Fixing Safe Harbor: An Economic Analysis

Abstract

When a pirated version of a copyrighted work is shared over the Internet, many online intermediaries may participate, exposing these firms to liability through legal concepts such as direct, contributory and vicarious infringement. Safe harbors largely shield intermediaries from “crippling liability” in return for cooperative action on infringing materials. Yet, digital piracy remains a problem. In this POLICY PAPER, we offer a simple economic model of safe harbor protection, demonstrating that de minimis liability for these platforms promotes infringing platforms to the detriment of responsible ones. Increasing the risk of liability for infringement results in a “separating equilibrium,” with one platform offering only legitimate and high-value content and another offering a combination of illegitimate and low-value content. Effective platform liability should ultimately change the structure of the platform industry, which we believe should improve enforcement of copyright law. Legal changes similar to those prescribed here were recently been proposed in the European Union.