A Sketch of My Paper on PPEI

I just gave a presentation on PPEI (Primarily Position-Enhancing Information), very kindly related (with very helpful comments and a Seussian illustration) by Rebecca Tushnet here. Some people have asked for a text copy, so I’m going to post a “sketch” I developed after the jump: . . .

This is a bit experimental, and to the extent there are formatting hiccups, I’ll try to address them soon. Gotta get some “plug ins” for wordpress to enhance this first!

Two big things I figured out from this presentation:

a) This plea for application of special IP rules to certain types of IP should be fit into Michael Carroll’s general account of “uniformity costs” of IP.
b) There are even more examples of “positional arms races” in the context of patent law and trade secret (especially to the extent the law incentivizes “real secrecy.”

Resisting the Commodification of Advantage:
Legal Responses to Unfair and Wasteful Positional Competition

Draft Article Synopsis, July 24, 2006
Frank Pasquale

To understand the costs imposed by positional competition, consider the following dilemmas faced by players in the legal system:

1. A patent defense lawyer suspects that her opponent has purchased reports from LegalMetric LLC that reveal “which judges rule most swiftly and which tend to favor patent holders.” Does she buy a similar report?

2. A large law firm must decide whether to purchase blanket access (“all you can eat”), hourly, or transaction-based access to materials from Lexis and Westlaw. It learns that several of its competitors are purchasing the blanket access plan. Does the firm follow suit?

3. A college junior learns that many of her friends are taking the Kaplan LSAT Preparation Course. She can either take a job in order to earn the money to pay for the course, or take her chances that her own methods of preparation can compete with the insights garnered by a large company. She knows that the company employs hundreds of individuals not merely to “outsmart” the test, but to base their work on otherwise secret test questions memorized by co-workers. Does she take the course?

Each of these situations pose “prisoner’s dilemmas,” where parties uncertain of the behavior of their competitors must decide whether to buy information that would confer a positional advantage. In order to understand the negative social consequences of such dilemmas, it is helpful to contemplate the instrumental nature of the information involved and the nature of positional competition more generally.
Although some information has intrinsic value, most is used instrumentally. We may gaze at a painting, enjoy a song, or peruse a novel merely for pleasure and edification–ars gratia artis. But much of the information created in today’s society is created for use. We might use software to organize spreadsheets or run a car; drugs to fight disease or enhance our health; the real estate listings to figure out where to buy a house. In each case, information is not valuable in itself, but rather for what it allows us to achieve in the world.

Despite the protestations of social critics like Thoreau, there is general consensus that, the more tools we have, the freer we are to make our way in the world. Given the tool-like quality of much information, intellectual property policy has focused on promoting innovation–that is, generating more and better information tools to achieve our purposes. Even critics of current policy rarely question its ultimate aims, and instead focus on how their proposed changes will promote more innovation than the status quo.

The current emphasis on innovation is understandable to the extent that it improves social welfare. However, much information may be used not simply to improve its user’s life but also to help its user gain advantage over others in a positional struggle. For example, most lawyers don’t simply read case law and secondary sources in order to find out the state of the law–they use it to prevail in a dispute. A person may take a drug to cure baldness, not simply in order to approach some platonic ideal of attractiveness, but to appear better than others. An LSAT preparation course does not primarily exist in order to improve students’ argumentative and problem-solving skills–one is rarely called upon to arrange lions, tigers, and bears into a series of color-coordinated cages (as one characteristic game asked test-takers to do). Rather, students take the course to help themselves best thousands of other competitors for places in law schools.

To the extent that information is used as a tool for competing in zero-sum games (like legal disputes or testing), it is unclear whether the production of more information is either efficient or equitable. For instance, imagine the development of a test-preparation course that guarantees its students 20 points more on the relevant test, in exchange for $100,000. Though the number of students may be small, and hard-working, they will nevertheless manage to leverage financial advantage into educational advantage. Moreover, even if the price of the course goes down, inequity persists until it is universally accessible. This is because the more accessible the course is, the greater the pressure to take it (spreading its cost more generally), and the greater the disadvantage suffered by those who don’t take it (increasing the penalty for non-participation). But perversely, once the course becomes universally accessible, it will afford no one a positional advantage, because all will see their scores raised by the same amount. Therefore, the course generates either inequity, or inefficiency (since universal accessibility destroys the only value of the course–the ability to raise one’s score relative to others).

The homely example of the test-preparation course suggests a more general theory regarding the commodification of advantage via primarily-position-enhancing information (PEI). First, the rise of such information immediately divides society into two groups–those who can afford to access the information, and those who cannot. To the extent that the latter group’s relative poverty is not its own fault, the new information inequitably subjects it to yet another disadvantage, whereby others’ wealth can be leveraged into status, educational, or occupational advantage. Moreover, even though the group that can afford access to the PEI is advantaged relative to those who cannot, the development of PEI may be inefficient for that group as well. The benefit of distancing itself from those who cannot afford the information may well be outweighed by the cost of access. And precisely to the extent that this cost is lowered, the positional advantage afforded by the innovation dissipates. In other words, PEI creates inequity when it first arises, and inefficiency as it becomes more universally accessible.

In this article, I will examine the rise of PPEI in several areas of positional competition, ranging from test-preparation courses to luxury brands. I will then examine how the laws of copyright and trademark (respectively) incentivize innovation–and thereby PPEI–in each area. After critiquing these trends, I will try to show ways in which the law can avoid motivating the production of PPEI. Given the negative social consequences of PPEI, efficiency and equity–rather than innovation per se–should be the guiding goals of intellectual property policy. Since PPEI is often intertwined with other, more socially useful forms of competition, legal responses to it must be carefully tailored.

The argument proceeds as follows. Part II examines the rise of positionality as a concern within economics and philosophy. Though positional analyses animate both Thorstein Veblen’s economic sociology and Fred Hirsch’s economics of sustainability, positionality has only been rigorously modeled economically in the 1980s in the pathbreaking work of Robert Frank. Frank’s ideas entered the legal academy in the work of Richard McAdams and Cass Sunstein in the 1990’s. While McAdams addressed social norm theory, and Sunstein cost-benefit analysis, this article attempts to apply positional analysis to innovation law. This article also proposes an expansion of the repertoire of legal responses to positionality beyond the adjustments to BCA proposed by Frank and Sunstein and the taxation focused on by McAdams.

Positional concerns have met some resistance in the legal academy. Both Viscusi and Besharov have objected to Sunstein’s application of positionality theory to cost-benefit analysis. Outside the legal academy, economic analysts Tyler Cowen and Virginia Postrel have tried to preempt any application of positional analysis to cultural policy. Though these criticisms are diverse, they share a common structure: the social criticism of positional dynamics unfairly minimizes the social benefits arising out of positional competition (the “relative valuation” critique). This article sidesteps the relative valuation critique by connecting the economic analysis of positionality to a) a philosophical critique of the commodification of advantage (unfair competition) and b) an evolutionary analysis of wasteful competition.

Unfair Competition (Part III): Michael Walzer’s analysis of commodification in Spheres of Justice provides a firmer normative foundation for extant economic critiques of positional competition in education. Walzer develops an “open ended distributive principle,” whereby “No social good x should be distributed to men and women who possess some other good y merely because they possess y and without regard to the meaning of x.” In the case of education, there is an ongoing debate over the exact criteria of merit that should govern the distribution of admissions slots at colleges and professional schools. However, there should be consensus that using money to get “inside information” about the best ways to package an application (via private educational consulting services) is a troubling development. Moreover, the law should try to ameliorate the differential access of poor and rich to courses designed to prepare them for the SAT, LSAT, and other pivotal tests. After exploring South Korea’s abortive efforts to ban positional competition in such areas in the 1990s, Part III will examine some less controversial methods of leveling the playing field. The malleable “idea/expression” and “fair use” doctrines of copyright law might privilege wider dissemination of the materials at the core of test-preparation courses. Moreover, government may use its newly affirmed powers in FAIR v. Rumsfeld to require most admissions offices to require applicants to disclose any use of private educational consulting and test preparation services in the admissions process.

Wasteful Competition (Part IV): After basic needs for food and shelter have been met, most individuals in advanced industrial economies can focus consumption and effort on a variety of satisfactions and aspirations. Few of these decisions are made in isolation from an awareness of their future consequences. In particular, decisions about what and where to study (at critical junctures in a student’s life) and what to wear and display (in any number of careers and lives) have far-reaching implications. Any particular personal decision has value not merely for the individual making, but also in light of the uncoordinated choices of thousands of others consumers.

While economists usually model personal preferences as independent of the preferences of others, relative preferences for status or regard exist only in the context of some hierarchical scale. Such preferences give rise to the phenomenon of the “positional good,” “whose value depends in significant part on how it compares with goods in the same class consumed by others.” For example, one might buy a custom-made suit for a job interview, not merely in order to look good (an objective good), but to look better than other applicants (a positional good).

The aspiration to position can have pernicious social consequences, since it is a classic example of a zero-sum game: one can only rise in position if others fall. As Frank and Sunstein have observed, “In many contexts, consumers find themselves on a positional treadmill, in which their choices do not really make them happier or better off, but instead serve largely to keep them in the same spot in the hierarchy.” For example, if one applicant buys a designer suit before an interview, he may well look better than all the other applicants; but if all applicants do the same, no one gains any advantage, and each is out the cost of the suit. In Part A below, I explore Frank’s account of positionality and show how this “suit example” generalizes to the consumption of many luxury brands.

Of course, the aesthetically sensitive may prefer a world of Armani-, Prada-, and Marc Jacobs-clad applicants. An intriguing philosophical literature in turn problematizes such skeptics’ expensive tastes, branding them less an expression of style than a prerogative of privilege (or a badge of waste). Section B attempts to adjudicate this conflict, both conceding the pervasiveness and potential good effects of positional dynamics and concluding that tailored legal interventions can diminish wasteful competition based on them. In the context of luxury brands, the key question is how to diminish trademark’s inducement of wasteful competition from its capacity to reward aesthetic innovation.

In Section C, I focus on a few strategies. First, there should be laxer enforcement against “Canal Street,” the unauthorized vendors of cheap goods that imitate the trade dress (and trademarks) of established luxury brands, so long as consumers are aware that they are getting imitation products. Wealthy consumers have ample means of using secondary authentication technology to assure that they are getting “the real thing.” Second, I argue that positional competition is another reason for diminishing the scope of trademark protection, particularly in light of growing calls for European-style “design protections” in the U.S. While optimists like Virginia Postrel see the “rise of aesthetic value” in a “designed world” of beautiful toilet brushes and potato peelers, skeptics aware of positional effects see an expanding imperative to “keep up appearances” that produces little social value. This latter, dimmer view of the expanding province of design needs to balance IP policy makers’ frequent celebrations of a “creative class.”

Conclusion: Economists have explored how competitive dynamics in a number of “brick and mortar” markets (including housing, test preparation, and automobiles) have led to socially wasteful “arms races” for positional advantage. The dangers of positional competition are potentially even greater in the “weightless economy” of IP. In ordinary markets, the presence of high-spending consumers will draw more producers so that, eventually, supply will approach demand. However, intellectual property laws confer monopolies, which can be indefinite (like properly maintained trademarks) or nearly so (as ever-lengthening copyright terms cover works for at least 70, and often over 100, years). When there are no close substitutes for a copyrighted work, and it plays an important role in positional competition, auction dynamics can easily ensue, crowding out the disadvantaged (or spurring many to wasteful efforts to maintain relative position).

Courts need to be particularly sensitive to positional externalities in competitive contexts, and to relax IP protections accordingly. Such concerns are particularly salient in law, a hierarchical and competitive field which has already been studied in the positional economics literature. Positional externalities are likely to arise all the way from students’ entry into the legal field (where the copyrighted LSAT, and LSAT-prep courses have extraordinarily important gatekeeping roles) to the conclusion of legal cases (whose results may only be effectively accessed via proprietary databases inaccessible to those with little money).

Once we acknowledge PPEI, we have a range of legal strategies to address it. In the case of unfair competition, we can “level up” information like test preparation materials by loosening the IP protections that are a pivotal part of exclusion strategies. We can also “level down” by forcing disclosure of the use of services like admissions packaging. In the case of wasteful competition, leveling up via looser IP protections is also an option, expanding access to “stylish appearance.” We can also level down with bans on certain particularly pernicious forms of appearance competition. The usual “social cost” of looser IP protections is “less incentive for innovation.” But in the case of PPEI, we may not want more innovation–or at least not as much innovation as we want from more intrinsically valuable sectors of the economy.