The Social Cost of Sharing

Consumers often share intellectual property. Sometimes sharing is facilitated by intermediaries such as libraries, license servers, used-book shops or video rental stores. Sometimes sharing is illicit, such as with pirated software or Napster. Sometimes sellers of intellectual property welcome sharing, as with site licenses or special prices for libraries, and sometimes they discourage it. Intellectual property that is intended to be shared normally sells for a higher price than intellectual property that is meant to be consumed by individuals. Think, for example, of the differential pricing of journal subscriptions for libraries and individual users. In other cases, such as books, sellers cannot easily discriminate between shared and individual users, so pricing tends to reflect the dominant use. I have examined the pricing behavior of profit-maximizing sellers of intellectual property when sharing is possible in Varian [2000]. Here I examine a related question: what kinds of products are not produced due to sharing? That is, what is the social cost of sharing?