Business: In a Spin; Music Industry,” October 13, 2001, p. 79. 5. V. Murphy, “The Enemy Strikes Back,” Forbes, November 24, 2003, pp. 218-220. 6. H. Green, “Downloads: The Next Generation,” BusinessWeek, February 16, 2004, p. 64. 7. Y. Kageyama, “Sony’s Anti-Hacker Move Raises Customers’ Hackles,” The Morning Call

(Allentown, PA), November 8, 2001, p. B11. 8. H. Itami, Mobilizing Invisible Assets (Cambridge, MA: Harvard University Press, 1987); D.

Miller and J. Shamsie, “The Resource-Based View of the Firm in Two Environments: The Hollywood Film Studios from 1936 to 1965,” Academy of Management Journal, 39/3 (1996): 519-543; S.G. Winter, “Knowledge and Competence as Strategic Assets,” in David J. Teece, ed., The Competitive Challenge (Boston, MA: Harvard Business School Press, 1987).

9. K. E. Maskus, Intellectual Property Rights in the Global Economy (Washington, DC: Institute for International Economics, 2000); L.C. Thurow, “Needed: A New System of Intellectual Prop- erty Rights,” Harvard Business Review, 75/5 (1997): 95-103.

10. Ibid. 11. For example, Y. Barzel, Economic Analysis of Property Rights, 2nd Edition (Cambridge: Cam-

bridge University Press, 1997); R.H. Coase, “The Problem of Social Cost,” Journal of Law and Economics, 3/1 (1960): 1-44.

12. G.D. Libecap, Contracting for Property Rights (Cambridge: Cambridge University Press, 1989). 13. Ibid. 14. Barzel, op. cit. 15. Ibid. 16. A.A. Alchian, “Some Economics of Property Rights,” Il Politico, 30/4 (1965): 816-829. 17. Ibid. 18. Alchian, op. cit.; Barzel, op. cit. 19. Alchian, op. cit. 20. H. Demsetz, “Toward a Theory of Property Rights,” American Economic Review, 57/2 (1967):

347-359. 21. S.N.S. Cheung, “The Structure of a Contract and the Theory of a Non-Exclusive Resource,”

Journal of Law and Economics, 13/1 (1970): 49-70. 22. Examples include: Barzel, op. cit.; Cheung, op. cit.; Demsetz, op. cit.; Libecap, op. cit. 23. Quote from p. 354 of Demsetz, op. cit. 24. Libecap, op. cit. 25. For example, Barzel, op. cit.; Coase, op. cit. 26. Barzel, op. cit. 27. Traditionally, resources have been seen to be made up of attributes some of which are sub-

ject to externalities. Externalities are defined as harmful or beneficial effects, related to a resource’s attributes, for which the costs of bringing these effects to bear on the decisions of the parties that interact over that resource are too high [e.g., Demsetz, op. cit.]. Externalities

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are proposed to get priced (i.e., internalized) when the benefits of pricing them exceed the costs of doing so, thus increasing the level of definition of the property rights over the resource that they are related to.

28. T. Eggertsson, Economic Behavior and Institutions (Cambridge: Cambridge University Press, 1990).

29. For example, Cheung, op. cit.; S.H. Gordon, “The Economics of a Common Property Resource: The Fishery,” Journal of Political Economy, 62/2 (1954): 124-142.

30. Demsetz, op. cit. 31. Maskus, op. cit. 32. J. Farrell and G. Saloner, “Installed Base and Compatibility: Innovation, Product Prean-

nouncements, and Predation,” American Economic Review, 76/5 (1986): 940-955. 33. M.A. Cusumano, M. Yiorgos, and R.S. Rosenbloom, “Strategic Maneuvering and Mass-

Market Dynamics: The Triumph of VHS over Beta,” Business History Review, 66/1 (1992): 51-94.

34. For example, Barzel, op. cit.; H. Demsetz, “The Exchange and Enforcement of Property Rights,” Journal of Law and Economics, 7 (1964): 11-26.

35. Barzel, op. cit. 36. T.L. Anderson, and P.J. Hill, “The Evolution of Property Rights: A Study of the American

West,” Journal of Law and Economics, 18/1 (1975): 163-179; B. Field, “The Optimal Com- mons,” American Journal of Agricultural Economics, 67/2 (1985): 364-367; Libecap, op. cit.

37. Demsetz, op. cit.; E.G. Furubotn, and S. Pejovich, “Property Rights and Economic Theory: A Survey of Recent Literature,” Journal of Economic Literature, 10/4 (1972): 1137-1162.

38. The Economist, op. cit. 39. Maskus, op. cit. 40. V. Murphy, “The Enemy Strikes Back,” Forbes, November 24, 2003, pp. 218-220. 41. E. Smith, “Music Industry’s Move Against Swappers Hits a Snag Just as Impact Takes Hold,”

Wall Street Journal, December 22, 2003, p. B1. 42. The Guardian, “New Media: Cybervillains,” May 20, 2002, p. 40. 43. Smith, op. cit. 44. C. Ingrassia, “Knockoffs Go Suburban,” Wall Street Journal, January 16, 2004, p. A7. 45. K. Bensinger, “Film Companies Take to Mexico’s Streets to Fight Piracy,” Wall Street Journal,

December 17, 2003, p. B1. 46. Based on the 1964 work of Demsetz, op. cit. 47. Cheung, op. cit. 48. Ibid. 49. As implied by A.A. Alchian and H. Demsetz, “Production, Information Costs, and Economic

Organization,” American Economic Review, 62/5 (1972): 777-795. 50. Maskus, op. cit. 51. Ibid. 52. Ibid. 53. Demsetz, op. cit. 54. Not all knowledge may be deemed beneficial from the point of view of the society (e.g.,

knowledge about creating biochemical weapons). However, in this article we focus on that knowledge that is generally accepted to be beneficial.

55. Thurow, op. cit. 56. Maskus, op. cit. 57. Ibid. 58. Note that World Trade Organization agreements still allow countries to choose between

U.S. type patent protection and the more traditional form of breeders’ rights. 59. The Times, “Anger over Rice DNA Controls,” March 29, 2002, Home News Section. 60. Ibid. 61. Chicago Sun-Times, “U.S., Britain to Share Human Gene ‘Map’,” March 15, 2000, p. 1; The

Washington Post, “Rivals Resume Battle of the Genome Map,” March 5, 2002, p. E01.

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