Against Intellectual Monopoly

factory is built, shoes can be produced cheaply at a relatively low cost for each pair. If two shoe factories are built, competition
between them will drive prices down to the cost of producing a pair of
shoes, leaving the factory owners with nothing left over to pay for having
built the shoe factories. Why, then, do we not consider shoes a special entity
among economic goods, also unsuitable for competitive markets? Why not
enact special shoe laws entitling the shoe manufacturer to special rights
over the lives of shoe buyers and sellers? The same could be said of gasoline
and many other industries: an oil refinery is most certainly a very expensive
plant. Building a refinery costs orders of magnitudes more than producing
a gallon of gasoline from that same refinery once it is in place; still, we are
not troubled by the idea that the oil and refinery industry should be ruled
by open competition.

    What is it that makes us so confident that competition in shoes and
gasoline is an obvious and good thing to have? A factory cannot produce
an unlimited number of shoes, and oil refineries have limited capacity. If
the shoe factory is small enough, relative to the size of the market, it will
produce only a modest number of shoes, and consumers will be willing to
pay a premium over marginal cost for the limited number of shoes available.
    We can illustrate our story about shoe production in a diagram of supply
and demand much beloved by economists. On the horizontal axis, we show
the quantity Q of the number of pairs of shoes that are sold. On the vertical
axis, we show the price P and the cost of shoes. The height of the grey
horizontal line labeled MC is what economists call marginal cost. This is
the cost of producing a pair of shoes after the shoe factory is built. But the
factory - or the factories - can produce only so many pairs of shoes. This
limited number is the capacity of the factory - or of the industry, when there
are many firms producing similar shoes - which we represent by the dotted
and dashed vertical lines, which show the cases of low and high capacity,
respectively. The willingness of consumers to pay for the shoes is their
demand, represented by the sloped line. The more pairs of shoes they buy,
the less willing consumers are to pay for additional shoes, so the demand
curve slopes downward. Take first the case of high capacity - the dashed
vertical line. Under competition, we have the famous result that competitors
will produce shoes until the price of shoes - represented by demand - falls
to marginal cost. In economics jargon, the competitive equilibrium is at
the intersection of the grey horizontal supply and sloping demand curves.
Because each pair of shoes is sold for the marginal cost of producing a pair
of shoes, the factory owners earn no profit - and so have nothing left over to
pay for their factories. Realizing from the beginning that this will be the case,
they would not build any factory and we would all go around barefoot.

    If shoe producers were foolish enough to build only large-capacity factories, or to build so many factories that total industry capacity always stands
at the dashed vertical line, this would be the end of the story. Suppose
instead that the factory is a low-capacity factory, represented by the dotted
vertical line. Even better, suppose the dotted vertical line corresponds to the
industry total supply obtained by adding up a bunch of reasonably sized
factories. It is no longer possible to supply enough shoes to drive price down
to marginal cost. The competitive equilibrium is now at the intersection of
the vertical capacity line and the sloping demand curve. Price is more than
marginal cost. The difference between the price and marginal cost is called
competitive rent.' This amount can be used by shoe producers to cover the
cost of building their factories. And indeed, in the competition to build factories, shoe producers will build just enough capacity that their competitive
rents cover the cost of building the factories. This is Adam Smith's invisible
hand - just the right number of factories of the appropriate size are built,
and social surplus is maximized.
    What is true for shoes is also true for ideas. It is no more possible to flood
the world instantaneously with copies of an idea than it is to produce an
infinite number of shoes from a finite-sized factory. Because copies of ideas
are always limited, like