The Economics of Copyright Levies on Hardware

We provide an economic analysis of the static and dynamic effects of copyright levies on hardware used to access original content. An immediate effect of this type of levy is to decrease the total consumption of content (both original and copied) by consumers since their available income decreases. We show that, in a competitive environment, the net revenue of content providers increases with the levy only if the proportion of taxes retained by content providers exceeds the proportion of consumers using licensed content; condition that does not seem to be satisfied in reality. Hence, from a static perspective, levies on hardware do not seem to compensate content providers for copying by consumers. This is because the levy is not \emph{targeted}, contrary to other types of levies on support explicitly used for copying like CDs, tapes or flash drives. We then extend the basic model to allow for differentiated content providers and show that in a dynamic setting of reputation building, less ``reputable'' content providers suffer more from levies on hardware. Finally, we allow for market power by content providers and show that the difference in profits between a subscription scheme and a uniform pricing strategy is decreasing in the level of the levy; this suggests that high levels of taxes will deter content providers from adopting subscription systems. This may happen despite the fact that subscription systems may bring back into licensed consumption ``pirates'' and benefit licensed consumers.