“Valuing Intellectual Property: An Experiment”

Christopher Buccafusco and Christopher Sprigman have a very interesting article, Valuing Intellectual Property: An Experiment, in the latest Cornell Law Review. From the introduction:

In this Article, we present an experiment that demonstrates a substantial valuation asymmetry between authors of poems and potential purchasers of them. As we explain, we created a market for poems modeled after a market for licensing IP. The observed differences in valuation indicate that IP licensing markets may be substantially less efficient than previously believed. Our results suggest that (1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and that (2) large gaps arise between WTP and WTA even though the poems are nonrival property and the contemplated alienation of the property is therefore only partial.

Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases. These biases in turn drive the price that creators and owners of IP are likely to demand considerably higher than buyers will, on average, be willing to pay. This discovery does not mean, of course, that transactions in IP will not take place—we see such transactions happening every day. Our research suggests, however, both that IP transactions may occur at a frequency that is significantly suboptimal and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value or for which no well-established custom or pattern helps to inform valuation. These results have considerable implications for the structuring of IP rights, IP formalities, IP licensing, and fair use.