THE ECONOMICS OF INTELLECTUAL PROPERTY PROTECTION FOR SOFTWARE:
                  The Proper Role for Copyright

                             Abstract

     This paper provides an economic analysis of the proper scope
of copyright protection for computer software.  We begin by
identifying key economic characteristics in the production and use
of software; notably, the costs to developers is largely fixed and
sunk, users often incur substantial sunk costs, and that the value
of software to users is usually a significantly increasing function
of the total number of users (i.e., "network externalities" are
important).

     We then use economic theory and analysis to establish three
propositions.  First, we demonstrate that the copyright protection
granted to the original developer of a software package should not
extend to elements of the software that achieve the status of a de
facto standard because the resulting monopoly leads to pricing that
fails to achieve efficient dissemination of the software and fails
to reward other sponsors who have invested in the de facto
standard.  Next, we argue that software interface specifications
also should not be copyrightable since it would permit an
inefficient extension of market power to complementary software and
to later improvements.  Finally, we favor reverse engineering for
the purpose of achieving interoperability since it enables firms to
efficiently design compatible programs and to guard against
unwarranted abuse of copyright protection.

     In most instances, recent case law is consistent with these
principles, especially since the recent Appeals Court decision in
Lotus v. Borland.  Importantly, copyright law has devised a "merger
doctrine" that denies protection whenever a product is the (nearly)
unique expression of an uncopyrightable idea, a principle that
effectively implements our prescriptions for software copyright. 
Since we conclude that copyright is the appropriate form of
protection for intellectual property only when the likelihood of an
unwarranted grant of monopoly is extremely low, this prescription
achieves the desired balance between the need to reward innovative
developers of software programs and the need to encourage suppliers
of complementary products and those who build upon and advance
prior work.