Information Policy

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					          Information Rules:
  A Strategic Guide to the Network Economy




Ch. 10. The Regulation of the
    Information Industry
            Carl Shapiro
            Hal R. Varian
                    Jim Barksdale

• “…working with the government is far more
  productive than trying to ignore it.”
• Companies aim
     – Max. profits
• Policy aim
     – Max. social benefit


Information Rules        2             Spring 98
                    Competition Policy
• Each of the following issues concerning the
  information industry affects policies:
     – Differentiation of products and prices
          • price discrimination, predatory prices and content
            customization raise doubts about competition
     – Lock-in
          • Some tactics may aim at creating monopolistic positions
     – Positive feedback
          • Agreements for standard may be considered collusion (trust)


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                Price Differentiation
• Robinson-Patman Act , 1936
    – price discrimination is illegal if it “effectively
      lessens competition”
• Legal arguments that work
    – Can set lower prices resulting from lower costs
    – Can set differential prices to meet competition
    – Pricing only questionable if it “lessens
      competition”


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                    Competition Policy
• Sherman Act (1890)
     – “Monopolisation” of a market is illegal
• Clayton Act (1914)
     – Mergers “substantially reducing competition” are
       illegal
• Anti-trust (competition) policies protect
  competition as a (fair) process
• Monopoly isn’t illegal if attained through
  economies of scale, low prices and better quality,
  but attempt to monopolize is
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               Government Choices
• Do nothing
     – When there are significant economies of scale
     – When there is a hope of potential competitors
• Act on basis that monopoly was illegally obtained
     – Mergers, take-overs, predatory prices, exclusivity relationships,
       bundling
     – Solutions:
          • Break up
          • Prohibit suspect practices
• Regulate the monopolist (if market is non-contestable)
     – Public utilities … sometimes surviving beyond necessity

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           Implications for Strategy
• Monopoly may be inhibited from using
  strategies that are legal for other firms
     – Example: modifications of software aiming at
       reducing consumer choice or increasing market
       power
• But even small firms may be accused of
  antitrust violations
     – Example: Iomega for Iomega 100/400 Zip disk
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                    Be Aware
• Virtually any acquisition or merger will be
  reviewed
• Watch out for meeting with rivals (even for
  negotiating standards)
• Document your compliance with anti-trust
  rules when accused by a customer feeling to
  be in a lock-in situation

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                    Mergers
• Illegal if reduce competition and damage
  consumers
• Adobe/Aldus: graphic software
• Microsoft/Intuit: personal finance
  management software
• Silicon Graphics/Alias/Wavefront: software
  for professional graphic workstations

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    Cooperative Standards Setting
• Standards setting…or cartel?
• Watch out for prices and terms agreements
     – Creating a standard should not give opportunities for raising prices
       and restricting T&Cs
• Performance standards as barrier to entry
     – Example. Manipulating standards for declaring products of some
       brands unsafe
• Patent cross licenses
     – Example: MPEG
• Interconnection agreements  generally useful to
  consumers
Information Rules             10                                     Spring 98
                      The MPEG-2 case
This standard is used to compress video and audio
data.
It is incorporated in millions of machines.

MPEG-2 Patent Portfolio License has grown to include more than
700 patents owned by:

Alcatel, Canon, Inc., CIF Licensing, LLC, Columbia University,
France Télécom, Fujitsu, General Instrument Corp., GE Technology
Development, Inc., Hitachi, Ltd., KDDI Corporation (KDDI), LG
Electronics Inc., Matsushita, Mitsubishi, Nippon Telegraph and
Telephone Corporation (NTT), Philips, Robert Bosch GmbH,
Samsung, Sanyo Electric Co., Ltd., Scientific-Atlanta, Sharp, Sony,
Thomson Licensing, Toshiba, and Victor Company of Japan, Limited
(JVC).
   Information Rules          11                            Spring 98
The MPEG pool is a model in terms of prevention of
anticompetitive effects:
   - it contains only patents that are essential to the compression
   technology
   - efforts are made to reduce the number of patents
   - Management and licensing is provided by



 MPEG LA pays royalties to patent holders in proportion to their
 share in the pool
 MPEG LA sells licenses on a non-discriminatory basis
 Every patent can be licensed separately from the others if
 required by another technology

  PatentsRules pool enhance welfare
  Information in the    12                                   Spring 98
               Single Firm Conduct
• Prohibited strategies:
     – Exclusive dealing: imposing to customers not to
       have relationships with competitors
     – Tying*: obliging customers to buy other
       products if they want to get the monopolised
       product
          • Example: Microsoft Explorer included in Windows
            although not part of the operating system  against
            Netscape
                                      * <vendite abbinate>:
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                      Regulation
• Control genuine monopoly power where it
  exists, and cannot be eroded by competition
     – USA Telecommunication Act, 1996
     – Italy, 31 July 1997, n. 249
          • Opening telephone market to competition implies
            interconnection, use of the network by other
            providers, keeping the same telephone number wen
            changing provider, etc.


Information Rules         14                            Spring 98
                    Universal Service
Should universal access to the Internet be supported by public
  policies?

Geography (isolated areas)
     – Incorporated into land prices
• Income level
     – Merit goods (goods that should be accessible to everybody)
     – Why do some not have service? Sometimes it is a choice (low
       income families prefer having a TV set and use telephone and
       Internet access in public areas.



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                    Lessons
• Don’t expect government’s role to diminish
• Every company needs to know the rules
• You can usually use differential pricing
• Policy should ensure fair fight, not punish
  winners or protect loosers
• Mergers are subject to review by DoJ


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                    Lessons, continued
• Cooperate to set standards and develop new
  technologies, so long as efforts benefit
  consumers
• If you gain a leading share of market,
  conduct audit of your practices
• Don’t expect government regulation of
  telecom to diminish any time soon

Information Rules        17              Spring 98

				
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