Re: Fear of Life (was Microsoft, Automation)

Michael Lorrey (
Wed, 13 May 1998 13:40:29 -0400

Dan Fabulich wrote:

> ChuckKuecker wrote:
> >>Well, the problem is this: under a lf-capitalist market, invention has
> >>lots of positive externalities. After all, you DO gain from the invention,
> >>just as much as your competitor did, but you also had to bear the cost of
> >>invention. When you give the inventor monopoly status, however, you cut
> >>off those positive externalities and allow the inventor to set prices
> >>arbitrarily high without fear that some pesky competitor will offer the
> >>same product at a lower price.
> >>
> >
> >Please define these 'externalities'. I still don't see how I benefit to have
> >my market stolen from me..
> I'm not saying you do benefit from having competitors. Indeed, it's
> primarily us consumers who benefit from your competition.

SO you admit it. However, you don't seem to answer the question as to why anyone
would invent anything if they didn't get paid for it. Name me one civilization in
which there was a similar level of invention as there currently is in the present
day, yet did not protect the intellectual property of inventors? You can't can

> However, even
> without copyright, all firms benefit from invention. Suppose your firm is
> producing goods in a regular competitive economy with normal supply and
> demand curves:
> Price |\_ _/ <-- supply
> | \_ _/
> | \_ _/
> P* |______\_/
> | _/^\_
> | _/ | \_
> | _/ | \_
> |/ | \ <-- demand
> ----------------------
> Q*
> Quantity
> We imagine that you make a variety of goods, and this demand curve
> represents the demand for all the different goods you might make in a
> competitive market. OK, now suppose you invent something new. The
> invention is a "sunk cost": it does not add to your marginal costs (see
> below) and so it does not change the shape of your supply curve. (This may
> not necessarily be true; making a sensor may be more costly the other goods
> which you make currently, or it may be cheaper. However, because the
> effect is ambiguous, we can presume that it doesn't change your supply
> curve. Even if it does, this doesn't affect my argument.) Nonetheless, it
> DOES increase the demand for your goods, since you now attract new buyers
> who want to buy your new product.
> |\_
> | \_
> | \_
> | \_
> Price |\_ \_ _/ <-- supply
> P**|--\_------\_/
> | \_ _/^\_
> P* |______\_/ | \_
> | _/^\_ | \_
> | _/ | \_ \_
> | _/ | |\_ \_
> |/ | | \ \ <--- new demand
> ---------------------------
> Q* Q**
> Quantity
> Where P** and Q** are the new price and quantity. As this graph shows, you
> reap increased revenues thanks to the invention, even under a market where
> you don't have copyright protection. To be specific, you reap extra
> revenues given by the trapezoid formed by the y-axis, the old price line,
> the supply curve and the new price line.
> So what did I mean by externalities? Well, just as your firm will receive
> the money in that trapezoid, so will all other firms who produce
> "knock-offs." You will all EACH receive the quantity inside that
> trapezoid. Thus, invention has positive externalities on other suppliers.

Ok, this is obvious. What benefit is it to ME that somebody is benefitting from
my invention without paying me for the favor? Altruism aside, you still cannot
answer this question because you automatically assume that others benefitting
from my intelligence without paying me for it gives me some sort of net benefit.
I don't put much value in the only benefit being that some cheapskates think that
I am some 'cool dude'.

> Meanwhile, it IS worthwhile to pay for invention, even if the invention is
> not protected with a government monopoly, if the area inside your trapezoid
> is equal to or greater than the cost of invention. Indeed, the larger your
> stake in the market, the more worthwhile invention is.
> >If I set my prices arbitrarily high, I limit my sales to those for whom
> >money is no object. This is a very small market. If I charge a reasonable
> >price for my invention, based on its' costs and a fair payment to me for the
> >development, I should have more takers.
> Let's look at what you're saying economically.
> You correctly point out that if you set the price arbitrarily high, you
> won't have as many takers as if you set the price somewhat lower. I agree
> with this; monopolies do not get to set their own revenues, they only get
> to set the market price without worrying about competitors. So we imagine
> that you demand curve looks like this:
> Price |\__
> | \__
> | \__
> | \__
> | \__
> | \__
> | \__
> | \ <-- demand
> -----------------------------
> Quantity
> However, because you are the only source of this particular good, you
> represent the entire market for that good.

This is the central fallacy of your argument. You treat an invention as a
monopoly product of a monopoly inventor. In fact, in any idea market, there are
almost always several ways to accomplish something. Technology A, technology B
and technology C, all of which solve problem #1, may be invented by entirely
different people, and thus, you have a competetive market for technologies to
accomplish a certain thing. I ran into this in the energy saving lighting market
several years ago. A may have only half of the up front cost of B, but is twice
as expensive to operate over time. They may have identical costs, and are only
different in maybe their aesthetic value, or maybe those are identical as well.
In any event, your problem is that you treat solutions (i.e. inventions) as
monopoly items, when they are not. Only PROBLEMS are unique. There are almost
always several ways to solve a problem.

Mike Lorrey