Against Intellectual Monopoly

time being, two caveats should
suffice. The key word in the former statement is "enough": how much
profit amounts to "enough" profit? The second caveat is a bit longer as it is
concerned with price discrimination, and we examine it next.
    The example of AIDS drugs brings out another feature of monopolies -
their desire to price discriminate. That is, competitors charge the same
price to everyone, but monopolies try to extract a higher price from those
who value the product more highly. Economists usually argue that this is a
good thing because monopoly without price discrimination is even worse
than monopoly with price discrimination. Price discrimination, they argue,
enables lower-valued consumers to purchase a product that otherwise the
monopoly would not sell to them. Relatively speaking - that is, relative to a
world where the monopolist does not price discriminate - this is a correct
statement. In the case of AIDS drugs, effective price discrimination would
enable the large pharmaceutical companies to charge a low price to poor
Africans without lowering the price they charge rich Westerners. A more
successful example of price discrimination for drugs is the low price charged
to poor Canadians against the high price charged to rich Americans.
    In practice, however, it is both difficult and costly to price discriminate.
Experience suggests that though it is relatively easy to find consumers who
highly value a product and are willing to pay a high price, there is not much
selling by monopolies at low prices to consumers who are only willing or
able to pay a low price. Economic theory suggests two related reasons for
this. In anonymous markets, the monopolist has a hard time telling which
consumers value its product a lot and which value it little, as the former would pretend to be the latter when given a chance. The second reason,
even more straightforward, is that selling to some consumers at a low price
creates competition for the monopolist. It creates an incentive to buy at
the low price and resell at a medium price that undercuts the high price
charged by the monopolist to the highly valued consumers. In the case of
Canada and the United States, the lower price charged to Canadians has
led to a booming gray market for importing drugs from Canada into the
United States - so much so that there have been efforts both to enshrine
the right to import cheap Canadian drugs in U.S. law and to make it illegal
entirely.

    In the case of AIDS drugs, the pharmaceutical companies do not sell to
Africa at a steep discount because they are afraid that a parallel market,
reselling the cheap African product in the Western market, will undercut
their profits. Do not let the pharmaceutical companies' laments confuse
you. It is not by selling to the African market at a low price that they would
record a loss, to compensate for which they would desperately need the
U.S. and European profits. Because the cost of producing a larger quantity
of AIDS drugs is very low, the pharmaceutical companies would make
a profit also by selling cheaply to the African market. Their problem is
the loss of monopoly profits in markets other than the African one. This
example is, in fact, quite general: intellectual monopolists often fail to price
discriminate because doing so would generate competition from their own
consumers.
    Effective price discrimination is costly to implement and this cost represents pure waste. For example, music producers love digital rights management (DRM) because it enables them to price discriminate. The reason
that DVDs have country codes, for example, is to prevent cheap DVDs sold
in one country from being resold in another country where they have a
higher price. Yet the effect of DRM is to reduce the usefulness of the product. One of the reasons that the black market in MP3s is not threatened by
legal electronic sales is that the unprotected MP3 is a superior product to
the DRM-protected legal product. Similarly, producers of computer software sell crippled products to consumers in an effort to price discriminate
and preserve their more lucrative corporate market. One consequence of
price discrimination by monopolists, especially intellectual monopolists, is
that they artificially degrade their products in certain markets so as not to
compete with other more lucrative markets.1
    So, monopoly has many bad consequences. Through a series of case studies, we use this