Against Intellectual Monopoly

1987 Ishtar are widely distributed on the Internet. We have already
mentioned elsewhere that such an argument makes little practical sense:
there is only one way in which one can tell for sure if a movie or a book is
a great success or a flop, and that always comes after the fact. If something
is labeled a "great success," it means has sold lots of copies already, thereby
allowing its original creator to make lots of money. That an imitator comes
in after the fact to grab a few crumbs from the floor cannot make much of
a difference.
    In any case, it remains true that when a new product is launched it is with
a high degree of uncertainty as to its actual market performances. What
implication does the existence of uncertainty have for competition in the ideas sector? Does it make a difference that some ideas are revealed not to
have any or little market value after the initial investment has already taken
place, while others are hugely successful? It does not; it simply changes the
algebra of computing profits. Imagine that producing an innovation has a
given cost, which we label C. The amount earned in competition with many
imitators we may label q. The social value of the innovation we may label v.
When uncertainty is absent, the innovation is undertaken whenever C < q.
However, if the project only succeeds with probability p, abstracting from
risk aversion, the expected amount earned is only pq. So, the condition for
innovation to be undertaken and profitable without intellectual monopoly
becomes C < pq. Now think about the monopolist. Given the same fixed
cost of creating the first copy of the idea, if the profit under monopoly is Q,
the innovation will take place as long as C < pQ. Naturally, the lower the
probability of success, the less likely the innovation is to occur - under either
competition or monopoly. Of course, the social value of the innovation is
pv and, if p is small enough, C > pv and it is better from a social perspective
that the innovation does not occur.

    In short, the uncertainty surrounding the success of an innovation
changes the specific calculations of how likely it is to take place; this is
true with or without intellectual monopoly. But the basic theory of competitive innovation does not change on account of uncertainty - an uncertain
outcome is equivalent to earning a lower rent or to having a higher cost.
The Social Value of Imitation
    Imitation is a great thing. It is among the most powerful technologies
humans have ever developed: there is a debate over the extent to which
living beings other than Homo sapiens can actually learn through imitation.
In spite of the miracles that our mimetic instinct has been performing for
us over the millennia, imitation has received very bad press in the literature
concerned with innovation and ideas. This is not a view that we share, as
imitation is a powerful tool of economic development.
    It should be clear, in fact, that acts of imitation, carried out while respecting ordinary private property rights and the rights to personal privacy, are
key components of the competitive markets that benefit us on a daily basis.
Imitation may or may not require reverse engineering; most times it does,
as it is rather difficult to imitate a product without even looking at it and
examining its internal components. But imitation is not limited to reverse
engineering; it involves, and this is what makes it particularly valuable,
leaping ahead of the pack.

    On the one hand, imitation is a technology that allows us to increase
productive capacity. Innovators increase productive capacity directly, while
imitators increase productive capacity by purchasing one or more copies
of the idea and then imitating it. Imitation, therefore, always requires an
investment: not only do you need to purchase a copy of the idea (and if you
try doing this shortly after the innovation has been released, it may be quite
costly) but you also need to invest your time and other resources to carry
out the imitation process. The output of the imitation process is additional
productive capacity. As long as industry capacity is low enough that there are
rents to be earned in selling copies of ideas at a price higher than marginal
cost, people will make investment to increase capacity. Imitation is the main
way in which such investments are implemented.
    On the other hand, imitation is also a technology that allows further
innovation. When you