Transaction Costs

Intellectual property rights can be very costly to enforce, and may require complicated negotiation and monitoring of use, which is also costly. These costs are called "costs of transaction" or "transaction costs." The transaction costs also may not be stable. All of these things can be illustrated by the costs and difficulty of enforcing intellectual property rights in computer software. The producers of the software have to invest in "copy protection," but copy protection schemes can be broken by clever "hackers," leading to a sort of arms race of increasing expenditure on copy protection and cracking. To the extent that they are successful, the costs of copy protection have to be paid for with higher prices, thus compounding monopoly waste. But, in practice, intellectual property rights are often not enforced, so that the rights lose some of their effect in remedying the incentive problem.

Nonprotectable Products