Are Digital Resale Markets Legal? Should They Be?

The other day I came across an article at Ars technica about ReDigi. You may have heard of ReDigi. They resell digital goods. Me, I was puzzled, so I emailed Ben Shiller, who has just finished his dissertation about resale digital markets. His dissertation is called “Digital Downloads and the Prohibition of Resale Markets for Information Goods.” This is up his alley.

We traded emails and I learned a lot from it. Heck, let me quote Ben directly. (Yes, I asked him if it was ok to quote him and embed the links, etc.)

Ben says the following:

“Resale markets for physical media, such as CDs, DVDS, video games, books, etc., have been around for a long time, and many consumers (like me) have used them frequently to buy or sell used media. However, consumers have not had a place to resell digital media, like MP3’s. That all changed when ReDigi, the first used market for MP3’s, opened last month. But is it legal? They have already been sent cease and desist letters from the Recording Industry Association of America (RIAA).

They seem to think their site is legal, at least according to an excerpt from their FAQ sections:

The thing that sets ReDigi apart from any company that has attempted to do what we are doing is our revolutionary patent pending technology that facilitates the “verification” and “hand off” of a digital music file from the seller to the buyer, ensuring both that the file is from a legitimate source and eligible for resale on ReDigi, and that any additional copies of a sold file that may have been made by the seller (e.g., for use on multiple devices in accordance with “fair use” limitations on copying for personal use), are also deleted.

In this way, ReDigi brings the familiar process of selling a physical good (CD, Vinyl, Pink Cadillac, etc.) into the digital age.

Let’s use the Pink Cadillac as an example. You bought that outrageous gas-guzzler, you own the title, and by all means you have the right to sell it. However, once you hand over the keys, it’s no longer yours to drive.

The same concept applies to a used song sold through ReDigi.

They argue that because resale of physical goods is legal, resale of digital goods should be too, provided that the seller relinquishes ownership.

However, while argument makes intuitive sense, it may be wrong from a legal standpoint. The right to resell physical copies of copyrighted goods has been guaranteed by the First Sale Doctrine. However, the doctrine does not apply to digital goods, due to a technicality. Technically, the First Sale Doctrine only applies to the original copy. In the case of a download, the original copy is data on the hard-drive from the original download. Copying the data to a disk, attaching it to an email, and other methods of transferring the good, all require making a copy of the original data. So the First Sale Doctrine does not apply, and sellers can prohibit resale of their copyrighted products.

Prior inaction by the government would suggest that this omission is more than a mere technicality. Congress considered applying the First Sale Doctrine to digital goods, allowing the “forward and delete” resale method, the one used by ReDigi, in the Balance Act of 2003. However, the bill failed to passed.

It gets worse for Redigi. Most digital music is not sold, but licensed via “click-wrap” agreements – when you click on the box to agree to the terms of service, you are agreeing to a license. A circuit court (the circuit courts are regional courts, one step below the Supreme Court) decided in a case (Vernor v. Autodesk) that firms can restrict resale simply by licensing their goods, and explicitly forbidding transfer of the good in the licensing agreement, even when the license looks like a sale from a legal standpoint. The Supreme Court has not weighed in however. So this may change.

While the iTunes licensing agreement used to allow a one-time transfer of songs from one user to another, it no longer seems to. For a related type of good, apps, the current licensing agreement is quite explicit in forbidding resale:

You may not rent, lease, lend, sell, transfer redistribute, or sublicense the Licensed Application and, if you sell your Mac Computer or iOS Device to a third party, you must remove the Licensed Application from the Mac Computer or iOS Device before doing so.

So it would seem that ReDigi is illegal. Should it be?

From an economic standpoint, resale should be legal if it improves overall welfare, i.e. consumer welfare plus firm profits. I find in my research that overall welfare is not impacted by resale markets. But resale markets do have a major impact on how that surplus is split between consumers and firms.

It is not surprising that restricting resale of entertainment goods increases profits. Consumers of these goods get bored of the good over time, and when resale markets exist, will resell them. Consumers who wait and buy the good later in the used market typically didn’t value the good as highly, so the price in the used market is typically less than the original price. But the good still has the same quality since it is just data. Knowing that they can buy the same quality product for less later limits how much consumers will pay initially for the new product, hence lowering profits.

Restricted resale makes consumers worse off. First of all, goods are inefficiently allocated later on. If, after you get bored of the product, value it less than I do having never owned it, then we are both better off by your selling the good to me. It also allows firms to maintain high prices.”

There you have it! Very thoughtful. For those further interested in more of the economics Ben’s work on the topic, his email is Benjamin Shiller bshiller@nber.org. He also has a web page: http://benjaminshiller.com/