The End of Friction - Property Rights and Contract in the Newton World of on-Line Commerce

Abstract

The conventional account lists four types of transaction costs: - Identifying potential buyers and sellers; - Negotiating deals; - Measuring performance, e.g., metering use; and - Enforcing agreements. Despite recent hype, cyberspace is not truly Newtonian because it does not eliminate all of these sources of friction. Enforcement costs in particular are still considerable with existing technology. With an eye toward these transaction costs, this Essay discusses one aspect of law in the on-line environment: the respective roles of contract and property rights. I discuss why property rights are necessary in cyberspace, notwithstanding predictions that low transaction costs will allow contract to usurp property rights in this setting. The possibility of a break in the chain of privity means that property rights -- which can be thought of as an "off the shelf" contract -- will still be necessary. In other words, contract formation may be costless, but monitoring post-contract execution behavior will often not be. Property rights will thus continue to be necessary to permit enforcement against parties not in contractual privity with information providers. The ease of contract formation informs the analysis of another important legal issue -- the "fair use" doctrine in copyright law. Conditions in cyberspace at least partially undermine the prevailing "market failure" theory that informs this doctrine. Instead of abandoning the doctrine, which I believe serves some important goals, I advocate a different theory. At least where markets are robust, I argue that we should return to the redistributive roots of the doctrine, in effect giving low transaction-cost subsidies for certain users of copyrighted works.