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Circulation Title: An Information Framework for the Planning and
                   Design of "Information Highways"

                          Dr. W. Curtiss Priest
             Center for Information, Technology, and Society
                           466 Pleasant Street
                            Melrose, MA  02176
                               617-662-4044
                           BMSLIB@MITVMA.MIT.EDU

NOTE: This is a seminal work for the design of the National
      Information Infrastructure (NII).  Contained in the
      14 characteristics of information are the seeds of how
      to build better information systems.  In particular,
      the 8 characteristics related to market failure provide
      the rational for non-profit and government involvement.

      Contact us if you are interested in supporting or partic-
      pating further development of this work.

NOTE: Report has been converted to ASCII.  Underlining of text
      has been removed and subscript/superscript are indicated
      by >text< and <text>, respectively.




                      THE CHARACTER OF INFORMATION:
                      Characteristics and Properties
               of Information Related to Issues Concerning
                          Intellectual Property

                            February 10, 1985
               (Revised September 2, 1985, October 1, 1994)

            In Support of the Office of Technology Assessment
                     Project on Intellectual Property
                           Contract 533-1510.0

       (c) Center for Information, Technology & Society, 1985, 1994

      Parts may be copied in derivative works with full attribution
      under the Doctrine of Fair Use.

                                 Author:

                         W. Curtiss Priest, Ph.D.
Submitted to:

Congress of the United States
Office of Technology Assessment
Washington, DC  20510








                      The Character of Information:
                      Characteristics and Properties
               of Information Related to Issues Concerning
                          Intellectual Property


                            Table of Contents

                                                                    Page

1.  An Operational Definition of Information                         1
        1.1  The Function of Information in Achieving Outcomes       1
        1.2  Information as Intellectual Property                    3
        1.3  Conclusion                                              5

2.  Characteristics and Properties of Information
    in Commerce and Transactions                                     6
        2.1  Market Related Characteristics of Information as        6
             a Commodity
                2.1.1  Intrinsic Co-production                       6
                2.1.2  Time Constrained Consumption of Information   7
                2.1.3  High Investment to Reproduction Cost Ratios
                       for Information                               7
                2.1.4  Relevance of Information More Variable
                       Across Consumers                              8
        2.2  Market-failure Related Characteristics of Information  10
                2.2.1  Public Good Characteristics                  11
                        2.1.1.1  Inappropriability                  12
                        2.1.1.2  Non-depletability                  13
                2.2.2  Externalities                                13
                2.2.3  Indivisibilities (of supply)                 15
                2.2.4  Economies of Scale and Scope                 16
                2.2.5  Inherent Uncertainty and Risk in Information
                       Production                                   17
                2.2.6  Information/Knowledge About the Information  19
                2.2.7  Intangibility                                19
                2.2.8  Transaction Costs and Information            21







                                                                    Page

        2.3  Non-market Related Characteristics of Information      23
                2.3.1  High Intrinsic Relationship to Human Welfare 24
                2.3.2  High Intrinsic Relationship to Freedom and
                       Privacy                                      26

3.  Relationship of Information to Products and Services            28

4.  Rewards, Incentives, and Funding Sources for the
    Creation of Intellectual Property                               36
        4.1  Rewards, Incentives, and Funding for Science           36
        4.2  Rewards, Incentives, and Funding for Culture           39
        4.3  Rewards, Incentives, and Funding for Products
             and Services                                           40

5.  Structural Role of Intellectual Property in Maintaining a
    Viable Economy                                                  43

6.  Summary                                                         45

Appendix A - Bibliography                                           46






                            EXECUTIVE SUMMARY


        To comment on issues concerning intellectual property it is useful
to identify what distinguishes information from other forms of property.
Fourteen distinguishing characteristics of information are identified and
discussed in relation to property rights.
        These characteristics, however, are not only useful for
considering issues concerning intellectual property but for more generally
inquiring into the nature and purpose of information in society.
Summarized below are brief definitions of the fourteen characteristics and
introductory remarks about the general importance of the distinguishing
characteristic.

Definitions and Introduction to Fourteen
Characteristics of Information

As a Commodity:

 1.  Intrinsic Co-production
        The character of information to be instrumental in achieving other
        goods and outcomes.  This character makes information inherently
        more valuable than goods that are not instrumental in character.

 2.  Time Constrained Consumption
        The character of information to occupy more consumer time per
        dollar expenditure than other commodities.  This characteristic
        combined with the relatively low reproduction cost characteristic
        (3) has long run employment implications.

 3.  High Investment to Reproduction Cost Ratios
        The creation costs of information divided by the cost of
        reporducing one unit of the good.  The implications of this
        characteristic are economies of scale and scope, and resulting
        market structure.

 4.  Relevance, More Variable Across Consumers
        The character of particular information be be acquired usually
        only once.  The results is high variability in consumption by each
        consumer.  This characteristic tends to work in the opposite
        direction of low reproduction costs, since it implies that
        information will become more and more customized and
        particularlized.

Market-failure Related Characteristics:

 5.  Public Good
        The same information can be used by many consumers without
        interference.





        Inappropriability
                The difficulty in receiving full market compensation for
                the creation of infor mation due to the problem of
                exclusion.  The result is under-production and
                under-compensation.

        Non-depletability
                Information does not dissipate with use.  Producers must
                compete with past producers but society benefits with an
                accumulation of knowledge.
        Goods with substantial public good characteristics such as
        national defense,  recreational parks, and safety facilities such
        as lighthouses are usually supplied by the government to reduce
        the "free rider problem" associated with inappropriability.

 6.  Externalities
        The effects of information, usually positive, that are not
        accounted for in its price.  The effects of information,
        especially as education, have considerable positive externalities
        in terms of reducing unemployment and increasing general social
        welfare.

 7.  Indivisibilities (of supply)
        Information must be purchased in lumps; these lumps may be vastly
        greater than the information actually sought.  This characteristic
        along with the variable relevance characteristic will contribute
        to utilization of information technology that reduce
        indivisibilities and permit customization.

 8.  Economies of Scale and Scope
        1)  Decreasing unit costs when the scale of operation is
        increased; and 2) decreasing costs associated with joint
        production.
        Historically, information distribution such as telegraph,
        telephone, radio, and television have exhibited sufficient
        economies of scale and scope as to require government regulation
        to reduce problems associated with natural monopolies.

 9.  Uncertainty and Risk in Production
        The inability of firms to produce information when risks and
        uncertainties are present.  A problem, in particular, in the
        generation of basic knowledge that requires substantial investment
        in research.

10.  Information/Knowledge
        Information about information is less likely to be available
        because of appropriability problems.  This leads to
        under-consumption of information due to problems of search.





11.  Intangibility
        The character of the value of some information to be
        non-monetizable.  Information is the basis of education,
        communication, and other activities which are difficult to value
        because the contribution of these activities to the welfare of
        society is largely intangible.

12.  Transaction Costs
        The additional costs incurred by the producer in appropriating the
        value of information.  [Transaction costs, in the economic sense,
        are those costs associated with negotiation, contracting, and
        enforcement, and does not refer to the the general costs related
        to distributing or transmitting information.]  Transaction costs
        are a major contribution to indivisibilities in the supply of
        information since contracting and enforcement costs are difficult
        to reduce below a certain minimum.

Non-market Related Characteristics:

13.  Intrinsic Relationship to Human Welfare
        Human welfare is a product of individuals and groups achieving
        desired outcomes.  Thus, information is intrinsically related to
        human welfare in that it inherently facilitates the achievement of
        outcomes.

14.  Intrinsic Relationship to Freedom and Privacy
        Freedom -- Information affects the range of choices available to
        the individual.  Freedom is a lack of restriction on choices.
        Thus information leads to greater freedom.

        Privacy -- Incomplete information may result in defamation of
        character.  Therefore, information must be selectively made
        private to reduce the probability of defamation.








                       The Character of Information
                      Characteristics and Properties
               of Information Related to Issues Concerning
                          Intellectual Property


1.  An Operational Definition of Information

        The common-use definition of information refers to the act of
informing or the condition of being informed.  But how can we really judge
if some arrangement of bits, words, etc. really does inform?  To answer
that we should look at what it means to inform -- we should see what is
different about a person after information has been communicated to him or
her.
1.1  The Function of Information in Achieving Outcomes
        As the section title implies, it is useful to think in terms of
the function of information to define it.  Indeed, the common-use
definition states a function -- "the act of informing."  Once "informed",
what is different about the person?  The choices that a person might make
are different.  For example, if I inform a shopkeeper that it may rain,
the shopkeeper may choose to cover-up outside merchandise or may choose to
close the shop's windows.  By informing the shopkeeper I have provided
"... a basis for choice -- that is, a belief in the greater efficiency of
one choice compared to another" (Ackoff, 1972, p. 153).  The concept of
"efficiency" is a very key one.  It is tied with a fundamental purpose of
information and human activity.
        Nearly all human activity is directed toward achieving outcomes.
Outcomes include getting to the bank on time, relaxing, getting an A in a
course, and cheering a friend.  These outcomes can be achieved with more
or less efficiency.  Now there are two basic attributes about a person
that affect the efficiency of achieving an outcome -- 1)  The ability to
choose among alternative ways of achieving the outcome, and 2)  The
capability to make sure the choice succeeds.  Returning to the shopkeeper,
the outcome is keeping rain off the merchandise.  Informing the shopkeeper
of the possibility of rain changes his choices -- he can now know to
protect the merchandise before it rains.  But having chosen to, say, cover
an outside table with plastic, his capability to keep the plastic in place
(using lead weights or whatever) also determines the efficiency of
achieving the outcome.  For if the plastic were to blow away the
efficiency of protecting the outside merchandise has gone to zero.  If
information affects the basis for choice, what affects the capability of
ensuring success?  Success comes from practice, instruction, and other
activities that affect capability.<*>

---------------------
<*> In accounting for the shopkeeper's actions we said, as a result of the
information about rain, he could now "know" to protect the merchandise.
The literature on information often refers to the related term knowledge.
Indeed, Macklup's general term in his writings is the word knowledge
rather than the word information (Macklup; 1962, 1980, 1984).  Also,
Lamberton's anthology of writings was on "economics of information and
knowledge" (Boulding, 1971, etc.).  With the concepts introduced so far we
can relate information and knowledge.
A person's "degree of knowledge" is his efficiency in achieving an outcome
by making choices -- i.e. his ability to make good choices.  Information
-- by informing the person of possible choices and their relative
potential for achieving outcomes -- improves a person's degree of
knowledge (cf. Ackoff, 1972, p. 48).
                                   -2-




        Thus the fundamental function of information in human activity is
to affect the efficiency of achieving outcomes.  The effect need not
always be positive for if I am poorly informed, I will make less efficient
choices and my efficiency will decline.
        By defining information in terms of outcomes, the value of
information follows immediately.  Take the expected value (EV) related to
achieving an outcome -- this is the sum of the probability of each
particular choice, times the efficiency of each choice, times the relative
value of the outcome (cf. 2.3 for relative value).  Considering the
expected value (EV>1<) without the information and the expected value
(EV>2<) with the information, the value of the information (EV<i>) is:
                   EV>i< = EV>2< - EV>1<
In economic terms, EV>i< = P (price), but only:
      1)  When there are no market imperfections, and
      2)  For those consumers where the marginal utility (the utility of
          the last unit) equals the market price.
        Examples of where the price is not a proxy for value include
situations where the information provides benefits to other than the
purchaser (a positive externality) or where the purchaser would have paid
more than the market price.  In the latter case, with no market
imperfections, we know that the value to the purchaser is at least the
market price and we could attempt to use a "willingness-to-pay" measure
(how much the person says or indicates he might pay) for the information
as a better proxy for its value (cf. discussion in 3).
        This choice based approach to the value of information differs
from Machlup's approach where he uses the opportunity cost of the
productive factors as a shadow price for the value of information
(Machlup, 1980, p. 208).  The approach is more like Hall's -- "[the] value
of a specific message is equal to the utility gained from shifting to a
better choice among terminal actions" (Hall, 1981, p. 161) and Taylor's
description of information value in decision contexts (Taylor, 1985).
        We can now define information as:
          Information: A communication that produces a change in the
          tendencies to choose certain actions over other actions
          (where a change in tendency can be observed by noting
          changes in the probabilities of choice). (cf. Ackoff, 1972,
          p. 144).

        Mackaay (1982, p. 107) states, "[i]nformation is the essential
ingredient in choice..."  Cherry (1966, p. 170) states, "Information can
be received only where there is doubt; and doubt implies the existence of
alternatives -- where choice, selection, and discrimination is called
for."
        At the recent Elsevier Symposium on Information Policy and
Scientific Research, Manten and Timman examine "external" and "internal"
definitions of information.  An external definition of information
presented by Vinken (Manten & Timman, 1983, p. 154) defines information as
something someone is willing to pay for.  Internal definitions of
information are typically: "Information consists of data, that change the
world view of the receiver" (Manten & Timman, 1983, p. 7).  The internal
definition is rejected because "it is impossible to say which data are
information and which are not."
                                   -3-



        The above definition, however, is not an internal definition but a
different and more fundamental external definition.  The problem with the
strictly economic external definition is that it excludes all information
for which pecuniary (monetary) measures are inapplicable and all
information which a person wouldn't pay for.  For example, if I inform my
daughter that she must stay in at night, I doubt she would pay me for that
information.  Manten & Timman, similarly, reject the external economic
definition.
         We can also define communication as:

          Communication: A message between sender and receiver that
          affects  1) the choices of the receiver (information, as
          above), 2) capabilities of the receiver (instruction),
          and/or 3) affects the receiver's values (motivation).<*>


1.2  Information as Intellectual Property
        To what extent is intellectual property a piece of information?
We should investigate some particular forms of intellectual property and
see how they meet the definition.  Some forms are:
        An invention -- An invention is the embodiment of many new
        choices.  The invention combines parts and processes in new
        combinations to produce the desired effect.  A description of the
        invention, such as a patent, or the invention itself in practice
        is informing since it conveys to others how a desired effect can
        be attained with new choices or different combinations of choices.
        For example, to create a letter printer, the invention may relate
        to spraying ink rather than transfering ink by impact.  (The idea
        of spraying ink, per se, cannot be patented, rather the embodiment
        of the idea in a specified set of choices for making the printer
        is what is patentable.)  Thus, invention clearly is information.

        A song -- The music and score are copyrightable under law.  Songs
        can evoke past feelings and evoke new feelings by providing a
        vicarious experience and stirring empathy as well.  They can be
        symbols and images to identify with and emulate.  A sense of
        catharsis is common as difficult situations are experienced
        at-a-distance.


---------------------
<*> This, like the definition of information, is an "idealized"
definition.  We determine whether communication took place by whether
behavior changes.  The difficulty in actually observing changes is a
secondary issue.  Also, communication may have occurred but not resulted
in an observable behavior change.  This is also a secondary issue since we
could construct a situation for the individual to test for changes in
choices that would reveal whether communication took place.  The advantage
of the approach is that it distinguishes between communication and noise
-- if a message is heard but does not result in behavioral change the
message was noise rather than communication.  Similarly, a message is said
to contain information only if there are resulting changes in choices,
otherwise there was no information, only noise.
A message is a set of one or more signs intended by its producer to
produce a response in the receiver (where a sign is anything that is a
potential producer of a response to something other than itself).
                                       -4-



        Since much of the effect of a song is affective (affecting
        feelings) the relationship among feelings, outcomes, and
        information should be identified.  A feeling is the sense of
        satisfaction or dissatisfaction associated with a particular
        outcome or potential outcome.  For example, the feeling of anxiety
        is a sense of dissatisfaction with the uncertainty of a potential
        positive outcome.  (If I sense that the actions of a co-worker
        will jeopardize my getting a promotion, I will feel anxious about
        my job.)  Thus, feeling is an evaluation associated with an
        outcome (cf. Ackoff, 1972, p. 100).
        A song provides the listener with a synthesized experience that
        temporarily replaces (or becomes) "reality."  The experience can
        be mainly vicarious, mainly empathetic, or both.  If it is
        vicarious, the experience substitutes for one's own; if it is one
        of empathy, the experience becomes like a close relationship to
        another.  There are two behavioral effects of these experiences 1)
        The positive and negative feelings can be "consumed", for example,
        a stirring piece of music can evoke exhilaration and that can
        simply be felt, and 2)  The feelings evoked can influence future
        choices.  Feelings influence choices mainly by becoming attitudes.
        For example, marching music can be used to build up strong
        attitudes of nationalism.  A strong nationalistic attitude will
        then result in loyalty to country and other forms of patriotism.
        Thus a song is partly information but not obviously so.  A song,
        by creating synthesized experiences, creates feelings and
        attitudes that influence choices to achieve outcomes and is,
        therefore, by definition information.  Songs also are motivational
        (i.e. produce changes in a person's values) and are consumptive
        goods -- to be enjoyed for the immediate sensate.

        A Textbook -- Textbooks are subject to copyright.  The material in
        the textbook directly changes the reader's available choices
        through the knowledge that it brings the reader.  For example, if
        the reader needs to show a correlation between crop growth and
        rainfall there are varying degrees of efficiency he can achieve in
        obtaining the outcome -- a statement of the correlation.  He might
        have no notion about how to go about making this statement.  A
        textbook on statistics would provide information about the
        technique of regression analysis and the R<2> term that expresses
        correlation as a number from 0 to 1.  With this new information,
        the reader would choose that analysis and his efficiency would
        significantly increase.  (His capability may still be low and
        require practice and instruction to be very efficient in achieving
        a correct outcome.)
        Thus, a textbook squarely fits the definition of information.

        In summary, while most intellectual property is mainly
information, there are exceptions.  In particular, music, movies, and
similar products that create synthesized experiences are part
informational, part motivational, and part consumptive.  Further, the
proportion of these three components depends on the response of the viewer
or listener.
                                   -5-



        What remains is the question of what is it that intellectual
property rights are really given for.  As technology continues to change
the medium of expression, it is important to distill what is fundamentally
being protected by patent law, copyright law, etc.
        It is commonly stated that what is being protected are not these
ideas but the form of expression.  While this loosely pins things down, it
is too vague to apply to many new situations resulting from technological
change.  Let us consider the textbook again.
        Paul Samuelson's Economics is an excellent textbook.  Why do I say
that?  Because it is comprehensible, anticipatory, progresses logically,
is well illustrated, and is comprehensive.  These features make it easier
for me to improve my knowledge.  This comes back to a notion of
efficiency.
        As indicated above, what makes information valuable is how it
changes  my efficiency in achieving an outcome.  Thus, what is valuable
about a piece of intellectual property is how effective it is in changing
my efficiency.  The list of positive features on Samuelson's textbook all
relate to how effective it is in changing my efficiency.  It is this
aspect of the work that is unique and can be protected.
        As a short cut, however, copyright protects the work by preventing
copying.  Of course, a good copy would have the same efficiency
characteristics as the original, and by preventing copying the work is
"protected."  Can we, however, generalize the notion of efficiency to get
a more fundamental protection approach?  Particularly when "bits and
pieces" of various works can be combined on wordprocessors, in film
editors, etc. problems of copyright and royalties become difficult.
        To accomplish this, the concept of efficiency would have to be
generalized to include not only information but motivation and consumption
so we can account for synthesized experiences.  With these in place, we
could deal with issues of imitations, replicas, and partial copies.  As a
guide, it would be useful to compare court decisions on copyright and
patent infringement with the evolving theory.
1.3  Conclusion
        The definition of information permits us to identify the extent
that information is embodied in intellectual property.  The value of
information follows readily from the definition.  The definition, by tying
messages to outcomes, is not suceptible to the problems associated with
definitions of information that are defined in terms of bits.  The
definition is also a reasonable extention of the common use meaning of the
word.

_______________________________________________________________________________
|               W. Curtiss Priest, Ph.D.             *********************** |
|      Center for Information, Technology, & Society *  Improving humanity * |
|                                                    *  through technology * |
|                  466 Pleasant Street               *********************** |
|                Melrose, MA  02176-4522                                     |
|                  Voice: 617-662-4044     Gopher to our publications:       |
|                   Fax: 617-662-6882      GOPHER.STD.COM (under nonprofits) |
_____________________________________________________________________________|
                                   -6-




2.  Characteristics and Properties of Information
    in Commerce and Transactions

        Information in commerce has different characteristics from most
economic commodities.  In a society whose commerce is based increasingly
on buying and selling information these characteristics will have
increasing significance.  Also, there are inherent characteristics of
information that relate to non-economic transactions such as the role of
information in maintaining human relationships.  Fourteen different
characteristics of information are identified and their implications to
commerce, transactions, and intellectual property are described.
        The characteristics are grouped in three categories.  The first
category, "market related," pertains to commodity characteristics that set
information apart from other goods in market activities.  The second
category, "market-failure related," pertains to characteristics of
information as a commodity that cause markets to behave inefficiently (or
not at all).  The third category, "non-market related," pertains to
characteristics of information in non-economic transactions -- primarily
those comprised of human relationships.
2.1  Market Related Characteristics of Information as a Commodity
        Drawing on the definition of information in Section 1, information
as a commodity can be examined.  Fundamentally, producers of information
are in the business of increasing the efficiency of choices made by the
purchaser of information.  Their products are the instruments by which the
purchasers increase their efficiency by "consuming" the product.
2.1.1  Characteristic I -- Intrinsic Co-production
        Information is not typically the object of consumption as are
apples, coal or umbrellas.  In contrast, information has an instrumental
value -- it aids in attaining desired outcomes.  We thus refer to
information as an intrinsic co-producer.  Information inherently is a
co-producer of outcomes.  New information works in tandem with the
knowledge already possessed by the person and with the capabilities of the
person to achieve outcomes.  The same applies to groups, families, firms,
and other organizations.
        There are many classes of commodities that are co-producers.
While we do consume pencils as they wear down, the pencil is a co-producer
of the written word.  Cosmetics are co-producers of romance and cars are
co-producers of transportation.  But all of these co-producers are
dissipated as we use them.  Perhaps the closest parallel to information is
the chemical catalyst.  The catalyst is not consumed in the reaction and
yet accelerates the process.  But even most catalysts become contaminated
after a while and need to be replaced.
        Some writers have termed information a resource (Levitan; 1980,
1982, Cleveland, 1982).  A resource is something that can be drawn on for
help.  Most resources are depleted with use -- oil, iron ore, etc.  A
non-depletable resource such as solar power is a closer analogy to
information.
        Cleveland (1982, p. 36.) describes two characteristics of
information that are directly related to intrinsic co-production.
Cleveland refers to the "expandability" of information.  "[I]nformation
expands as it is used."  Information is co-productive of more information
-- knowledge builds upon existing knowledge and news often repackages
                                   -7-



older information with newer information.  The proliferation of
information has been referred to as the information explosion and has
resulted in "information overload."  Indeed, the production of information
for information's sake is not necessarily co-productive of other desired
outcomes.  Thus there is a need to manage information to keep it relevant
and make it efficiently co-productive.
        Secondly, Cleveland refers to the substitutability of information
(Cleveland, 1982, p. 37).  "It can replace capital, labor, or physical
materials."  This primarily emphasizes the co-productive capacity of
information through invention.  As information contributes to the
transformation and automation of manufacturing, capital will further
substitute for labor.  To refer to this as information replacing labor is
perhaps euphemistic.
        In summary, we can define the intrinsic co-productive capacity of
information as:
          Intrinsic Co-production -- The character of information to
          be instrumental in achieving other goods and outcomes.  This
          character makes information inherently valuable.

        Since information is inherently valuable it is significant whether
the information can be held as property.  Property rights will enable the
owner to gain some return from its creation (cf. 2.1.1.1 --
Appropriability).
2.1.2  Time Constrained Consumption of Information
        For a message to be information it must affect the choices of an
individual (see def. Section 1.)  To affect choices, the receiver must
take time to assimulate the information.  This process involves reception,
memorization, thinking, and reflecting.  (Even the process of synthesized
experiences, such as watching a movie, takes considerable time.)
        In relation to many other goods, more consumer time is occupied by
information than most other goods per dollar of expenditure.  For example,
$2.00 of beef can be consumed in ten minutes while a $2.00 movie can last
two hours (and $2.00 of basic cable service can occupy days of time).
        The economic significance of this characteristic of information
has not been specifically studied.  In general, it would operate to reduce
the demand for information.  Reduced demand would work against the
potential for economies of scale (cf. 2.1.4).
        In summary, we can define the time-constrained consumption of
information as:
          Time-Constrained Consumption -- The character of information
          to occupy more consumer time per dollar expenditure than
          other commodities.

        Reduced demand would result in reduced prices, making the value of
information as property less valuable to its owner.
2.1.3  High Investment to Reproduction Cost Ratios for Information
        The initial costs for creating information are high relative to
the costs of reproduction.  This contrasts sharply to most other goods
where the production of multiple units of a good require considerable
factor inputs of capital, labor, and materials.
                                   -8-



        Returning to the definition of information, the reason for this
large difference relates to the necessary facilities needed to affect the
choices in behavior.  The informing process is mainly one of
communication.  Communication primarily consists of transferring audio and
visual images.  For the written word printed paper is quite effective and
very low in cost.  For motion picture images, the VCR cassette is less
than $5.00 plus recording or pre-recording costs.
        Equipment for accessing information such as VCR's, television
monitors, computer terminals, and communication lines are not low in cost.
If one amortizes the costs of these devices over the media costs, the
reproduction costs are noticeably higher for some types of information.
For example, the cost of a basic VCR over five years would be around $700
including maintenance and the cost of capital.  Allocated over a film
library (and rentals) of 200 tapes, this would add another $3.50 per tape.
While appreciable, the additional cost is not large.
        The literature abounds with accounts of dropping prices for
terminals, minicomputers, and other hardware.  Though this is not expected
to continue to drop as steeply in future years, even the costs of the more
expensive devices will probably not swamp the situation.  Nonetheless,
there is still considerable room for improvement in picture resolution,
3-dimensional display, and the instant accessibility of large quantities
of information.  The question remains, how much more effective would the
communication be with these types of enhancements and what will be the
costs of these improvements?
        High investment costs put pressure on the industries to search for
the means to reduce these costs.  The development of information is labor
intensive.  Some film footage can cost $2000 a second to produce.  Because
of the skill and intellect required to produce information, these costs
are not likely to drop soon.  Thus the investment/reproduction ratio is
likely to remain high.
        In summary, we can define the investment to reproduction cost
ratio of information as:
          Investment/Reproduction Cost -- The creation costs of
          information divided by the cost of reproducing one unit of
          the good.

        The implications to issues of intellectual property are important
and one of the main problems today.  Since investment costs are high and
it is so relatively costless to reproduce the product, it is extremely
important to protect the owners of the investment (cf. 2.1.1.1 --
Appropriability).
2.1.4  Relevance of Information More Variable Across Consumers
        There are various factors that determine the relevance of a good
to a consumer.  The most common factor is the consumer's preferences (or
values).  Consumer goods that are purchased out of preference are
generally consumed again and again.  Further, while many goods are
slightly differentiated by styling, the demand for many basic goods is
consistent across consumers.  Combs, pencils, shovels, lumber, etc. are
demanded consistently by many consumers.
        Information, by contrast, is peculiarly different.  The basic
goods of information, such as the alphabet, vocabulary, etc. need only be
consumed "once."  The consumer does not generally go back for a second
helping of learning arithmetic.  He does go on to learning more
                                   -9-



arithmetic.  Thus at any time, each consumer of information has a stock of
knowledge that he or she is adding to and makes selections for more
information based on an assessment of what further information is useful.
Only when "memory fails" might the consumer go back and then usually to a
familiar reference already on the shelf.
        The "synthesized experiences" (cf. Section 1), if they are
consumed again and again (like seeing a movie many times), become less and
less information each time and more a simple consumptive good like food.
        Thus, a second factor that determines the relevance of a good is
its utility in building up a stock of knowledge.  If the person reads
something that is completely redundant to what he or she already knows,
the material is not information at all -- for there will be no changes in
the future choices of the individual as a result of the message.  If the
person persists in re-reading it we can only assume there is a consumptive
value in doing so.
        This characteristic of relevancy produces high variability in the
"consumption" of information as a commodity.  What I require for
information today I will probably not require tomorrow.  Only if we look
at information in the aggregate, over time, does its variability
substantially decrease.  Everyone will learn the alphabet at some time;
everyone will probably read Romeo and Juliet.
        In summary, we can define the variable-relevance of information
as:
          Variable-relevance -- The character of particular
          information to be acquired usually only once.  The result is
          high variability in consumption by each consumer.

        The implication of this to property is striking.  Basically a
producer of information gets "one shot" at his consumer.  The market
segments for information as a commodity are much more tightly drawn than
for other goods.  The success of a "reader" for five year-olds is very
dependent on previous learning environments and the age-group.
        But because of the variability in prior information, it encourages
product differentiation -- information can be packaged and repackaged to
fit the particular circumstance of the consumer.  (Computer-assisted
instruction, with the ability to branch as required by the student, is a
good example.)
        But product differentiation is problematic to establishing
property rights.  I must continue to copyright each variant to try to
protect it and if someone else produces a variant for a slightly different
market segment, that producer might be able to take most of my product
without compensating me.
                                   -10-




2.2  Market-Failure Related Characteristics of Information
        The failure of markets has been a subject of public finance study
for many decades.  Market-failure and the role of government are closely
entwined since a major role of government is to provide what the market
cannot.
        In the early part of the twentieth century, market-failure
problems associated with transportation (railroads, trucking and
airlines), communications (telephone, radio, and eventually television),
public utilities (water, gas, etc.), and food, drugs, and cosmetics were
closely studied and the associated industries were subjected to "economic
regulation."  In the mid-part of the twentieth century market-failure
problems associated with health, safety and the environment were addressed
with "social regulation."
        Economics, as a discipline, primarily concerns the operation of
markets.  Market-failure, therefore, represents exceptions to the rules of
the discipline.  The basic concepts of Pareto optimality and cost/benefit
analysis, however, transcend market operation and are thus useful economic
concepts in the analysis of market-failure.  (But even these concepts
seldom address the form of market-failure associated with the distribution
of wealth.)
        In a short space it is not possible to describe all of the
economic concepts related to markets and market-failure.  To provide some
common reference, however, the following terms are germaine:
          Allocating Resources -- Using labor, raw materials and capital
             in production
          Efficiency -- Allocating resources to their most valuable use
             (also called allocative-efficiency)
          Pareto Optimality -- The condition where all resources are
             allocated to their most valuable use
          Pareto-move -- a change in allocation that increases the net
             value to society
          Market-failure -- a situation where the operation of markets
             will not result in pareto-optimality or the fair
             distribution of wealth
          Perfect Competition -- many producers and many buyers, where no
             individual producer or buyer can affect price; the absence
             of market-failure in a competing market
          Imperfect Competition -- competition under forms of
             market-failure
          Good -- Something bought and sold
          Consumptive Good -- A good that is acquired mainly to be
             consumed
          Instrumental Good -- A good that is acquired mainly for its
             co-productive capacity
          Marginal -- the last unit of production or consumption
          Marginal Cost Pricing -- Usually a firm operates where:
             marginal cost (the cost of producing the last unit) equals
             the market price for that good
             (Stated as MC=P)
                                        -11-



          Marginal Utility -- The utility derived from the last unit of
             a good
          Rate-of-Return -- the income (or benefit) derived from an
          investment
             (Typically expressed as a percentage of the original
          investment)

        Information as a commodity is subject to many forms of market
failure.  The recognition of some of these in economics date back to the
mid-1920's when Pigou (1924), and Marshall before him, recognized that
knowledge provided benefits to society as well as to the purchaser (cf.
2.2.2 -- externalities).  The recognition of externalities of information
and knowledge was continued by Viner (1931), Meade (1952), Scitovsky
(1954), and Bator (1958).
        In 1962, Arrow (1962) wrote a seminal piece "Economic Welfare and
the Allocation of Resources for Invention," in which he recognized three
forms of market-failure associated with information: indivisibilities,
inappropriability, and uncertainty.  This was one of the first treatments
of "information as a commodity."  Others who have addressed information as
a commodity and the subject of market-failure include Braunstein (1976,
1981), Levitan (1982), Mackaay (1982), Cooper (1983), and Priest (1984a,
1984b).
2.2.1  Public Good Characteristics
        Public goods include goods like national defense, parks, and
lighthouses.  They are goods that multiple consumers can enjoy at the same
time (sometimes referred to as jointness-of-consumption).  Information has
the characteristic of a public good -- the use by one consumer does not
prevent the use by others.
        Public goods are often provided by government.  Since consumers
cannot be excluded from enjoying the benefits of a public good, use of
tax-payer money to supply the good can be often justified.  Economists and
public administrators are quick to point out that government is not
obligated to provide all public goods -- there are situations where the
waste and distortion of government in trying to counteract the market
failure results in more inefficiency than the original inefficiency (cf.
Machlup, 1984, p. 157).
        The market failure associated with public goods relates to the
concept of marginal-cost-pricing described above.  For maximum profit and
maximum social efficiency, the firm should set the price of the good equal
to the cost of producing the last unit (P=MC).  But for a pure public good
the cost of the last unit is zero and the firm should charge nothing at
all.  Thus for public goods social efficiency and private efficiency
diverge.  Pareto-optimality would be achieved only if the good were given
away but then no firm could stay in business to produce it. (Baumol and
Ordover suggest that the analysis is not this simple.  "Resource
allocation may benefit by the imposition of positive prices for public
goods in cases where such prices are collectable" [1975, p. 1]).  One
common prescription for the situation is to have government subsidize the
firm to an amount equal to the cost of creating the information.  Another
is to have government supply the good.
                                   -12-



        In summary, we can define the public good characteristic of
information as:
          Public Good Characteristic of Information -- The same
          information can be used by many consumers without
          interference.

        Before exploring the relationship of this characteristic to
property, it will help to explore two closely related characteristics --
inappropriability and non-depletability.
2.2.1.1  Inappropriability
        The term inappropriability is from the word appropriate.  To
appropriate something is to take possession for use by oneself.  In the
economic sense, it means to be able to take possession of the worth of
something -- typically by selling it at the market price.
Inappropriability is the difficulty in taking possession of the worth of
something.
         As indicated in the public good discussion, there is difficulty
in excluding people from using information who have not paid for it.  This
occurs in two basic ways:
          Exclusion 1 -- Materials such as books and films are often
          passed along.  This is particularly the case when they are
          provided by libraries or rentals.  Fifty percent of computer
          software is copied (Frazier, 1985).


          Exclusion 2 -- The information contained in any one material
          often represents the embodiment of prior work.  For example,
          while I give credit to those writers from whom I have drawn for
          this piece, I have not financially compensated them.

        The major result of inappropriability is under-production of
information.  If the producer of information cannot appropriate its full
market value the producer will only produce information where he can
recover costs and make a profit.  This results in fewer books, movies,
information systems, etc. than is socially efficient (all other things
being equal).  Further, the types of information that are produced are
distorted toward those types that can be subject to exclusion.
        In summary, we can define the inappropriability characteristic of
information as:
          Inappropriability of Information -- The difficulty in
          receiving full market compensation for the creation of
          information due to the problem of exclusion.  The result is
          under-production and under-compensation.

        Problems of appropriability have been recognized by Arrow (1962,
1971), Boulding (1971), Braunstein (1976, 1981), Cleveland (1982), Gordon
(1982), Hall (1981), Macklup (1962, 1984), O'Brien (1980), and Priest
(1984a, 1984b), and in inventive activity by Dutton (1984), Nordhaus
(1969), Mansfield (1977), and Scherer (1977).
        Cleveland (1982) refers to information as diffusive, easily
shared, and transportable.  He relates Colin Cherry's comment that
information by nature cannot give rise to exchange transactions, only to
sharing transactions (p. 37).  Some of the positive effects associated
                                   -13-



with ease-of-sharing and transportability are discussed in Section 2.3
(Non-market characteristics).
2.2.1.2  Non-depletability
        Information is a very durable good.  It does not dissipate with
use.  It may become less valuable when "better" information is generated
but the original information is still present.
        Information and knowledge can therefore accumulate over centuries
and millennia.  From society's standpoint this is a very positive
characteristic but from a firm's standpoint this is a negative
characteristic.  A producer of information must not only compete with
other present producers of information but also with all past producers.
During periods like the twentieth century this is not an insurmountable
problem because of the enormous increase in scientific and technological
information, and the significant changes in media technology.<*>
        In summary, we can define the non-depletability characteristic of
information as:
          Non-depletability of Information -- Information does not
          dissipate with use.  Producers must compete with past
          producers but society benefits with an accumulation of
          knowledge.

        In relation to property and property rights, the public-good
nature of information makes holding information as property very
difficult.  Thus the assignment of rights in the form of patents,
copyrights, trade marks, and mask works, directly addresses the
public-good nature of information.
        Appropriability is a serious problem for the producers of
information.  The 1976 Copyright Act tackled Exclusion 1 (above) by
establishing the Copyright Clearance Center to collect royalties for
photocopies (McDonald, 1983, p. 19).  Also, the Act established the
Copyright Royalty Tribunal to collect payments from cable operators for
the importation of distant signals.  Valenti (1982) notes how low these
royalties are in relation to other income.  Besen (1978) points out that
royalties set by a tribunal are unlikely to resemble real market
valuations and will result in social inefficiency.
        Solutions to Exclusion 2 are more difficult.  The fair-use
provision of the copyright law generally assures that exclusion will not
occur.  (For a most comprehensive discussion of fair-use and
market-failure see Gordon [1982]).
        Non-depletability can result in dwindling markets for information,
particularly if new information cannot be readily generated.  It is
generally believed that extending the seventeen years of patent protection
will not provide the inventor significantly more return on the invention's
value.  Within seventeen years newer inventions tend to take the older's
place, but with notable exceptions such as xerography and the instant
camera.<*>
2.2.2  Externalities
        If there is an effect associated with a good -- positive or
negative -- that is not accounted for in its price, there is an
externality present.  For example, the polluting of a stream by a pulp and
paper mill represents a negative externality.  The production negatively
affects others and the good is more cheaply produced than if the pollution
were controlled.  We refer to internalizing the externality if there is
------------------
<*> Patent life extensions have been suggested for products where
government regulation delays the product's entry.  FDA requirements can
hold back a new drug or device for up to ten years.
                                   -14-



some way to have the firm more fully account for such effects.  A set of
water quality standards could be established that the mill must meet by
law.  The presence of negative externalities was a major impetus for
health, safety, and environmental legislation.
        Information, in contrast, has few negative externalities, but
significant positive externalities.  The non-depletability character of
information leads to positive externalities that extend for generations --
the "wealth of knowledge" that has accumulated over time.
        To determine the value of a positive externality we can turn to
cost/benefit analysis.  Cooper (1983) reviews a number of C/B studies
which include assessments of various information science activities.  A
study by Goddard assesses the benefits of public and school libraries.
These libraries are seen as promoting education and therefore resulting in
externalities in education -- the benefit to more than just the person
being educated.
        The positive externalities of fine arts has been a subject of
congressional debate for decades.  For example, in introducing a bill in
1953 to establish a National War Memorial Arts Commission, Charles Howell
of New Jersey said, "There is a philosophical difference in viewpoint
which must be considered in the evolution of the measure I have sponsored.
The debate is between the proponents of the belief that the arts are
living and must be encouraged with every resource at hand, and those who
regard the arts basically as the product of a past age, which must be
preserved rather than encouraged" (Larson, 1983).
        The positive externalities of science have been recognized in the
massive support the government provides for it.  Alvin Weinberg commented,
"society expects science somehow to serve certain social goals outside
science itself.  It applies criteria from without science -- broadly,
criteria concerned with human values -- when it assesses the proper role
of science as a whole relative to other activities" (Reagan, 1969, p. 34).
Reagan reviewed congressional hearings, journals, and other sources and
found five basic reasons for support of science (four of them
externalities):
          1.  Intellectual and cultural values of science
          2.  The utility of basic research as the foundation
              of all technological development
          3.  Research as an essential component of graduate
              education
          4.  The high costs of scientific research, and the
              unlikelihood of adequate private financing
              (appropriability, risk, uncertainty)
          5.  The political values of science, especially in
              international affairs.

        Positive externalities and appropriability are closely tied
concepts.  Whatever the producer of information cannot appropriate will
be, by definition,  a positive externality.  The appropriability of
invention (see 2.2.1.1) has been a subject of considerable research.
        Nordhaus (1969, 1985) estimated the ratio of marginal social
product to marginal private product using data on American agriculture.
He calculated ratios of 12.7 for 1949 and 8.5 for 1959.  These ratios
imply very high social rates of return on research and verify earlier work
by Griliches on the magnitude of the rate of return on hybrid corn.  I.e.,
                                   -15-



Nordhaus found very high positive externalities to agricultural research.
        Mansfield (1977) performed an empirical study on social and
private rates of return from industrial innovation.  For seventeen
innovations the median private rate-of-return was 25% (before taxes) and
the social rate-of-return was 56%.  Mansfield's ratio of social to private
return was 2.2.  The highest social return was 307% for a "thread
innovation" (private return of 27%)  and the highest private return was
2l4% for a "household cleaning device" (social return of 209%).
        Calculations of positive externalities, at best, are fraught with
methodological difficulties.  Thus these data should be considered
suggestive of the possible externalities associated with information.
        In summary, we can define externalities associated with
information as:
          Externalities of Information -- The effects of information,
          usually positive, that are not accounted for in its price.

        Externalities refers to the non-property aspect of information.
Higher economic efficiency can be achieved by internalizing externalities,
i.e., providing the producer of information greater appropriation.  This
can be achieved by the creation of property rights and corresponding
payments to owners.
        For information, however, the transaction costs (see 2.2.8) of
"keeping book" (adding up who owes what to whom) are likely to be high,
thwarting attempts at increasing the appropriability.  Perhaps in the era
of the information utility, where computer information systems can keep
track of many minor transactions, full accounting will be possible.
Before that, we must struggle with clearinghouses and tribunals to attempt
a solution.
2.2.3  Indivisibilities (of supply)
        Information users are confronted with an all-or-nothing option:
they may either acquire the whole amount of information available at the
prevailing price or buy no information at all (Pethig, 1983).  At some
level, all information is indivisible.  Four years at college, a year, or
a course can be purchased, but not a particular lecture.  To have the
editoral page of the New York Times the entire paper must be purchased.
To have the telephone numbers of those I want to call, I have books mainly
filled with the numbers of people I do not want to call.
        The problem of indivisibility relates to the organization of
information and knowledge.  To obtain new information I must continually
pour over old information in search for new.  So not only do I incur the
cost of purchase but also the opportunity cost of search.
        In summary, we can define indivisibilities associated with the
supply of information as:
          Indivisibilities (of supply) -- Information must be
          purchased in lumps; these lumps may be vastly greater than
          the information actually sought.

        In terms of property, it is easier to provide legal protection for
a large lump of information than many small pieces.  This tendency will
help perpetuate the generation of larger lumps.  This is not socially
efficient since the consumer is forced to purchase unwanted information.
                                   -16-



2.2.4  Economies of Scale and Scope
        For some goods, increasing a scale of operations results in
decreasing costs per unit.  This condition is called economies of scale
and explains why so many of the goods we buy are produced by large
companies.
        As an example, Braunstein (1981) notes that daily newspapers have
high set-up costs and low costs associated with the production of each
copy printed.  As a result, the vast majority of daily newspapers have no
competing daily newspaper published in the same city.
        Economies of scale are usually associated with production
involving high set-up or fixed costs, decreasing unit costs, or both.  If
economies of scale are substantially present when the output of the
producer is equal to the total market demand, there is the condition of
"natural monopoly."  A monopoly in these cases can be more socially
efficient than competing producers.  Unfortunately, the monopoly can make
higher profits by under-producing and thereby inflating prices (Samuelson,
1973).  Public policy towards this situation has been to permit the
monopoly to exist but to regulate rates so that price equals average costs
plus some reasonable return on investment for the stockholders.  Typical
regulated monopolies are local gas and electricity distribution companies
and local telephone companies.  (Regulated monopolies have also been
criticised for being socially inefficient because 1) They have little
incentive to minimize costs, and 2) They often display lower innovative
capacity for new inventions, features, etc.)
        Economies of scope arise when it costs less to produce several
different products by the same firm.  This can occur when one product
utilizes a by-product of another or when both products draw from the same
intermediate product.  "Information, because it can be packaged in so many
ways, is often produced or distributed under conditions of economies of
scope (Braunstein, 1981, p. 59).
        The presence of economies of scale and scope is often indicated by
industry concentration -- the presence of fewer, larger producers.  Homet
(1984) finds the electronic information-delivery sector increasingly
characterized by concentration.  He notes that in 1980, fewer than 100
corporations controlled a majority share of each of the mass media: daily
newspapers, periodicals, books, records and tapes, radio and television
distribution and sponsorship, and movie distribution.  "Cross-ownership
trends among these media drew the net even tighter:  Time, Inc., with book
publishing and cable (not to mention HBO), Times-Mirror with TV and cable
and videotex, CBS with book publishing and records and magazines" (Homet,
1984, p. 14).
        Dertouzos and Wildman (1981) made a historical study of
concentration in the recording industry.  They found that the percentage
of sales controlled by the top 4 firms declined from 1947 to 1972 from 79%
to 48%.  In 1972 a full 15% of sales were made by firms smaller than the
largest fifty.  But concentration in distribution and marketing of
recordings has occurred as the major recording companies have increasingly
been relied on by independent recording firms for distribution.
        Valenti (1982, p. 75) agrees with Homet about concentration in the
cable area, [t]he 'Giants' are taking over the cable industry,
concentrating power and increasing revenues."  As of 1980 the 25 largest
multiple system owners (MSO's) controlled over 60% of all U.S.
subscribers.
                                   -17-



        Concentration and monopoly in telecommunications is not
unexpected.  Telephone was recognized as a monopoly and regulated in the
first part of this century.  The recent attempts to increase competition
in telecommunications may be working against the condition of natural
monopoly.
        In summary, we can define economy of scale and scope with regard
to the production of information as:
          Economies of Scale and Scope -- 1) decreasing unit costs
          when the scale of operation is increased; and 2) decreasing
          costs associated with joint production.

        In relation to property, economies of scale and scope appear to
mainly affect the distribution portion of the value-added process of
information production.  In those cases where property rights are given to
independents and distribution occurs by "majors" there is little
additional concentration effect.  However, in vertically integrated firms
that own both information creation and distribution processes, providing
strengthened property rights will increase their monopoly.
2.2.5  Inherent Uncertainty and Risk in Information Production
       (particularly basic knowledge such as science and technology)

        A producer of information takes inputs such as capital and labor
(e.g. medical instruments and physician-researchers) with some expectation
of an output (e.g. a medical advance).  In some cases, when there is
sufficient prior experience, the producer knows that a particular
percentage of the projects will be unsuccessful.  This percentage is a
statement of risk, e.g., 80% of the research projects will be
unsuccessful.  Using statistics, the producer can then determine how many
projects must be supported to produce a success, say with a 95%
confidence.
        This approach to risk employs the standard theory of portfolio
selection to decrease the riskiness of investments by diversifying among
projects with statistical independence (where the success of one is not
dependent on the likely success of another).
        Risk has been termed a "mild uncertainty" (Nordhaus, 1969).  We
are uncertain about which project will succeed, but we are fairly
confident that some will succeed.  In some areas, however, there is not
even sufficient experience to judge the probability of success.  These are
cases of full uncertainty.  Cancer research and interstellar
communications are subject to large uncertainties.
        If the risks and uncertainties are small, private investors will
continue to produce.  What they appropriate for the successful projects
must cover not only the costs of the successful projects but also the
costs of the unsuccessful projects.  The costs of unsuccessful projects
are part of the costs of doing business.  When risks increase to the point
that the producer lacks the ability to diversify enough to assure a
success, the producer will withdraw.  When there are sizable uncertainties
the producer will also withdraw because there is insufficient information
to justify the activity to stockholders or other investors.
        Under these conditions of risk and uncertainty, information will
be under-produced.  The problem is exacerbated when the size of firms in
the industry is small.  Smaller firms have less capacity to handle risk
and uncertainty.  In contrast, firms like IBM and AT&T can "afford" some
                                   -18-



ventures that a smaller firm could not.  Unfortunately, larger firms also
tend to be more risk averse than smaller firms -- that is, they require
greater potential return to risky ventures than a smaller firm does.
Whether the degree of risk averseness of the larger firm negates its
greater capacity to absorb risks is a point of current debate.
        If individual firms cannot bear risks or uncertainty, in some
cases it is socially efficient that society do so.  "In operational terms
this implies that the government do all R&D or that the government have
R&D done by firms or individuals on cost plus contracts" (McFetridge,
1977, p. 16).  Other mechanisms include partial subsidies and forgivable
loans where the state bears part of the risk associated with a given
project.  Finally, some projects are too risky or uncertain even for
society to undertake.
        The public policy response to risk and uncertainty is fraught with
unknowns and debate.  The social rate-of-return must be sufficient to
justify the risk and uncertainty.  Thus, government tends to support basic
science and R&D to a lesser extent.  The greater the potential
"co-productive capacity" of the resulting information (cf. 2.1.1) the more
government involvement can be justified.
        In summary, we define the risks and uncertainties in information
production as:
          Inherent Uncertainty and Risk in Information Production --
          The inability of firms to produce information when risks and
          uncertainties are present.  A problem, in particular, in the
          generation of basic knowledge.

        For an extensive treatment of uncertainty in the production of
information see Arrow (1962,1971).
        The issue of property and uncertainty and risk relates to the
interesting area of debate on property and government funding.  Until
recently, depending on the enabling legislation of the various federal
agencies, patent rights are often assigned to the government.  This
follows from the argument that if the government pays for the information,
the government (the tax payers) should own the information, not the
private contractor.  With the 1980 amendments to the Patent and Trademark
Laws, universities and small firms were given rights to patents provided
they would be developed; large businesses' patent rights must be reviewed
on a case-by-case basis (Peyton, 1981, p. 80, 84).
         Supporters of these types of changes point out that government
ownership of patents is not socially efficient.  Since a major purpose in
assigning property rights is to encourage invention and exploitation of
the invention, government ownership greatly reduces the development of
invention.  This is particularly true when the government cannot issue an
exclusive license.
        Providing property rights for information does not solve the
problem of under-production under conditions of uncertainty and risk.
This is because, for the property right to be useful, the invention, etc.
must be forthcoming.  But it is the very uncertainty in whether there will
be property at all that is the source of market-failure -- protection is
only useful once the property exists.
                                   -19-



2.2.6  Information/Knowledge About the Information
        Arrow noted a fundamental paradox in the determination of demand
for information, "its value for the purchaser is not known until he has
the information, but then he has in effect acquired it without cost"
(Arrow, 1971, p. 148).  If the seller could maintain property rights to
the information this would not be a problem, but given problems of
appropriability, "the potential buyer will base his decision to purchase
information on less than optimal criteria (p. 148).
        The problems of "search" is a well known related topic in
economics (cf. Kwon, 1982; Stigler, 1971).  Perfect competition presumes
the presence of perfect information -- that all buyers are aware of all
sellers, their products, their quality, and their prices.  Perfect
information does not typically exist and the result is potentially
inefficient: some products may be purchased at too high a price for their
level of quality, performance, service, etc.
        Information is subject to the problems of search but the problem
is compounded by the appropriability problem discussed by Arrow.  A
producer of information will hide information to the extent that it is not
appropriable.  But hiding information greatly increases the problem of
search.  The less the buyer knows about a product, the less likely the
buyer is to purchase it, or to purchase it at the "correct" price (the
price under perfect competition).
        To counteract this problem, producers of information rely on
"brand recognition."  Producers of information develop a reputation for
the value of their information.  For example, Standard & Poor is respected
for its appraisals of the stability of firms and bond offerings.
        This tendency raises again the issues of monopoly and
concentration addressed in 2.2.2.  It is difficult for a new entrant (a
firm that attempts to sell in the new market) to succeed.  Thus
information about information leads to "barriers to entry" and industry
concentration.
        In summary, we can define the problem of information about
information as:
          Information/Knowledge About Information -- Information about
          information is less likely to be available because of
          appropriability problems.  This leads to under-consumption
          of information due to problems of search.

        With regard to property, the more property rights the producer has
the less a problem information about information will be.  Property rights
will enable the producer to attain higher appropriability and thus will
encourage the producer to provide more information about information.
However, to the extent that property rights cannot be enforced, this form
of market-failure will still be present.
2.2.7  Intangibility
        Thus far we have referred to the market price of information as
some reflection of the marginal utility of information to the consumer.
For simple consumptive goods (cf. definitions at 2.2) the price of a good
is a reasonable proxy for its marginal utility.  For instrumental goods,
such as information and knowledge, the price of the good may have little
resemblance to its marginal utility.
                                   -20-



        This problem has been referred to as the inability to monetize
(set a monetary value on) a particular good.  For example, what is the
monetary value of good health?  Good Health is the co-producer of many
desired outcomes -- it permits thinking, locomotion, stamina, etc.  The
impact of an acute illness, an illness of three months or less, may in
some circumstances be monetized but the impact of chronic illness cannot
be monetized (Priest, 1981).
        What is the monetary value of education, libraries, guidance
counseling, or church attendance?  All of these activities involve
substantial levels of information.
        Boulding (1971, p. 23) interprets the problem of intangibility as
one of the problem of information measurement.  "One longs, indeed, for a
unit of knowledge, which perhaps might be called a 'wit', analogous to the
'bit' as used in information theory; but up to now no practical unit has
emerged."
        The problem of intangibility and measurement relates back to the
definition of information.  Information derives its utility by changing
the efficiency of achieving outcomes by changing choices.  An activity
such as education involves millions of changes in potential choices.
"Education produces possibilities."  To faithfully arrive at the utility
of education then I would have to consider two situations, the attainment
of all outcomes without the education and the attainment of all outcomes
with the education.  I would have to measure the efficiency with which
each outcome was achieved under the two conditions, and sum the
efficiencies to attain a single value of merit.  Further, I should perform
this exercise, not after the impact of the education has been seen (ex
post), but before (ex ante), because this is the circumstance in making
the purchase.  This means forecasting the efficiencies and outcomes under
the two situations.
        When a consumer is faced with purchasing education, however, it is
exactly this calculation he must make to make the correct buying decision.
But this is not how education is "sold."  The U.S. adopted compulsory
education for grades 1-12 because the value of the education was believed
to be at least worth the cost (and effort).  Much college education is
purchased with the faith that the value of college education is at least
worth the cost. (Occasionally this wisdom is questioned.)
        In summary, there are many forms of information, such as
education, that affect a great many potential outcomes and are, therefore,
largely non-monetizable.  We can define intangibility of information as:
          Intangibility of Information -- The character of information
          to be non-monetizable.

        Intangibility and property are antithetical terms.  Property is
usually concrete and well defined.  But something that is intangible is
not.  Specific components of education such as textbooks, film strips, and
study guides can be copyrighted.  But it is difficult to assess the value
of these components, since they contribute to the "building process" of
education.  What is the value of a primer on the alphabet?  What if
another primer costs twice as much -- is it worth it?  These questions
have faced educators and others who have dealt with the intangibility of
information.
                                   -21-



2.2.8  Transaction Costs and Information
        Besen (1977, p. 87) notes, "[i]t is unfortunate that, in the
economics literature, the term "transaction cost" is used to describe two
quite different phenomena."  In the first sense "... the term is applied
to the costs involved when agreement must be reached among a large number
of parties in order to carry out an activity.  Transaction costs are said
to be high in such situations because the free-rider problem raises the
cost of reaching an agreement.  A second meaning of the term involves the
costs of negotiation, contracting, and enforcement which exist even when
exchange is bilateral" [first emphasis added].  Sometimes the term is
misapplied to mean "the cost of transmitting information which has already
been produced" (cf. O'Brien, 1980, p. 452).
        In this discussion we refer to the second meaning of the term.  In
this sense, transaction costs and indivisibilities (cf. 2.2.3) are
related.  As we attempt to reduce indivisibilities by breaking information
into pieces, we increase transaction costs as we attempt to appropriate
its value.
        In summary, we can define transaction cost and information as:
          Transaction Cost of Information -- The additional costs
          incurred by the producer in appropriating the value of
          information.

        The reduction of transaction costs was the explicit goal of the
compulsory licensing of distant signals by cable television operators.
According to Ladd (1982, p. 946) in congressional testimony:
          ... it would be impractical and unduly burdensome to require
          every cable system to negotiate with every copyright owner
          whose work was retransmitted by a cable system.
          Accordingly, the [House] Committee [on the Judiciary] has
          determined to ... establish a compulsory copyright license
          for the retransmission of those over-the-air broadcast
          signals that a cable system is authorized to carry pursuant
          to the rules and regulations of the FCC.

Further testimony of Monroe M. Rifkin agreed:

          There are 4,350 cable systems, each carrying an average of
          five distant signals, (2 networks, 2 independents and 1
          educational) each with a minimum of 6 - 17 hours of
          programming per day.  Although it would be impossible to
          estimate the number of transactions that would be necessary,
          it is clear the the simple multiplication of 4,350 cable
          systems times 1,000 program suppliers seriously
          underestimates the probable number.  While most program
          suppliers offer several programs, the number of contacts
          required to program five channels, 17 hours per day, 365
          days a year would be enormous.

        In contrast, Valenti (1982, p. 86) argued that transaction costs
are not sufficiently high to warrant compulsory licensing.  In 1976, many
cable operators were independents and there had not been the full scale
use of "packagers" for pay TV.  Valenti describes the marketplace for
cable's licensing of its own programs as:
                                      -22-



          First, middlemen could package programs for basic cable
          systems and program suppliers just as they now package
          programs for existing cable origination services.  The
          Satellite Program Network, a service of Southern Satellite
          Systems, is already providing such a program service to over
          300 cable systems.  The marketplace would quickly adjust to
          the new procedures.

          Packagers of cable programs would license programming
          material, take it to a satellite, and make a variety of
          programming available to cable systems.  By catalogues and
          price lists, based upon a per subscriber rate, the packager
          would beam to the cable system whatever programming that
          system owner has chosen.  Paperwork would be at a minimum.
          There would be no need for a forest of bureaucratic filings.

          Second, advertiser-supported programs, purchased by basic
          cable systems, are growing in number and revenue.  It is one
          of the hottest phenomena in an industry that is full of
          tremendous changes... This will be a boon to the cable
          operator and will provide an additional source of large
          revenue without relying on an increase in subscriber costs.

          Today there are at least 35 "cable networks," ranging from
          Cable News Network to Home Box Office ... These networks
          include both "pay TV" operations such as HBO and
          advertiser-supported operations such as the Modern Satellite
          Network and the Satellite Program Network.

          Third, direct negotiations between program suppliers and
          cable operators.  Right now, as noted earlier, 25 MSO's
          control some 60% of all cable subscribers.  This
          concentration will grow even faster in the future, as large
          companies merge and/or buy out smaller operators.  This
          concentration will simplify direct negotiations between
          program suppliers and cable systems.

        The attempt to reduce transaction costs through compulsory
licensing is claimed to reduce the income to the property of the movie
producers.  Yet if transaction costs are "prohibitive ... exclusivity of
property rights may ... reduce rather than increase the efficiency of a
resource use (R. Posner in Gordon, 1982, p. 1608).  Clearly a difficult
balancing is required.
        The granting of property rights such as copyright reduces
transaction costs (cf. Gordon, 1982, p. 1613).  Without such explicit
rights, contracts would have to be established under common law.  This
process would be far more tedious and time consuming.
                                   -28-



3.  Relationship of Information to Products and Services

        Talking about information is like talking about a calorie, no one
buys a calorie, they buy food.  To trace information as it becomes
embodied in products and services one must follow the life cycle of
information production.
        A simple version of the life-cycle model has the following steps:
Through the generation of information there is created an information
source; then through institutionalization of the source there is created
an information resource; then through maintenance & enhancement there is
created information products & services; then through dissemination the
information becomes used (Levitan, 1982, p. 47).  For example, a reporter
writes up a story; the story is sent to UPI; an editor picks up the story,
combines it with other information in the files; a newspaper article
appears; the newspaper is delivered to the front door.
        More complex versions of the life-cycle model include various
additional stages or components of "value-added" activity.  Value-added
can be considered in two ways.  The strict economic definition can be
defined as:
          Value-added -- The sum of the input factors of production
          excluding all purchases of materials and services from other
          firms.

Returning to the example of the reporter, the value added by the editor is
his labor, some percentage of management's labor, and depreciation on the
editor's word-processor.  But as so defined, we have not included
"intermediate inputs"  of the business such as telephone service, office
space, paper, etc.
        This exclusion makes the economic definition of value-added
appropriate to avoid double counting in performing the "national
accounts"<*> but is not complete enough to give a sense of the full added
value.  To remedy this problem we can define a second term, full
value-added, to be more complete:
          Full Value-added -- The sum of the input factors of
          production excluding all purchases of materials and services
          from other firms except intermediate inputs.

        This definition is reasonably workable.  It provides the sense
that everything a producer adds to information is his value-added
contribution to the product or service.
        But like the economic definition of the value of information
referred to in 1.1, even the full value-added (say stated in dollars) will
not reflect the actual value added to information when there are forms of
market-failure (cf. 2.2).  Returning to the definition of the value of
information in 1.1, we can state what value-added is in terms of final
outcomes.  The value-added is the increment of efficiency increase in
achieving outcomes due to changes the value-added activity makes in the
information.  This can be defined as:


----------------
<*> The concept of value-added was developed to avoid double counting
when the entire economy's activities are being tallied up -- as the
U.S. Dept. of Commerce does for the National Accounts.  For example,
if Firm A makes dough and Firm B makes bread, we must avoid counting
the dough again when we count the bread (cf. Samuelson, 1973, p. 183).
Intermediate inputs must also be excluded since these too will be
counted elsewhere.
                                      -29-


          Value-Added -- There is an expected value (EV) related to
          achieving an outcome -- this is the sum of the probability
          of each particular choice, times the efficiency of each
          choice, times the relative value of the outcome (cf. 2.3 for
          relative value).  Considering the expected value (EV>1<)
          without value added to the information and the expected
          value (EV>2<) with value added to the information, the value
          added to the information (EV<i>) is:
                             EV>va< = EV>2< - EV>1<

        In those cases where the value-added activity makes otherwise
unaccessible information available to the user, the value-added is at
least equal to the value of the information.  The economic definition
defines value-added as an accounting of inputs, regardless of outputs.
The behavioral and management science definition defines value-added as an
accounting of output, regardless of inputs.  For example, by the economic
definition, there may be considerable value-added (labor, etc.) but the
result, let us say, is confused, this added confusion would result in a
negative value-added by the second definition.  The individual would be
better off consuming the information before the value-added step than
after.
        One technique to attempt a quantifiable measure has been the use
of willingness-to-pay (cf. Griffiths, 1982, p. 274).  In
willingness-to-pay, the individual is being asked to quantify in dollars,
the perceived value of the information.  I.e., he is being asked to
translate the incremental increase in expected value into dollars.
Willingness-to-pay, as a measure is subject to large uncertainties but in
some situations provides useful data.  Let us consider two extremes.  The
individual is about to go to a $5.00 dance club.  A promotion service
(value-added) calls the individual and says there is a free $5.00 ticket
to the same dance club waiting for him.  The individual's
willingness-to-pay for this information would be $5.00 (ceteris paribus).
In another situation, an individual is chronically depressed, irritable,
and angry.  The individual is informed that central sleep apnea (a form of
sleep disorder) can cause these symptoms.  Subsequently, the individual is
cured.
  What is the willingness-to-pay of this individual?  He might have hocked
his soul.  When intangibilities are high (cf. 2.2.7), there are
significant externalities (cf. 2.2.2), or there is poor information about
the information (cf. 2.2.6), willingness-to-pay is an unreliable measure
of value-added.
Products and Services
        Different types of value-added activities are associated with
products and services.  It is useful to distinguish between product and
service, though as information technologies become more interactive, the
distinction becomes blurred.  We can define these as:
          Information Product -- An information product is usually a
          tangible piece.  It may be bought and sold, if an external
          commodity, or it may be charged back, if internal within an
          organzation (Taylor, 1982b, p. 345).

          Information Service -- Services are intangible, they are
          usually provided on demand, are a performance rather than a
          product, are nearly inseparable from their production
          (Stankard in Taylor, 1982b, p. 345).
                                      -30-



        Taylor (1982b, p. 345) notes that products generally are
mass-produced, i.e. there is little or no variation.  In contrast,
services are usually custom produced with large variation.
        Cuadra (1980, p. 98) recently compiled a list of the primary
activities of 122 Information Industry Association members.  In that list
he distinguishes producers of products from producers of services.  Table
3-1 shows the numbers of producers in 64 classes of products and services.
        Taylor (1982, p. 342) developed a value-added spectum for
information.  This appears as:

   DATA ----|: INFORMATION ----|: INFORMING --|: PRODUCTIVE ----|: ACTION
                                  KNOWLEDGE      KNOWLEDGE
      grouping
      classifying       selecting        presenting       matching goals
      relating          analysing          options        compromising
      formatting        comparing          advantages     bargaining
      signaling         interpreting       disadvantages  choosing
      displaying
     -------------     -------------      -------------   --------------
      ORGANIZING       SYNTHESIZING        JUDGEMENTAL       DECISION
       PROCESSES        PROCESSES           PROCESSES        PROCESSES
                                              Source: Taylor (1982, p.342)

Taylor suggests that products are situated to the left side of the
value-added spectrum.  Services, being more unique and customized, are
located to the right since they are based principally on human
interpretion and intervention between system and client.
        Value-added is thus identified in terms of what is done to the
information -- made accessible, enhanced, etc.  For example, King and
Zaltman performed a value-added analysis of scientific and technical
information (STI) communications (1979, p. 17).  They arrived at the
following list of dimensions of "value":
          o  Identification of User Needs.  Does -- or could -- a
             component provide insight into the kinds of information
             desired by users or potential users?
          o  Creation/Production Data.  Does a component stimulate the
             development of new data and ideas?  For example, symposia
             might stimulate the creation of new STI.
          o  Creation of Awareness of Data.  How many users become aware
             of STI only as a result of a component?  How much earlier is
             awareness established among users as a result of a component
             such as preprints?
          o  Quality Control: Validity of Data.  Does a component such as
             refereed journals impact the quality of the data transmitted?
          o  Quality Control: Potential Usefulness of Data.  How helpful
             is a component in enhancing the usefulness of data?  Does a
             component such as an abstract journal allow the practical
             relevance of data to become evident?
          o  Storage.  How valuable is a component for warehousing
             purposes?
          o  Retrieval.  How easily can data be recalled via a particular



                                   -31-



                                Table 3-1
      Primary Activities of Information Industry Association Members


26  Document Acquisitions and Delivery  8  Cataloging Services (S)
    (S)                                 8  Engineering Information (P)
26  Periodicals-publishers (P)          8  Environmental Information (P)
25  Publishing (P)                      8  Legal Information (P)
22  Consulting Services (S)             8  Television Information (P)
22  Data Bases - Design and/or          7  Clearinghouse (S)
    Management (S)                      7  Library Automation Services (S)
22  Data Bases - Information (P)        7  Medical Literature (P)
    (Publishers of Information About    7  Newsletters-Publishers (P)
    Data Bases)                         7  Typesetting Services (S)
20  Indexing Publishing (P)             6  ASIA (P)
19  Data Bases - Searching (S) (firms   6  Economics (P)
    that carry out data base searches)  6  Electronics Information (P)
19  Information Systems - Design and    6  Forecasting Services (S)
    Evaluation (S)                      6  Microform System Design Services (S)
19  Market Research Services (S)        6  Micrographic Services (S)
18  Business Information (P)            6  Records Management Services (S)
18  Micropublishing                     6  Reprint Publishers (P)
17  Current Awareness Services (S)      5  Accounting Information (P)
17  Data Bases - Vendors/Lessors (S)    5  Agriculture (P)
    (Companies that Produce or Sell     5  Book Information (P)
    the Use of Data Bases)              5  Bookselling Services (S)
17  Government Information (P)          5  Chemical Information (P)
17  Literature Searches (S)             5  Computers-Hardware (S)
16  Corporate Information (P)           5  Conferences-Information (P)
15  Directories (P)                     5  Drug Information (P)
13  Abstracting Publishing (P)          5  Education (P)
13  Indexing Services (S)               5  Europe (P)
13  International Business Info. (S)    5  Financial Information (Intl.) (P)
12  Energy Information (P)              5  Information Industry (P)
11  Abstracting Services (S)            5  Looseleaf Services (P)
11  Financial Information (P)           5  Management Information (P)
10  Marketing Services (S)              5  Patent Information (P)
10  Software (S)                        5  Product Development (S)
 9  Scientific Literature (P)           5  Social Science Literature (P)
 8  Audiovisual Materials (P)           5  Statistics (P)
---------------------------------------------------------------------------
(S) -- Service        (P) -- Product            Source: Cuadra, 1980, p. 98
                                        -32-


             component.
          o  Translation of Data into Implications.  Does the nature of a
             component permit a statement of the way in which the data are
             important?  Can bibliographics be retrieved on the basis of
             implications?
          o  Translation into Action.  Does a component permit statements
             about the actual use of the data once its relevance is
             determined?
          o  Feedback.  Does the component permit feedback from the user
             to the disseminator and creator of the data?  How many
             journal channels must be altered to facilitate feedback?

        Taylor recently completed a major work on the value-added
processes in abstracting and indexing services (1984a)  He notes that
abstracting and indexing services do not alter input.  The references,
papers, documents remain the same.  What they do is provide a "whole
series of tangible signals and intangible values that make it easier for
customers to make choices (p. 131).  Taylor identifies 24 specific ways
value is added by abstracting and indexing services.  These are listed in
Table 3-2.
        Porat (1977) has developed the most comprehensive study of
value-added in the economic sense.  While the study provides little sense
of what particular value is being added, it spans the entire information
economy. (Recall also that intermediate inputs are not included.)  He
divides the information economy into two major sectors: the primary
information sector -- "includes those firms which supply the bundle of
information goods and services exchanged in a market context" (Vol. 1, p.
4), and the second information sector -- "includes all the information
services produced for internal consumption by government and
noninformation firms" (Vol. 1, p. 4).
        For the primary sector, he presents value-added (VA) by two-digit
SIC (Standard Industrial Classification) categories (Vol. 1, Table 4.8, p.
55).  For example, VA in 1967 for Services: Motion Pictures is $1,525
Million; for Service: Educational - $5,170 Million; and for Communication:
Radio Broadcasting and Television - $1,580 Million.
        For the secondary sector, a similar table is presented but only at
the one-digit level (Vol. 1, Table 9.2, p. 155).  A second table is
presented in the Appendices (Vol. 8, Table 10, p. 18-21) contains
value-added at the two digit level.  For example, VA in 1967 for all of
Transportation - $8,115 Million; for all of Manufacturing - $57,880
Million; and for Agriculture, Forestry, and Fisheries - $467 Million.
        For more detail, the value-added process in particular information
industries can be constructed from business books on the industry.  While
these books are mainly focussed on how to get into and keep in business,
they cover the activities of business and from those activities the
value-added process can be constructed (cf. Gomery, 1982 p. 82).  For
highly promoted products like soft drinks, cosmetics, and perfume the
information components include the development of image and a market
niche, the use of advertisement and promotion, and the use of
"industrials" (film productions presented at sales conferences, etc.) to
motivate and coordinate the sales force.
        In summary, value is added to information in two basic ways, 1) By
adding greater accessibility, ease of use, etc., without changing the
basic information such as in abstracting, and 2) By writing, editing,
cutting, etc. where the basic content of the information and its
                                   -33-



                                Table 3-2
             Value-Added in Abstracting and Indexing Services


Access (Reducing Noise): the values added by the intellectual technologies
that provide the systematic means, based on subject matter, of narrowing the
information universe to a set of data and information which have some
probability of containing material that is wanted or needed.  Different
kinds of intellectual access provide different sets of the subject universe.

Access I (Reducing Noise): the value achieved by the identification of any
information chunk or discrete piece of data by systematic physical
description and location information.

Access II (Reducing Noise): the provision of a subject description through
access points such as index terms, descriptors, names, etc.

Access III (Reducing Noise): the result of processes that assure error-free
transfer of data and information as it flows through the system and is
eventually displayed to a client.

Accuracy (Quality): the value added by system processes that assure
error-free transfer of data and information as it flows through the system
and is eventually displayed to a client.

Browsing (Ease of Use): the capability of a system to allow a client to scan
an information neighborhood, with the probability that the client will
serendipitously find information of value.

Closeness to Problem (Adaptability): the value added by the activities of
the system, usually through human intervention, to meet the specific needs
of a person in a particular environment with a particular problem; this
implies knowledge of that person's style, bias, and idosyncracies, as well
as the politics and constraints of the context.

Comprehensiveness (Quality): value added by the completeness of coverage of
a particular subject or of a particular form of information.

Cost-Saving: the value achieved by conscious system design and operating
decisions that save dollars for the client.

Currency (Quality): the value added i) by the recency of the data acquired
by the system; and ii) by the capability of the system to reflect current
modes of thinking in its access vocabularies.

Flexibility (Adaptability): the capability of a system to provide a variety
of ways and approaches of working dynamically with the data/information in a
file.
                                    -34-



                           Table 3-2 (Continued)
              Value-Added in Abstracting and Indexing Services


Formatting (Ease of Use): the physical presentation and arrangement of
data/information in ways that allow more efficient scanning and hence
extraction of items of interst from the store.

Interfacing (Ease of Use): the capability of the system to interpret itself
to users.

Interfacing (Mediation) (Ease of Use): the means used to assist users in
getting answers from the system.

Interfacing (Orienting) (Ease of Use): the means used to help users
understand and to gain experience with the system and its complexities.

Linkage (Reducing Noise): the value added by providing pointers and links to
items, sources, and systems external to the system in use, thus expanding
the client's information options.

Ordering (Ease of Use): the value added by initially dividing and organizing
a body of subject matter by some form of gross ordering such as
alphabetization, large groupings, etc.

Physical Accessibility (Ease of Use): the processes of making access to
information stores easier in a physical sense.

Precision (Reducing Noise): the capability of a system which aids a user in
finding exactly what he wants.

Reliability (Quality): the value added by the trust a system inspires in its
clients by its consistency of quality performance over time.

Selectivity (Reducing Noise): the value added when choices are made at the
input point of the system, choices based on the appropriateness and merit of
information chunks to he client population served.

Simplicity (Adaptability): the value achieved by presenting the most clear
and lucid (explanation, data, hypothesis, method, etc.) among several within
quality and validity limits; not to be confused with 'simplistic'.

Stimulatory (Adaptability): those activities of an information system that
may not be directly supportive of its primary mission, but which assume
importance in establishing a presence in the community or organization
served and which encourage use of the system and/or its staff expertise.

Time-Saving: the perceived value of a system based on the speed of its
response time.

Validity (Quality): the valued added when the system provides signals about
the degree to which data or information presented to users can be judged as
sound.
                                   -35-


presentation are changed such as in publishing.
        There are several issues in relation to property.  In the case of
abstracting, the abstracter distills out the points of an article or book.
To the extent that abstract serves the user, rather than the original
piece, the property right has been weakened.  But in other situations, the
property right can be enhanced such as when a book is made into a movie.
The value-added activity of the movie increases the value of the book, and
the author benefits from the new contract royalties.
        To the extent that "bare information" which is difficult to
appropriate becomes bundled with a product or service, the appropriability
is increased.  For example, say there are eight principles by which to
lead a good life.  The value of these principles may be very great but
highly inappropriable.  But, in adding value by placing the principals
into context in stories or screenplays, the information becomes bundled
with synthesized experiences.  These can be protected as property and the
value is more appropriable.
        A trend in computer software is to bundle software with further
access to information.  A user becomes a subscriber to hot-line advice,
further enhancements, and consulting.  This bundling increases the
appropriability of the software since only registered users can be
subscribers.
        Unfortunately, bundling is not socially efficient from another
perspective.  It forces the buyer to purchase more than he may otherwise
want, reducing allocative efficiency.  It also can increase the monopoly
power of an industry and produce serious antitrust issues.  IBM was forced
by the Justice Department not to bundle software with its hardware.  The
securities industry was forced by the SEC not to bundle their information
services with the prices charged for stock transactions.  Each form of
bundling will have to be reviewed on a case-by-case basis, however, since
there are no clearcut ways of predicting the affect of bundling on
industry structure.
                                   -36-




4.  Rewards, Incentives, and Funding Sources for the
    Creation of Intellectual Property

        In the search for the best ways to provide incentives for the
development of intellectual property, it is important to have a picture of
what motivates the development of different types of intellectual property
and what sources fund the work.  While there has been a fundamental shift,
with the advent of copyright, toward a market system approach for the
motivation and funding of intellectual property, other forms of motivation
and funding are still important such as art patronage and private
endowment of colleges.
        Copyright can overcome only some forms of market-failure described
in Section 2.  It cannot overcome intangibility, risk and uncertainty,
externalities, economies of scale, and indivisibilities.  It contributes
substantially to overcoming problems of appropriability (where copyright
provides an enforceable right), and to a lesser extent aids in information
about information (by making the producer less likely to retain
information), and in reducing transaction costs (by providing clear
contract obligations).  Copyright will actually exacerbate problems of
economies of scale and the existence of monopoly power and reduces social
efficiency by withholding intellectual property from the public.
        This section treats three groups of intellectual property --
science, culture (art, music, etc.), and products & services.  The types
of rewards and incentives in each of these groups differ considerably.
The first two involve "internal motivation" much more than the third.  The
nature of funding for the three groups is also distinctive -- patronage of
science and culture is still common today while products and services are
rarely funded outside of the market system.
4.1  Rewards, Incentives, and Funding for Science
        Intellectual property in science mainly consists of journal
articles, books, and some computerized databases on physics, chemistry,
etc.  While scientists are paid salaries, the relationship between this
compensation and the incentives to create intellectual property is weak.
In science, there is a distinctly different set of rewards and incentives
operating.
Rewards and Incentives for Science
        Gaston (1978) studied the reward system in British and American
Science.  His findings affirmed what generally has been believed that
scientists are rarely motivated by salary or other compensation.  Merton
(1973) contributed substantially by describing the sociology of science --
the networks, communications, and relationships among scientists.
Considerable motivation to produce can be traced to these linkages.
Science is an uncertain process that depends on data and information from
others.  While scientists tend to work with some isolation, they are
dependent on others for information and critique.  Associated with this
dependency has been a form of "work motivation" -- scientists are pleased
to be cited in other articles, are pleased to be invited for a paper, and
particularly pleased when their work leads to a "break-through."  "In the
scientific world the highest value is for the research speciality or
parent discipline to develop through contribution of new data and
theoretical explanations to account for the data" (Gaston, 1978, p. 3).
                                   -37-



        Merton suggests that four basic norms consitute the "ethos" of
science and guide the behavior of scientists -- universalism, organized
skepticism, communism, and disinterestedness.  These norms help explain
the scientist's detachment from pecuniary (monetary) rewards.
Disinterestedness requires that scientists do research for the "sake of
science."  While there are those scientists who have cared only about
advancing their personal careers, most display disinterest and thus their
progress is detached from monetary gain as well.  Communism encourages the
sharing of information among scientists.  There are no "charges" for this
beyond occasional photocopy expenses, journal subscription fees, etc.
Thus, the scientist does not become involved in selling information.
Motivation to Work
        General theories on the motivation of work have been developed by
Abraham Maslow, Frederick Herzberg, D. Yankelovich. and E. H. Schein.  A
recent MIT doctoral dissertation reviewed the literature in determining
incentives for engineers and scientists (Reece, 1981).  A discourse on
motivation goes beyond this paper but a few comments can be made drawing
from the behavioral and management science concepts introduced in 2.3.
        The generation of intellectual property is a particular outcome
produced by an individual.  To increase this production we should think in
terms of the parameters that lead to choice and success of an outcome.
This differs from our discussion about the function of information.
Information is fairly neutral with respect to motivation for it affects
the choice of action (from a set of possible actions) to achieve an
already determined outcome.  We defined motivation in Section 1 as "a
communication that produces a change in any of the relative values the
receiver places on possible outcomes of his choice."
        Pecuniary (monetary) rewards motivate the individual in two ways.
Money is instrumental in achieving many other desired outcomes.  Thus the
individual often places a high relative value on outcomes that produce
money -- holding employment, winning the lottery, etc.  Second, money
becomes a proxy for success.  Success is a recognized outcome in our
society and the psychic rewards are high.  This places an even higher
relative value on outcomes that produce money.  It is this pair of
motivations that embraces the market system.  It is also this pair of
motivations that are considered narrow, sterile and unredeeming.  Why so?
        This relates to other cultural values whose purpose is to make
sure that human welfare flourishes.  If all human welfare could be
produced by the market, there would be no tension, but because of
intangibilities, externalities, etc. they cannot; fortunately there is a
non-market process that ensures these outcomes -- the production of
poetry, kindness, charity, human growth, and science.
        Non-pecuniary rewards to motivate are thus tied with this set of
other cultural values.  These are values like "love of learning,"
"goodness to others," "courageousness," the "work ethic," etc.  Through
the process of inculcation, these values become part of an individual's
values.  The result is a high relative value placed on the generation of
intellectual property that represents "contributions to society."  Since
these values, like the value of success in business, are recognized by
society, the psychic rewards are high.
        In addition to pecuniary and non-pecuniary motivations there is
one additional aspect that affects the production of intellectual property
-- the efficiency of the choice of action to achieve the outcome and the
                                   -38-



efficiency of achieving the outcome by that particular action
(proficiency).  The first efficiency is affected by information, and
instruction and practice affects proficiency (cf. Section 2.3).
        Copyright is to pecuniary rewards what plagarism norms are to
non-pecuniary rewards.  Copyright gives possession and increases
(monetary) appropriability.  Copyright actually reduces non-pecuniary
rewards by restricting circulation.  What the author is concerned about in
terms of non-pecuniary rewards is that he be cited and recognized -- that
his ideas are recognized as his own.  This is protected by the ethics
regarding plagarism and the responsibility to acknowledge other's
contributions.  Copying, with acknowledge, is a form of non-pecuniary
recognition.  Thus copyright is a good tool to stimulate pecuniary
motivation but not for non-pecuniary motivation.
        Incentives that have been useful for non-pecuniary motivation
include forms of recognition such as:
          o  Distinguished Titles at Universities
          o  Distinguished Levels of Membership of Professional
             Associations
          o  Honors
          o  Prizes
          o  Placed on Board of Editors of a Journal
          o  Fellowships
          o  Name Cited in Journals and Other Sources

Funding
        In earlier periods of science, in Greece, and later in Europe,
science was funded through patronage.  The scientist would appeal to a
wealthy citizen to support his work.  Governments recognized problems of
appropriability and high positive externalities (benefits) associated with
science and adopted the role of funding science.  Arrow (1962, 1977) noted
that the economic relation of government support is very different than
that in the usual markets.  Payment is independent of product; it is
governed by costs by the typical cost-plus fixed fee of contracts or costs
alone in the case of grants.  "This arrangement seems to fly in the face
of principles for encouraging efficiency, and doubtless it does lead to
abuses, but closer examination shows both mitigating factors..." (p. 157).
Abuse is curbed since the award of future grants and contracts are
contingent on prior performance.  But more importantly, the system works
because the incentive to produce is non-pecuniary.
        Forms of government support and incentives tend to be either forms
of direct subsidy, or indirect subsidy through tax policy.  Support and
incentives include:
          o  Grants
                  -- for research
                  -- for education
          o  Contracts
          o  Fellowships
                  -- for research
                  -- for education
          o  Loans
                  -- increased availability
                                        -39-



                  -- lower interest
                  -- some "forgiveable"
          o  Provide Information Resources
                   (e.g. MEDLARS for health research)
          o  Tax
                  -- option to "expense" research costs
                  -- accelerated depreciation for capital
                  -- 25% tax credit for qualifying projects
                  -- 10% tax credit for capital investments
                  -- deductions for charitable contributions
                     to universities

        The implications of various funding and incentives from a
standpoint of economic efficiency is complex.  An excellent treatment of
the relative efficiency of subsidy or tax measures is presented by
McFetridge (1977, p. 5).  Some have commented that in some circumstances
government involvement produces more distortion than it reduces (cf. Eads
in McFetridge, 1977, p. 15 on government support of aircraft research).
4.2  Rewards, Incentives, and Funding for Culture
        Many forms of intellectual property are considered an important
part of a society's culture.  These include music, painting, theatre,
dance, poetry, and novels.  The rewards and incentives for these are
similiar to science, however, the sources of funding are different.
Rewards and Incentives
        The artist is usually highly "internally" motivated.  Some artists
are like scientists, described above, who thrive on recognition.  Others
are producer-consumer-critic -- in almost complete detachment from others.
Collingwood, the British philosopher, described art as a process by which
the artist grows and affectively experiences the world through his own
art.  As such, art becomes an external product of an internal process.
Others who can identify with the internal process are said to "appreciate"
the art.
        The above discussion on cultural values is most germaine to
understanding what causes the production of cultural forms of intellectual
product.  To use the word property is perhaps too antagonistic, since the
purpose of most cultural products is for universal availability and use.
        Incentives for production of cultural products are integrally part
of the culture.  Mechanisms such as copyright have little positive effect.
Attempts have been made to provide performing artists with performing
rights (cf. 1981 Judiciary Hearings on Copyright, e.g. Dertouzos, 1981, p.
2). but this has met with no success.
Funding
        Like science, cultural production has been classically funded by
patronage.  There was a close linking of patrons and artists.  Haskell
(1963, p.4) describes the process in Italy during the Baroque Age:
          The young painter would at first be found living quarters,
          in a monastery perhaps, by a cardinal who had once been
          papal legate in his native city.  Through this benefactor he
          would meet some influential Bolognese prelate who would
          commission an altar painting for his titular church and
          decorations for his family palace -- in which the artist
          would now be installed.  The first would bring some measure
          of public recognition, and the second would introduce him to
                                      -40-



          other potential patrons within the circle of the cardinal's
          friends.  This was by far the more important step.  For many
          years the newly arrived painter would work almost entirely
          for a limited group of clients, until at last a growing
          number of altar-pieces had firmly established his reputation
          with a wider public and he had sufficient income and
          prestige to set up on his own and accept commissions from a
          variety of sources.  Once this had been achieved, he could
          view the death of his patron or a change in regime with some
          degree of equanimity.

        The role of government funding has been mixed in the U.S.  During
the depression, in 1936, the WPA arts project had more than 40,000 artists
on its roles.  Representative Sirovich of New York hailed the activity as
bringing culture to the masses in a way that no government had before
(Larson, 1983, p. 1).  Unfortunately, art was increasingly viewed as
linked with subversion and boondoggle as the country came out of the
depression.  For the next twenty years one bill after another failed to
produce substantial government support for culture.  There were also those
on the side of art who were concerned about government intrusion.  Even
with the passage of a bill that established the National Endowment for the
Arts, support was still low.  The $2.5 million in program funds
appropriated in 1966 was not even a third of what the Ford Foundation had
spent on ballet alone the previous year and tiny compared with the $85
million symphony orchestra program announced by the Ford Foundation in
October (Larson, 1983, p. 230).
        Thus, much of the support for culture comes from private
foundations, charitable contributions of corporations, church
contributions, and individual donations.  For further documentation of
these activities consult Miller (1970) on private endowment of education,
Nielsen (1972) and Goulden (1971) on private foundation philanthropy, and
Goldin (1969) on the support of public broadcasting.
4.3  Rewards, Incentives, and Funding for Products & Services
        Rewards and Incentives for Products & Services are largely
pecuniary.  Funding is mainly achieved by contracts from one firm to
another or within the firm by revenues produced by sales.
Rewards and Incentives
        The major debate in incentives to creators of intellectual
property is the extent that ownership in the product (service) is
important.  Many creators of intellectual property are mainly salaried --
newspaper writers, editors, movie script writers, engineers, etc.  In most
businesses (as well as many universities) ownership of copyrights and
patents reside with the institution.
        The argument is similar to the one regarding government ownership
of patents (cf. 2.2.5).  Business funded development should be the
property of business.  The argument is even stronger than government
ownership, since the business has the resources to exploit ownership more
than the individual (economies of scale, information about markets, etc.)
the ownership should reside with the business.
        On the other side, individual ownership will increase the
individual's production of valuable intellectual property.  For example,
employee stock ownership has been found to improve the productivity of
firms.  All other things being equal, individual ownership would be
                                   -41-



desirable.  However, this interferes with business control and the policy
of many firms is to not provide ownership and to recognize important
contributions through either cash bonuses or stock bonuses.  The stock
control this provides the individual would be too small to affect the
company's operations. (For details on corporate-employee agreements and
contracts regarding intellectual property cf. Gilburne, 1982).
        We should distinguish between for-profits and not-for-profits.
Libraries, some of the abstracting and indexing services, the OCLC (Online
Catalogue of the Library of Congress), are not-for-profits.  With regard
to incentives, these firms behave much more like scientists as described
in 4.1.  As Taylor (1984a) noted, these tend to be people dedicated to
performing a socially valuable service.
        Almost by definition, for-profits operate with pecuniary
incentives.  Internally, a major task of management is to devise ways to
distribute the incentives to maximize output.  Some segments of the firm
respond to pecuniary incentives more than others, for example, marketing
and sales forces have been traditionally targeted for varying compensation
keyed to sales.  In attempting to accelerate the rate of production,
incentives keyed to meeting deadlines have been sucessful.  However, this
is not universal, as some production of intellectual property depends on
professionals with temperments unsuitable to such coarse persuasion.
        One of the most powerful tools for generating intellectual
property, particularly invention, is equity.  Members of a firm that hold
sizable equity positions in the firm can be literally worth millions
overnight in the right circumstances.  Recall, under the risk discussion,
that smaller firms tend to be less risk averse than larger firms.  One
major reason is the potential for enormous gain if the stock price is bid
up quickly.
        If property rights cannot be obtained or protected, the firm must
still be able to appropriate a return on its investment.  Sometimes this
is achieved by being first.  If the new product or service is very
attractive, and if it takes some time to imitate, the firm can appropriate
its investment before others compete away the return.  Also, sometimes it
is possible to keep some hidden aspect of the product or service a trade
secret.  In such a case, the firm can appropriate a return without the
need for intellectual property protection.
        If the return cannot be appropriated from the consumer there is a
danger that an important intellectual product could go unproduced.  If the
social return is high and especially if there are positive externalities,
it may be efficient for the government to create a market by guaranteeing
certain levels of demand at a particular price.  The government could also
directly contract with the for-profit to produce the good on a
cost-plus-fixed-fee basis.  Government contracting with major aerospace
firms for the production of planes and armaments falls into this category.
Funding
        Holmes (1983) discusses intellectual property developed both
internally to the firm and from outside resources.  Funding flows are
summarized as follows:
          o  Intra-firm -- internally financed development
          o  Research Consultants -- funding of external invention
          o  Acquiring Externally Developed Intellectual Property
                                        -42-



                  -- Acquisitions as part of a complete business
                     or product line
                  -- As separate intellectual property assets
                  -- Exclusive versus non-exclusive acquisitions
          o  Joint Ventures to Develop Intellectual Property
          o  Pooling and Cross-Licensing Arrangements Involving
             Intellectual Property

        The last two forms of developing intellectual property are
potentially socially efficient and socially inefficient.  They are
socially efficient because they solve problems of appropriability and can
achieve economies of scale.  They can be socially inefficient if they lead
to collusion and other antitrust concerns.  The Justice department has
eyed both forms of joint development with suspicion and firms have been
reluctant to be sued for antitrust infringement because they are liable
for trebal damages.  The current administration has sought to reduce these
concerns and change the antitrust law to encourage more joint development
(cf. Gellhorn, Antitrust Law and Economics, 1981).
        In the publishing field, Crew (1984) discusses the efficiency of
different forms of contracts between author and publisher regarding
payment.  The five types of contracts are:
          o  Standard Royalty -- publisher pays author a percentage based
          on sales, perhaps with a sliding scale
          o  Profit Sharing -- author receives royalties based on
          publisher's profits on the book
          o  Cost Sharing -- some of the costs of production are incurred
          by the author
          o  Author's Fixed Fee -- fixed fee paid by the author to the
          publisher
          o  Publisher's Fixed Fee - fixed fee paid by the publisher to
          the author

In particular circumstances, contracts other than the standard royalty
form of payment are superior in establishing a fair contract between
author and publisher.
                                   -43-




5.  Structural Role of Intellectual Property in Maintaining a
    Viable Economy

        There are two traditional functions of property.  The first is to
reduce the "tragedy of the commons."  If a pasture is open to all herdsmen
in a village, each herdsman will try to keep as many cattle as possible on
the commons.  When the land becomes overgrazed, the grass dies leaving
everyone in disaster.  In contrast, if the land is held as property, the
owner will use the land wisely and only allow as many cattle to graze as
can be supported by the land.  Property rights, by making it possible to
exclude others and their cattle, has increased the efficiency of
production of the land.
        Pejovich (in Mackaay, 1982, p. 38) notes a second, dynamic
function of property.  From the individual's point of view the
specification of property rights is associated with his search for more
utility.  For example, who would invest his time and effort in preparing
land and sowing if at harvest time anyone could come and take the crop?
For any investment to be worthwhile, the investor must rest assured that
he can exclude others from the fruits and trade only at terms acceptable
to him.  There are internal motivations to ownership that has its owner
press it into service or sell it to someone who will.
        Posner views the major function of law as to aid in attaining
general economic efficiency.  "The Common law method is to allocate
responsibilities between people engaged in interacting activities in such
a way as to maximize the joint value, or, what amounts to the same thing,
minimize the joint cost of the activities" (Posner in Mackaay, 1982, p.
34).  Thus, a major function of law is to assign property rights to the
extent efficiency is increased.
        The economic function of property rights was recognized by A. T.
Hadley in An Account of the Relations between Private Property and Public
Welfare (in Cross, 1981, p. 37).  Hadley traces the historical development
of property rights and demonstrated that changes in economic structure,
such as from hunting to agrarian societies, were accompanied in changes in
the property rights that were held.
        Dutton (1984) documents the historical development of the patent
system in Europe.  He states that patent rights were typically justified
by four arguments: the natural-law thesis, the reward-by-monopoly thesis,
the monopoly-profit thesis, and the exchange-for-secrets thesis.  The
gradual change in emphasis from the natural right thesis to the economic
efficiency thesis occurred over a period from 1790 to 1860.  In 1791,
French patent law enshrined the belief in natural property rights in
invention  -- that the use without some form of compensation amounted to
theft since the property was personal and exclusive.  By the patent reform
campaign of the 1820s in England, J. R. McCulloch referred to both natural
rights and the increase of the level of inventive activity that occurred.
But even at that time few others spoke of natural rights.  "When the
Westminster Review brusquely announced that 'to talk of the natural rights
of an inventor is to talk nonsense', it was condemning an idea already
widely discredited" (Dutton, 1984, p. 18).
        In 1924, Commons (in Dugger, 1980, p. 47) said of "modern"
property rights, "[t]hey protect the individual in his pursuit of rightful
economic opportunity by enveloping him in property rights enforced by
                                   -44-



state sovereignty."  "Natural rights of man are a myth, even though the
myth once helped free man from the divine right of kings ... such rights
as we have proceed from national and other collective action, and are not
natural (p. 47).
        In the Economic Council of Canada's study on intellectual and
industrial property it is stated, "[t]he extent of private rights in
property can have great political and sociological significance, notably
at times when, as in seventeenth-century England and eighteenth-century
France, the extent and distribution of property rights becomes one of the
central issues in a major political and social revolution.  Even at such
junctures, however, the underlying struggle is more likely than not to
involve strong elements of out-right economic interest as well, and at
most times people appear to value the rights in property which the law
grants them primarily for their ability to generate a stream of economic
satisfaction of "income", using that word in its broadest sense" (Economic
Council, 1971, p. 222).  The report defends the notion of natural-rights
in one way though, "they have played and continue to play a highly
significant role in the evolution of human societies ... people who firmly
believe that they possess not just an interest in some objective, but a
basic 'natural right' in it, are likely to be more vigorous and
indefatigable in the pursuit of that objective" (Economic Council, 1971,
p. 225).
        There is still one further issue of political economy.  This
relates to the access or denial of access that granting property rights
creates to all "potential players" in economic/political activities.  For
example, the National Broadcasting Corporation statement in hearings
before the Judiciary commented on performing rights.  First they said that
performers can freely contract with producers to receive income.
Secondly, that copyright legislation was not remedial labor legislation --
it was not to provide additional jobs for performers (U.S. Congress
Judiciary Hearings, 1979, p. 664).  But the question returns to the
appropriability of the value-added by the performing artist.  Is the
provision of copyright for the author of a song sufficient to provide full
appropriability by the artist?  Can the producer fully appropriate the
performing artist's contribution and pass that along to the artist?  In
the hearings, it was noted that a few of the performing artists made most
of the income and that royalties would only increase their wealth and not
that of the "struggling" performers.  But we have progressive income
taxation to handle our concerns about excess distributions of wealth.  So
the issue for performing artists, and any other contributor to
intellectual property through "adding value" remains open.
                                   -45-




6.  Summary
        This paper has shown that fourteen characteristics of information
make it necessary to treat information different from other commodities.
In particular, there are many ways in which information will be
under-produced without legislation or government support.
        The assignment of rights to intellectual property is one mechanism
to solve problems of appropriability, transaction costs, and encourage
more information about information.  However, the assignment of rights
exacerbates problems when there are high social returns to the easy and
free access to information.  Further, problems of positive externalities,
indivisibilities, and risk/uncertainty are not addressed by the rights
approach.
        Alternatives to the assignment of rights include various forms of
subsidies and tax incentives from government (and other sources) -- for
example, the support of science through grants; research through tax
credits.  When the producer is motivated from mainly non-pecuniary
(non-monetary) rewards, the abuse of these systems can be low.
        The development of an information product or service is part of an
information life-cycle.  Information sources become information resources.
These are tapped in the creation of products and services, and the results
disseminated.  Along this cycle, value is added to the original
information.  The value-added data from the Department of Commerce was
found to have limited application.  More fruitful are industry level
studies of value-added activities.
        Finally, little is still known about the political economy of the
information sector.  What are the employment effects?  Are various
segments of the industry seriously concentrating?  To what extent can and
should property rights be extended to those who add value to a basic piece
of information?
                               -46-

                             Appendix A
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