Profiting from innovations in digital information goods: the role of intellectual property rights

Advances in digital technology have substantially reduced the costs of reproducing and distributing digital information goods such as computer programs and games, documents, and works of music. Yet while abuses of intellectual property rights are difficult to trace, and infringement suits are expensive and uncertain to prosecute, innovation in these goods has continued unabated. This paper asks: How do firms appropriate the rents from their investments in R&D in digital information goods? To a certain extent, developments in digital technology fundamentally challenge commonly accepted precepts of how firms profit from investments in R&D. Yet software firms have made extensive use of traditional intellectual property rights like patents, copyrights, and trademarks. They have also adopted other approaches to appropriability, including cooperation with academic researchers, first-mover advantages, technical methods to restrict access such as encryption, cross-subsidization, price differentiation, and exploiting network externalities. Given the complexity of appropriating the rents from digital information goods, how effective are the different approaches, and what is the role of intellectual property rights?