Monday 16 April 2012

Evidence-based policy -- or policy-based evidence? An academic responds

The content of this post is self-explanatory: it is the defence by Professor Martin Kretschmer against criticisms that have been made of his research paper, "Private Copying and Fair Compensation: An empirical study of copyright levies in Europe”, in circumstances in which, in the absence of any formal platform for a response, the posting of a public statement is appropriate. The 1709 Blog is pleased to help Professor Kretschmer clarify his position and hopes that this will facilitate further debate on what is -- whatever the state of evidence -- a sensitive and controversial topic.  He writes:
Private Copying and Fair Compensation

A response by Martin Kretschmer to the public, and less public reception of his study on copyright levies addressing in particular five unpublished arguments circulated by Will Page, Chief Economist of UK collecting society PRS for Music

1. Context 
During my 2010/11 ESRC fellowship at the UK Intellectual Property Office, I researched and wrote a 75-page report entitled “Private Copying and Fair Compensation: An empirical study of copyright levies in Europe”. Published on 19 October 2011, the report has been exposed in many places. It is cited in the Hargreaves Review of Intellectual Property and Growth (2011, p. 116), in the government’s response to Hargreaves and in the government’s copyright consultation (which closed on 21 March 2012). It has been discussed at the World Intellectual Property Organization (Geneva, 15 February 2012, here and by the European economic think tank Bruegel (Brussels, 28 March 2012, here).

Interestingly, the report is cited by both proponents and opponents of copyright levies. The opponents focus on one part of the report’s conclusion (p. 71): “Within the constraints of EU law, the UK’s economically efficient option appears to be the de minimis argument (= no harm): a certain amount of copying in already priced into the first retail purchase.For an example of this reading, see Nokia’s discussion paper: Recent Trends in Alternatives to Copyright Levies (7 March 2012): “Just before Christmas 2011 the UK government published proposals to introduce a statutory private copying exception for the digital age, while at the same time rejecting copyright levies, following the Recommendations in Professor Martin Kretschmer’s report on ‘Private Copying and Fair Compensation’, commissioned by the UK-IPO, claimed to be the first official empirical study of copyright levies in Europe which concluded that the levies system across Europe is ‘deeply irrational’.”

The proponents of copyright levies draw on a different aspect of the report, as summarised for example by (20 October 2011): “People should be able to buy a licence that allows them to download and pass on copyright material in a way that would currently break the law, an academic has said. He said that this would encourage innovation and compensate rights owners.”

This reading is based on my analysis of the following activities users may consider as private:
(i)                Making back-up copies / archiving / time shifting / format shifting;
(ii)              Passing copies to family / friends;
(iii)            Downloading for personal use;
(iv)            Uploading to digital storage facilities;
(v)              File sharing in digital network;
(vi)            Online publication, performance and distribution within networks of friends;
(vii)          User generated content / mixing / mash-up (private activities made public).

I indeed argue that users would find it hard to understand permitting some of these activities, and not others (p. 19): “A more widely conceived exception that would cover private activities that take place in digital networks [activities (iii) to (vii)] might be better understood as a statutory licence. Possible rationales for issuing such a licence include: making the copyright system more permissive for consumer led innovation, as well as non-economic arguments (such as influencing the bargaining position of creators versus producers, or preserving fundamental rights of privacy). The EU concept of “compensatable harm” contributes little towards assessing an appropriate scope and tariff for such a licence. There is no case for copyright levies unless the payment of levies is linked to clear consumer permissions, and an argument is made why scope and tariff of these permissions cannot be left to the market.”

There are some critics who have taken a different line altogether. They suggest methodological faults with the research. Will Page, Chief Economist of UK collecting society PRS for Music, has produced a presentation in which he offers such a critique. While published criticism is welcome, and part of the academic process, Mr Page’s presentation slides have not been published, yet his critique has been circulated in various settings where I am unable to respond. It is therefore appropriate to offer a perspective on Page’s critique and a response to the points he raises.

2. Peer review 
The report “Private Copying and Fair Compensation” was commissioned by the UK Intellectual Property Office under a fellowship programme supported by the UK Economic & Social Research Council (ESRC). Research councils fund independent, peer reviewed research.

From its conception, the research was conducted to these standards.

·         The state of the art of economic thinking regarding “copyright compensation” was reviewed by a panel of leading economists on 14 October 2010, and the notes were published on the website of the Centre for IP Policy & Management;
·         the functioning of the levy system was discussed by a panel of stakeholders convened by the IPO on 1 December 2010, including representatives from right holders, collecting societies, ICT firms and consumers;
·         the research design, early findings and draft report of the study were exposed to the IPO Copyright Expert Advisory Group (of which Mr Page is a member) for peer review on 4 February, 30 March and 23 June 2011;
·         the draft final report was published in June 2011 as a working paper on the website of the Centre for IP Policy & Management, and presented at a peer reviewed conference (European Policy for IP, Brussels, 19 September 2011).

Mr Page had numerous opportunities to comment on the methodological approach of the study, but the minutes of the Copyright Expert Advisory Group do not show any critical interventions. Concerns with the methodology of a study may arise from unwelcome findings, and their subsequent policy implications.

3. Mr Page’s critique 
My report is based on three separate studies. Mr Page takes issue with Study II  “Empirical effects of copyright levy schemes”, which is introduced in the report with this paragraph (p. 38):

As an empirical starting point for assessing the economic effects of levy schemes, three product level studies were conducted, plotting retail prices against levy and VAT rates in a selection of 20 countries. This data should help to establish who is paying for the system (consumers, retailers, manufacturers), whether there are implications for product innovation and launch, and if there are trade effects (cross border arbitrage, pan-European price points regardless of levies).

In other words, this is a first attempt to establish if levies have an effect on retail prices, and consider possible explanations for who is paying for the levies, as someone must.

Study II ends with these findings:

1. The costs of indirect charges (including VAT and levy) may be passed onto consumers, or absorbed by manufacturers or distribution channels/retailers.
2. If products are sold via a distribution channel, the retailer is ultimately responsible for pricing.
3. Manufacturers of some premium products (Apple iPod Touch) with selective distribution channels appear to be able to pass on the full indirect tax burden to consumers.
4. Some manufacturers may absorb the levy for some products (where there is concentrated purchasing power of retailers). The costs will be carried as reduced profit by their shareholders. This appears to be the case for printers/scanners.
5. Where consumer markets are very competitive, and there are dispersed distribution channels lacking purchasing power, the cost of levies may be absorbed by the retailer.
6. There appears to be a pan-European retail price point for many consumer devices regardless of levy schemes (with the exception of Scandinavia where consumers are willing to pay a premium).
7. For the launch strategy of high value innovative products (tablet computers), manufacturers seem to ignore the levy. In a second phase, they may either decide to pass on, or absorb.

The key message from Study II is that levies are not automatically passed on to the consumer, and that there are several competing explanations why “pass on” does, or does not occur.

In his slide presentation, Mr Page appears to state five criticisms.

       Kretschmer ignores Company structure.
Firms subsidise printers to charge a premium on cartridges.

Answer: Yes, it is well known that the price of printer cartridges may subsidise printers. This does not change the need to explain why there are countries with comparatively high levy rates (Germany) where printers are traded at a similar price as in non-levy countries (UK).

       Kretschmer doesn’t look at market over time.
                Single time period under study omits dynamic effects.

Answer: Yes, in a larger study it would be desirable to look at retail pricing over time, not only as a snap shot. However, the basic challenge remains: to explain the pattern observed.

       Kretschmer makes minimum attempt to normalise prices.
                Surely price discrepancies need fuller explanation.

Answer: Yes, in a larger study it would be desirable to make adjustments (e.g. for exchange rate variations over time, and purchase power parity). But again this does not affect the validity of the central observation, that levies are not consistently passed on (even in a single market with a single currency where surely no adjustments are needed).

       Kretschmer omits any demand-side analysis.
                Does the demand for printers differ given the country?

Answer: This is not a study of the market for printers. The retail data offer a challenge. Mr Page may find a demand-side explanation why prices differ in different countries, and why levies are not consistently passed on. If they are not passed on, the onus remains with Mr Page to show who pays for the levy.

·         Kretschmer misunderstands the concept of competitive markets.
In (perfectly) competitive markets, it would not be possible to absorb the levy. Therefore imperfect market dynamics should be considered. Unfortunately, they were not.

Answer: In perfectly competitive markets, levies must be passed on as, by definition, such markets are perfect. However, the study investigates real markets, and under imperfect competition the findings are supported by the theory. The suggestion that manufacturers are prepared to absorb levies came from interviews with manufacturers. I qualify this carefully (p. 56):

The extent to which it is profit maximising to pass on the levy depends on a number of factors. These may vary across different markets. Economists may consider the degree of competition, elasticity of demand, and if levies are applied uniformly to all manufacturers (firm-specific or industry-wide costs). It also matters that levies, as indirect charges, are not fixed costs but depend on sales.

In summary, I have offered new data which are in need of an explanation. The data are transparent, publicly available and open to examination by others who may conclude differently.  I concluded that there was no coherent rationale for the European levy system as I found it. Setting of tariffs and distribution of collected fees are seemingly arbitrary, and not based on an underlying concept of economic harm (Studies I & III). Consumer permissions associated with levy payments are incomprehensible (Study I). Study II contributes to our understanding of who pays for copyright levies. All researchers should welcome more data, and I would join Mr Page in this call.

Martin Kretschmer
Professor of Information Jurisprudence
Director, Centre for IP Policy & Management
Bournemouth University
This defence is also posted on the website of the Centre for Intellectual Property Policy & Management, Bournemouth University, here.

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