Shapley Values -- A Cautionary Tale

The federal government requires certain music copyright holders to license their work to qualifying streaming services at government-set rates. Those rates are determined in adversarial hearings before an administrative entity called the Copyright Royalty Board (CRB). The CRB for many years made the necessary determinations by, among other things, studying evidence from analogous markets. For the past ten years, however, the CRB has relied in addition on a game-theoretic concept known as the Shapley Value, which was first proposed in 1953 by Nobel Prize winner Lloyd Shapley. Shapley’s algorithm allocates economic surplus in instances where some number of distinct entities jointly produce a shared profit. The approach purports to achieve a “fair” division of that profit as between the relevant parties, accounting for each party’s unique costs and each party’s unique contributions.<br><br>This new point of emphasis has had jarring impact, with billions of dollars today changing hands under either Shapley-influenced government rates or private-party deals negotiated in their shadow. In this Article, I argue that the experts who convinced the CRB to adopt Shapley analysis got their economics wrong. Shapley analysis, it turns out, does not even purport to reflect baseline market outcomes that a regulator might then beneficially adjust. Nor does it offer any built-in levers by which regulators might quantify market power or measure other market imperfections. Most problematically, Shapley analysis is an unapologetically static framework that neglects both strategic play and long-run incentives—limitations that make it wholly inappropriate for copyright law, a set of rules fundamentally designed to inspire strategic responses and shape long-run decision-making.