Lowering Appropriability Hazards by Raising Infringers’ Costs

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Internet intermediary platforms are online services that provide a means for information to be hosted, accessed, shared, indexed, and transmitted between third parties. Such services lower search costs in the Internet economy by making it possible for users to find and evaluate the information, goods, and services they need and facilitating market exchanges by providing forums which establish transactional norms and codes of conduct. However, intermediary services also make it easier for unauthorized infringement of copyright and trademarks to occur online. In this context, their ability to control online information traffic and marketplace activities makes them a potentially valuable resource for intellectual property (IP) holding firms if they can be induced to assist in identifying and preventing instances of infringement. Accordingly, intermediaries are increasingly a target for IP holders who sue them for the actions of third party users. I frame these lawsuits as a multi-stage raising rivals' costs strategy in which IP holders use intermediaries to lower their own transaction costs while simultaneously raising those of infringers. I suggest that different types of property rights lead to heterogeneous selection preferences amongst potential intermediary targets for litigation. I then argue that the systematic importance of intermediary targets influences the magnitude of property enforcement requests, which in turn drives the likelihood of escalated rounds of litigation. I find that these hypotheses are supported and may have important implications for managers in IP industries, providers of intermediary services and policymakers with respect to Internet governance and intellectual property enforcement.