Subsidies versus intellectual property rights when innovators operate in two markets

Intellectual property rights are monopoly rights, which have undesirable welfare properties. Therefore, several studies suggest using rewards as incentives for innovation instead. However, these studies have thus far had little effect on actual policy, possibly because such rewards may be difficult to implement in practice. We suggest a new way of providing incentives to originators, which is easier to implement. Our suggestion can be used if there is an additional market in which originators operate, where copying is not easily possible. In this case, intellectual property rights in one market can be replaced by subsidies in the other market. Taking the music industry as example, copyrights in the records market could be replaced by subsidies in the market for live performances. We develop a partial equilibrium model that can be used to analyze in which cases the replacement of intellectual property rights in one market with subsidies in another market is welfare improving and better for the originator. A numerical application example suggests that the subsidy scheme may indeed be better in the music industry. The subsidy scheme can be implemented as a voluntary option, which would even be possible without changing the legal framework of intellectual property rights.