By definition, intellectual property cannot exist in a free market. Intellectual property is a massive government intervention in the otherwise free market, it kills lots of freedom for nearly everyone, and for a very dubious gain.
And as you noticed, the mere presence of IP changes the behaviour of market participant and makes them engage into grossly inefficient pathes.
I don't know if free markets are a solution here, but what you're observing is nothing near a free market because of IP.
Mandatory quote:
Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...] The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced. Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period. The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek
The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.
Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period.
The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek
I certainly prefer your definition of "free market" as one without IP, but it doesn't seem to be the definition that is proffered by the Main-Stream Media. I'm not arguing that you're correct, just that message we're being fed is that our economic success hinges on secure property rights, especially including IP (just pick up any issue of The Economist!).
I've even written that free access to information can benefit the most closed-informatio-access organizations: the government functions of military, security, and diplomacy.
Open Source Warfare
So I agree, restricting the use and access to information is certanly contra to the notion of "freedom," but it seems to be included in the "approved message" for how a free-market economy works. The providers of that message seem to enjoy trotting out quotes from the likes of Hayek or Mises when it suits them, while conveniently ignoring critical parts of their theories...
Economist Dean Baker reminds us of this often on his blog Beat The Press, see here and here.
In particular "free trade" agreements are everything but "free".
For example, if I remember well, 10 years ago the word "populism" meant politics appealling to simplistic way of social life (with lower taxes, less public involvement, or mpre nationalistic). Now this word is used in the media with exactly possitive meaning.
