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ABSTRACT

We examine the consumer-welfare implications of Google's project to scan a large proportion of the world's books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google's claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to "orphan books," which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

I. INTRODUCTION

New goods and services are among the most important sources of increased economic welfare. Recently, a Wharton School ranking of new products listed the internet, personal computers (PCs), and cell phones as the top three innovations of the past thirty years.1 Google's project to scan a large proportion of the world's books into a digital format is a massive undertaking with profound implications for how users will connect with information using the internet, PCs, and cell phones as well. Users will access Google Book Search (GBS) through the internet using cellular and Wi-Fi technology on PCs, digital book readers, and perhaps on their iPhones and other smart phones as the technology evolves.

Scanning all those books and organizing them for use on the internet is a costly undertaking. Google has copied approximately seven million books to date and aims to scan fifteen million books onto its digital platform. It has reportedly cost Google about $100 million to scan the books.2 Although the overall cost to Google is unknown, from estimates of scanning costs and legal fees it appears to be in the hundreds of millions of dollars.

Yet the overall cost is not so prohibitive as to prevent another company from engaging in a book-scanning project and competing with Google. Until 2008, Microsoft also had a project to scan books and produce a digital library. With Microsoft's cash hoard of $20 billion and a market capitalization of approximately $200 billion, Microsoft would not encounter funding problems, nor would other potential competitors, such as Yahoo ($23 billion in market capitalization) or Amazon ($38 billion in market capitalization). Thus, complaints from companies such as Microsoft and Amazon, which are competitors of Google in search engines and electronic book sales, should be analyzed within an economic framework that recognizes that these companies could invest in parallel projects and compete with GBS if they chose to do so.

Google's project, along with other evolving technologies such as Sony's or Amazon's digital book readers, is likely to have a significant effect on the current world of physical book use. Will universities need their imposing libraries and costly staffs when a researcher can investigate a topic much more efficiently on the internet rather than waiting for musty tomes to be retrieved from repositories, often after a significant time period?3 What role will university presses play in an internet world? With very few exceptions, university press publications, although important for a scholar's career advancement, are cash drains on fiscally challenged university endowment incomes. No reason exists for printing their output and physically delivering books with low readership that will sit largely unread on library shelves. For example, the MIT Press could, at a much lower cost than its printed publications require, publish a book solely in electronic form that buyers could download onto their book readers and libraries could load onto a server for research use. The likely result is that university presses will publish more books electronically, and this increased output will increase economic efficiency. The British Museum reading room, where Karl Marx sat day after day, is no longer a reading room but rather a tourist attraction and a venue for cocktail parties. An internet-based approach will make waits for books that are currently checked out or in use by other researchers and queues a memory of the past.4 Waits for inter-library loans will also become a distant memory.

Economists expect these types of changes to elicit protests by affected constituencies, including providers who benefit from the established and less efficient model. Very few changes make everyone better off, and those groups adversely affected will predictably try to stop or modify the changes to advance their own interests.5 In this article, we consider the effect of Google's book project on economic efficiency and consumer welfare. We find that Google Book Search will significantly increase economic efficiency and consumer welfare. If for reasons of regulation or other government intervention the project does not go forward, significant gains in consumer welfare and economic efficiency will be lost. Thus, we suggest that proposals for government-mandated changes to the GBS settlement and complaints from affected constituencies should be analyzed carefully, with the goal of consumer welfare and economic efficiency kept in mind.

The current proposed settlement arose after Google decided to make substantial investments to digitally scanning books, was sued by rights holders for copyright infringement, and, rather than continue to litigate its fair use arguments, agreed to a resolution that would authorize various uses of the rights holders' intellectual property.6 A federal court must now approve the settlement for it to take effect, and a number of individuals and organizations have called for modification or rejection of the settlement agreement based, in part, on concerns regarding Google's putative ability to exercise market power. In July 2009, the Antitrust Division confirmed that it is investigating the settlement.7 We examine here a number of the concerns that academic critics have raised, especially concerns that would invoke the antitrust laws to change the structure of Google's book project.

The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

II. THE VIRTUAL PRICE AND THE VALUE OF A NEW GOOD

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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