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3 Rev. Econ. Rsch. on Copyright Issues 1 (2006)

handle is hein.journals/rvwoecrh3 and id is 1 raw text is: Review of Economic Research on Copyright Issues, 2006, vol. 3(1), pp. 1-17 LICENSING AND ROYALTY CONTRACTS FOR COPYRIGHT RICHARD WATT ABSTRACT. This paper reviews briefly how the owner of the copyright to a creation can best market access to that right to licensees under a variety of assumptions concerning the market. After an introductory section, the paper considers a situation of full certainty, in which the value of the final product that is sold by licensees is fully deterministic. In that setting, we consider a very simple model in which the copyright holder himself may or may not compete with the licensee in the final product market. Above all, it is shown that a linear form for the royalty contract always suffices in equilibrium. After that, a model with uncertainty as to the market value of the final product is develloped. In this model, we consider Pareto efficient sharing contracts, and it is shown that now a linear form is unlikely to suffice. Throughout (i.e. in both sections), we shall be interested in exactly when a linear royalty contract is efficient, since these types of contract are so prevalent in the real world. Finally, as an introduction to the papers contained in the symposium, I devote a few words to each of them in turn. 1. INTRODUCTION The way in which access to copyrighted creations is remunerated is a particularly interesting aspect of the economics of copyright that can be studied using very simple tools of economic analysis. Copyright royalty contracts are the means under which the economic incentive for creating filters back down to the creator, and as such they are clearly a fundamental issue when the decision to create is taken. However, in as much as royalty contracts mandate how much money goes to the original creator, they also mandate how much goes to any other party involved in the process of creation-delivery-consumption of copyrighted products. And so they are also fundamental to the incentive for publishers, distributors, and even final consumers.' In a nut-shell, the royalty contract stipulates how the market surplus is divided between all parties involved. The economics of copyright royalty contracts has been studied in the literature, but nevertheless, this topic has not received the attention that it really deserves. Economists have spent more time dealing with the effects of copyright infringement, and alternative protection mechanisms, under very rudimentary assumptions on how the creator is financially rewarded. Almost always in such models, there is no general equilibrium type effects between how the market works and how the original creators are rewarded. There are many fundamental issues to resolve - exactly how should the contract that provides for the creator's financial reward be structured? Are the typical contracts that are used in the real-world appropriate? 'Consumers are affected as the royalty contract will, in the end, have an effect on the price that is charged.

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