The Economics of Copyright Law and the Concept of Market Failure
Wendy Gordon can be credited with suggesting in the early 1980s that courts seemed to be using a sort of rough economic calculus to make decisions in fair use cases.
She hypothesized that market failure theory could account for their results, and in fact, the presence or absence of a market failure could predict when courts would likely find a use fair. As she described it, a court would first establish that there was a market failure then balance injuries to the copyright owner against benefits to the user if the right to make the use were determined to be fair. A fair use would imply that the court had concluded that overall, permitting the use without permission would be socially desirable. But even with a market failure and a socially desirable use, the court should still go on to ask one more question: will a finding of fair use substantially injure the copyright owner’s incentives by depriving him of some source of revenue he might otherwise have obtained? In other words, if the court ruled against fair use, and in the wake of the court decision the parties would get together and find a way to “cure” the market failure, generating substantial revenues for the copyright owner, it would be wrong to say that the use should be fair. So, the court would conclude in such a case that the use should not be fair.
This may sound complicated, but as a practical matter, the economic concept of market failure now provides a simple way to judge fair uses. Under this theory, only if the market completely fails to facilitate a socially beneficial transaction (the “use” of another’s work in this case) between what would otherwise have been a willing buyer and seller of rights, should courts recognize the use as fair and thereby limit the scope of the copyright monopoly. In concrete terms, a court following market failure theory would find that a nonprofit educational use were fair only if it were impossible or very difficult for a user to make the use if she had to get permission from the copyright owner. For example, a court would find a use fair where the user cannot find the copyright owner, or if the work involves multiple rights-holders who cannot be identified, or if the copyright owner does not respond to requests to use her work, all situations where a requirement to get permission will result in the user foregoing the use, with no benefit to the owner. We might call this “narrow market failure theory” because it recognizes only a narrow, one might say one-dimensional, definition of fair uses: those justified by market failure due to current and likely continuing, unacceptably high transaction costs.
Market failure could be less strictly interpreted but so far courts have not given it a more generous scope. Markets do not fail only when there are high transaction costs. Generally, however, courts do not find that mere market dysfunction, that is, facilitating some but not the optimal number of transactions, justifies limiting the scope of the copyright monopoly.Courts using the narrow market failure approach generally conclude that if a market can or even could facilitate the theoretical transaction, it should. For example, if it is possible to license a use, it should be licensed (that is, not characterized as fair). Any revenue a copyright owner can get, she should get. It is easy to see how courts tend to expand rights rather than limit them when they start with the assumption that the copyright owner is ordinarily entitled to all revenue for all substantial uses of his works. They believe that expansive rights will achieve the goals of copyright in a manner consistent with our market-based economy. Markets should be allowed and encouraged to work, and it just seems right that an author (or more often the company that owns her copyright) should receive whatever revenues the initial effort may ultimately be capable of generating. The changes in copyright law in the twentieth century reveal a dramatic expansion of copyright owners’ rights, premised on these assumptions. Looked at in this way, it is not that hard to understand why those arguing for limits on the monopoly, or put another way, those arguing for generous interpretations of fair use in iterative use contexts, lose most of the time.
 Gordon, W. J. (1982). Fair use as market failure: A structural analysis of the Betamax case and its predecessors. 82
 A market failure here means that there is a malfunction in the normal way markets bring buyers and sellers of products, services and rights together. Usually, if there is demand for a good or service, in a free market, someone will see the opportunity and provide the good or service. If a person tries to offer a good or service that no one wants, the effort will not succeed. The “failure” occurs when there is demand, but no one steps up to provide the good or service.
 Gordon, Fair Use as Market Failure, pp. 1614 - 1622.
 This total market failure scenario also characterizes the circumstances currently applicable to “orphan works,” and suggests that if pending legislation to address the social need to utilize orphan works fails to pass, users who take reasonable steps to determine that a work is orphaned can probably rely on fair use to make many uses of it. But, fair use is not so certain a defense as the limitations on liability that Congress is considering in the orphan works bill. [cite] Nonetheless, there may be institutions and individuals willing to move forward with some uses of orphan works relying on fair use.
 Gordon, Fair Use as Market Failure, p. 1618 - 1619, 1630 - 1632; Loren, L. P., Redefining the market failure approach to fair use in an era of copyright permission systems. 5 J. Intel. Prop. L1. Market dysfunction is discussed more fully in the next section of the paper.
 Gordon, Fair Use as Market Failure, p. 1651; Lemley, Free Riding at p. 1041 - 1042.
 Goldstein, Copyright’s Highway.
 Vaidhyanathan, Copyrights and Copywrongs; Litman, Digital Copyright; Lessig, The Future of Ideas & Free Culture; Goldstein, Copyright’s Highway; Lemely, id.
 Texaco; Kinko’s; Michigan Document Services.