Ronald Coase’s 1937 article, “The Nature of the Firm,” observed that rational economic actors decide whether to “make or buy” depending on whether the transaction costs of assembling factors of production inside a firm’s boundaries are less than the transaction costs of assembling them in the external marketplace. Michael Heller’s 1998 Harvard Law Review article, “The Tragedy of the Anticommons,” observed that fragmented ownership of goods and services increases transaction costs for those who want to combine.
In a series of law review articles — Henry H. Perritt, Jr., New Business Models For Music, 18 Vill. Sports & Ent. L.J. 63 (2011); Henry H. Perritt, Jr., Technologies of Storytelling: New Models for Movies, 10 Va. Sports & Ent. L.J. 106 (2010); Henry H. Perritt, Jr., Cut in Tiny Pieces: Ensuring that Fragmented Ownership Does Not Chill Creativity, 14 Vand. J. Ent. & Tech. L. 1 (2011); The Internet at 20: Evolution of a Constitution for Cyberspace, 20 Wm. & Mary Bill Rts. J. 1115 (2012); Henry H. Perritt, Jr., Competitive Entertainment: Implications of the NFL Lockout Litigation for Sports, Theatre, Music, and Video Entertainment, ___ Hastings Comm. Ent. L. J. ___ (in press); and Henry H. Perritt, Jr., Crowd Sourcing Indie Movies (forthcoming) — I argue that Internet-centered technology developments are reducing the size of economically sustainable units of production in the entertainment industries, broadly defined, thereby reducing barriers to entry and allowing almost anyone with a creative bent to access global markets. The result, however, is greatly increased transaction costs, both for consumers who want to find entertainment that appeals to them, but also for other creators who want to combine what’s available into new creative works.
The most interesting technological developments are the ones that reduce transaction costs in this fragmented marketplace. iTunes and Amazon come to mind as early innovators. An extension of crowd-sourcing techniques popular so far mainly for raising donations for creative projects into all phases of creation is promising.
The law has a relatively modest role to play in this new marketplace, except to allow for enforcement of contracts. Intellectual property law, especially copyright is becoming irrelevant because technology is reducing marginal costs and making markets more competitive. In such markets, prices approximate marginal costs. As prices fall, there is no room for margins for pirates and thus diminishing economic incentives to engage in piracy.
The next frontier for the law is dealing with the growing threats of cyberwar and cyberterrorism. The best solution is not to try to roll back the essential features of the Internet: decentralization and autonomy for participants at the “edge” with new regulations and enforcement agencies. The best solution is to borrow a page-long part of the common-law of torts: to subject service providers to liability for negligence when they do not use best practices to protect their customers’ assets. In order to revitalize negligence law to play this role, some modification will be necessary in the doctrine disallowing recovery for mere economic injury. This is the subject of a forthcoming article, Cyberwar.