Valuing Intellectual Property: An Experiment

In this article we report on the results of an experiment we performed to determine whether transactions in intellectual property (IP) are subject to the valuation anomalies commonly referred to as “endowment effects”. Traditional conceptions of the value of IP rely on assumptions about human rationality derived from classical economics. The law assumes that when people make decisions about buying, selling, and licensing IP they do so with fixed, context-independent preferences. Over the past several decades, this rational actor model of classical economics has come under attack by behavioral data showing that people do not always make strictly rational decisions. Perhaps the most important research in this field is that related to the “endowment effect” – the discovery that, contrary to economic predictions, people value the same object more when they own it than when they do not. To date, the endowment effect has been observed for a variety of goods including mugs, lottery tickets, and hunting permits. Our experiment establishes a substantial valuation asymmetry between authors of poems and potential purchasers of them. As we explain in detail in the article, we constructed a market for the poems that was modeled on a market for licensing IP. The observed differences in valuation indicate that IP licensing markets may be substantially less efficient that previously believed. Our results suggest that (1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and (2) large gaps arise between purchasers’ willingness to pay and sellers’ willingness to accept even though the poems are non-rival property and the contemplated alienation of the property is therefore only partial. Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place – we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal, and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well-established custom or pattern helps to inform valuation. These results have considerable implications for the structuring of IP rights, IP formalities, IP licensing, and fair use

The Nature of Sequential Innovation

When creators and innovators take up a new task, they face a world of existing creative works, inventions, and ideas, some of which are governed by intellectual property (IP) rights. This presents a choice: Should the creator pay to license those rights? Or, alternatively, should the creator undertake to innovate around them? Our Article formulates this “build on/build around decision” as the fundamental feature of sequential creativity, and it maps a number of factors—some legal, some contextual—that affect how creators are likely to decide between building on existing IP or building around it. Importantly, creators are influenced by more than just formal IP rights. We identify three other sets of factors—(1) Technological and Artistic, (2) Market, and (3) Creator—that can also affect the path of sequential innovation by encouraging either building on or building around. Our focus on creators’ build on/build around decisions offers a richer, but more complex, account of the nature of sequential innovation and, in so doing, yields insights into its efficient legal regulation

Valuing Intellectual Property: An Experiment

In this article we report on the results of an experiment we performed to determine whether transactions in intellectual property (IP) are subject to the valuation anomalies commonly referred to as “endowment effects”. Traditional conceptions of the value of IP rely on assumptions about human rationality derived from classical economics. The law assumes that when people make decisions about buying, selling, and licensing IP they do so with fixed, context-independent preferences. Over the past several decades, this rational actor model of classical economics has come under attack by behavioral data showing that people do not always make strictly rational decisions. Perhaps the most important research in this field is that related to the “endowment effect” – the discovery that, contrary to economic predictions, people value the same object more when they own it than when they do not. To date, the endowment effect has been observed for a variety of goods including mugs, lottery tickets, and hunting permits. Our experiment establishes a substantial valuation asymmetry between authors of poems and potential purchasers of them. As we explain in detail in the article, we constructed a market for the poems that was modeled on a market for licensing IP. The observed differences in valuation indicate that IP licensing markets may be substantially less efficient that previously believed. Our results suggest that (1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and (2) large gaps arise between purchasers’ willingness to pay and sellers’ willingness to accept even though the poems are non-rival property and the contemplated alienation of the property is therefore only partial. Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place – we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal, and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well-established custom or pattern helps to inform valuation. These results have considerable implications for the structuring of IP rights, IP formalities, IP licensing, and fair use

What\u27s In, and What\u27s Out: How IP\u27s Boundary Rules Shape Innovation

Intellectual property law sorts subject matter into a variety of different regimes, each with different terms of protection and different rules of protectability, infringement, and defenses. For that sorting to be effective, IP needs principles to distinguish the subject matter of each system. This paper focuses on one of the most important aspects of border-drawing that our IP system undertakes — identifying “useful” subject matter. This aspect is critical because our IP system gives utility patent law pride of place and draws the boundaries of the other doctrines in large part to respect utility patent’s supremacy. Yet IP law’s sense of utility patent law’s domain is poorly theorized, and courts’ understanding of the boundaries of utility patent is mostly reductive and intuitive. While it’s clear that claimed inventions must be useful, courts inconsistently enforce a technological understanding of utility. That view of utility is normative rather than empirical. And its under-theorization has consequences for patent law itself — consequences that cascade across the other forms of IP because each of the other systems defers protection for these “useful” or “functional” features to utility patent.The problem is much more than a doctrinal one, since the sorting rules we develop cannot help but shape the nature and direction of innovation. IP incentives regarding software, for example, are necessarily shaped by the ways we sort some aspects into patent law and others into copyright. The choice of IP systems will also have significant competitive consequences. Different mixes of IP regimes (and of IP regimes with other types of regulatory exclusivity, etc.) will promote competition along different dimensions. A patent-heavy system will promote competition along utilitarian or conventionally “functional” characteristics, and systems that rely more on trademark/advertising are going to promote competition along other, more phenomenological, dimensions. Until we appreciate all of the forms of utility, and until we have a calculus for understanding their relative value, we can’t think coherently about which types of competition we want to promote or the costs of promoting that type of competition. Nor can we even think about how best to satisfy consumers’ actual demand, or how different IP regimes can actually help shape that demand. We are blind to a variety of considerations that actually affect consumer welfare

What\u27s a Name Worth?: Experimental Tests of The Value of Attribution in Intellectual Property

Despite considerable research suggesting that creators value attribution – i.e., being named as the creator of a work – U.S. intellectual property (IP) law does not provide a right to attribution to the vast majority of creators. On the other side of the Atlantic, however, many European countries give creators, at least in their copyright laws, much stronger rights to attribution. At first blush it may seem that the U.S. has gotten it wrong, and the Europeans have made a better policy choice in providing to creators a right that they value. But for reasons we will explain in this Article, matters are a lot more complicated than that. This Article reports a series of experiments that are the first to attempt to quantitatively measure the value of attribution to creators. In previous research, we have shown that creators of IP are subject to a “creativity effect” that results in them assigning substantially higher value to their works than neoclassical economic theory predicts. The first two experiments reported in this Article suggest a way that the creativity effect may be reduced – creators are willing to sacrifice significant economic payments in favor of receiving attribution for their work. The value to creators of attribution raises the question whether U.S. IP law should be re-structured to provide attribution as a creator’s default right. The third and most important experiment reported here casts doubt on the value of giving creators such a default right, because creators value attribution differently depending on whether the legal rule gives it to them as an initial entitlement or not. When creators are given a right to attribution as a default they value credit four times higher than when attribution is not the default option. Our findings make clear that creators value attribution, and that the prospect of obtaining it can lead to a more efficient level of transacting. At the same time, and paradoxically, our findings also suggest that before we restructure American law, which provides no right to attribution for the vast majority of creators, we need to take care, because it is possible, under conditions that we will describe, that providing creators with a default right to attribution will result in less efficient transacting. Finally, our findings have important implications for property theory which are broader than IP law or attribution rights. Our third experiment suggests that a party who enjoys a default legal right as part of her initial complement of rights will tend to treat that legal right in a fashion similar to any other form of initial entitlement, and overvalue it relative to what neoclassical theory would predict. This suggests a principle regarding how to efficiently structure default rules in any setting. All other factors being equal, an efficiently-structured default rule will locate the initial legal entitlement in the party who is either less likely to overvalue the entitlement, or, if overvaluation seems inevitable regardless of where the initial entitlement is placed, is likely to overvalue it less

Innovation Heuristics: Experiments on Sequential Creativity in Intellectual Property

All creativity and innovation build on existing ideas. Authors and inventors copy, adapt, improve, interpret, and refine the ideas that have come before them. The central task of intellectual property (IP) law is regulating this sequential innovation to ensure that initial creators and subsequent creators receive the appropriate sets of incentives. Although many scholars have applied the tools of economic analysis to consider whether IP law is successful in encouraging cumulative innovation, that work has rested on a set of untested assumptions about creators’ behavior. This Article reports four novel creativity experiments that begin to test those assumptions. In particular, we study how creators decide whether to copy, or “borrow,” from existing ideas or to innovate around them

What\u27s a Name Worth?: Experimental Tests of the Value of Attribution in Intellectual Property

Despite considerable research suggesting that creators value attribution – i.e., being named as the creator of a work – U.S. intellectual property (IP) law does not provide a right to attribution to the vast majority of creators. On the other side of the Atlantic, however, many European countries give creators, at least in their copyright laws, much stronger rights to attribution. At first blush it may seem that the U.S. has gotten it wrong, and the Europeans have made a better policy choice in providing to creators a right that they value. But for reasons we will explain in this Article, matters are a lot more complicated than that. This Article reports a series of experiments that are the first to attempt to quantitatively measure the value of attribution to creators. In previous research, we have shown that creators of IP are subject to a “creativity effect” that results in them assigning substantially higher value to their works than neoclassical economic theory predicts. The first two experiments reported in this Article suggest a way that the creativity effect may be reduced – creators are willing to sacrifice significant economic payments in favor of receiving attribution for their work. The value to creators of attribution raises the question whether U.S. IP law should be re-structured to provide attribution as a creator’s default right. The third and most important experiment reported here casts doubt on the value of giving creators such a default right, because creators value attribution differently depending on whether the legal rule gives it to them as an initial entitlement or not. When creators are given a right to attribution as a default they value credit four times higher than when attribution is not the default option. Our findings make clear that creators value attribution, and that the prospect of obtaining it can lead to a more efficient level of transacting. At the same time, and paradoxically, our findings also suggest that before we restructure American law, which provides no right to attribution for the vast majority of creators, we need to take care, because it is possible, under conditions that we will describe, that providing creators with a default right to attribution will result in less efficient transacting. Finally, our findings have important implications for property theory which are broader than IP law or attribution rights. Our third experiment suggests that a party who enjoys a default legal right as part of her initial complement of rights will tend to treat that legal right in a fashion similar to any other form of initial entitlement, and overvalue it relative to what neoclassical theory would predict. This suggests a principle regarding how to efficiently structure default rules in any setting. All other factors being equal, an efficiently-structured default rule will locate the initial legal entitlement in the party who is either less likely to overvalue the entitlement, or, if overvaluation seems inevitable regardless of where the initial entitlement is placed, is likely to overvalue it less

Testing for Trademark Dilution in Court and the Lab

Federal courts are currently split, even within particular districts, on the basic question of what a plaintiff must show to establish that a defendant’s conduct constitutes trademark dilution by blurring. Federal trademark law defines “dilution by blurring” as “association arising from the similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark.” In construing this statutory language, a majority of courts have held that to establish blurring, a plaintiff need only show that consumers associate the defendant’s mark with the plaintiff’s famous mark. These courts appear to assume that to the extent that there is consumer association, this association alone will “impair[ ] the distinctiveness” of the famous mark. A minority of courts have held that the plaintiff must show both consumer association and that the consumer association “impairs the distinctiveness” of the famous mark. In this Article, we make three contributions to the current debate over what must be shown to establish dilution by blurring. First, we report the results of a set of experiments that reveal that the majority approach is fundamentally deficient. These experiments demonstrate that even when consumers associate a junior mark with a famous senior mark, this association does not necessarily result in any impairment of the ability of the senior mark to identify its source and associations. Second, we set forth a new method for determining when association is likely to lead to impairment. This method, which we term the “association strength test,” evaluates changes in how strongly survey respondents associate a mark with its source or attributes upon exposure to a diluting stimulus. Third, we evaluate the current state of the art in trademark dilution survey methodology: response time surveys. These surveys purportedly show both consumer association and impairment. Through a set of experiments, we demonstrate that these surveys currently use the wrong control and are invalid. In light of our findings, we reflect more generally on the question of whether dilution by blurring ever occurs and on how the blurring cause of action may be reconfigured to better comport with courts’ intuitions about the true nature of the harm that the cause of action seeks to address