Markets fail for four reasons
1. Abuse of market power – having market power is not a problem, the problem is abusing it. It is abused through monopolies and monopsonies, a monopolist is a single provider of a service for example KBS TV in the 70’s while a monopsony is a single consumer. In Kenya when one wants to use software, they buy it from Microsoft so this is a Monopoly. It has been argued that Microsoft has been abusing its Monopoly power. When it got into the market it was giving windows explorer for free so as to kill Netscape Navigator, they killed navigator through bundling ( putting many products together so that to use one you need the other)
2. Asymmetrical information – one party to a transaction has more party than the other party. In IP and computer products, the supplier is likely to have more information than the buyer e.g. the software seller is likely to know more about the software than the buyer. In second-hand markets, this also happens a lot. For example the seller of a second hand car is likely to know more about the car. Need to create property rights to correct this anomaly.
3. Negative Externalities: the opposite of this is the Network Effect: It has been argued that whenever an individual cannot internalise certain costs, they are not going to internalise the cost unless there is a tax or penalty. There will be a moral hazard. In 1980s – 90s WM/IMF there was the argument that education, health service should be cost based, education should not be free because people are not likely to internalise the cost, they will abuse it.
Novels are good places from which one can do character merchandising e.g. Harry Porter – one can merchandise Harry.
Characteristics of “Network Effect” – examples tv programs and novels
Public goods problems:
If the cost of producing an extra unit of a product is limited. Book publishing- Aminata – Prof Imbuga – for Prof to publish Aminata he has to start with Research about the cultural practices. He has to spend time on writing the book
The book has to be edited, printed, Published, Advertised or promoted and distributed to bookshops
The processes are costly and time consuming,
This work can be destroyed by a counterfeiter who does not need to go through all the processes that the author has gone through. Where the book has a captive market, the counterfeiter does not pay any royalties.. this is the problem of freeloading.
Freeloading is a problem because the extra cost of producing of an IP product is costly. Stop free riding be a fair follower. The phenomenon of non-exclusive – if there is a tv program showing , it is difficult to exclude others from watching. It is non-rivalous and non-excluding, if you light your cigarette from mine, I don’t lose and you benefit. Theory by Yochai Benkler
Once an article of a public good is created, it is non-rivalous – it is non-exclusive. Because of that once a product is created it becomes much cheaper to reproduce, e.g. publishing Aminata, counterfeiters come to cash in. Problem of IP first copy difficult to produce but you cannot exclude others from enjoying it. There are two approaches to IP