Innovation spillovers and the "dirt road" Fallacy: The intellectual bankruptcy of banning optional transactions for enhanced delivery over the internet

Journal of Competition Law and Economics

Volumn 6, Issue 3, 2010, Pages 521-594

  Gregory Sidak, J ^a,b   Teece, David J ^c  

^a TILBURG UNIVERSITY   (Netherlands)

^b The Coase Foundation for Law and Economics   (United States)

^c UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77956920105     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhq003     Document Type: Article

References (186)

1. Lawrence Lessig, The Internet Under Siege, 127 FOREIGN POL'Y 56, 56 (2001)
2. See id; LAWRENCE LESSIG, THE FUTURE OF IDEAS: THE FATE OF THE COMMONS IN A CONNECTED WORLD (Random House 2001) [hereinafter LESSIG, THE FUTURE of IDEAS]
3. Lawrence Lessig, Congress Must Keep Broadband Competition Alive, FIN.TIMES, Oct. 18, 2006.
4. Lawrence Lessig & Robert W. McChesney, No Tolls on the Internet, WASH. POST, June 8, 2006, at A23.
5. Net Neutrality, Hearing before the Sen. Comm. on Commerce, Science, and Transportation, 109th Cong., 2d Sess. 59 (2006) (testimony of Lawrence Lessig), available at http://www.lessig.org/blog/archives/Lessig_Testimony_2.pdf.
6. Tim Wu, Network Neutrality, Broadband Discrimination, 2 J. TELECOMM. & HIGH TECH. L. 141 (2003).
7. See Barbara van Schewick, Towards an Economic Framework for Network Neutrality Regulation, 5 J. TELECOMM. & HIGH TECH. L. 329 (2007).
8. Christopher S. Yoo, Beyond Network Neutrality, 19 HARV. J.L. & TECH. 1 (2005).
9. Christopher S. Yoo, Network Neutrality and the Economics of Congestion,95 GEO. L.J. 1847 (2006).
10. See J. Gregory Sidak, A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet, 2 J. COMPETITION L. & ECON. 349, 349 (2006), available at http://www.criterioneconomics.com/pdfs/A_Consumer_Welfare_Approach_to_Network_Neutrality_Regulation_of_the_Internet.pdf
11. Net Neutrality, Hearing before the Sen. Comm. on Commerce, Science, and Transportation, 109th Cong., 2d Sess. 59 (2006) (testimony of J. Gregory Sidak) [hereinafter Sidak 2006 Senate Te s t i m o n y] (listing six essential characteristics of communications networks that rendered regulation unnecessary and likely harmful to investment and innovation incentives among network operators: the substantial sunk investments required to build networks, economies of scale, economies of scope, differential pricing, two-sided demand, and the susceptibility of networks to congestion)
12. see also J. Gregory Sidak, Consumer Welfare and Network Neutrality, Presentation at the Federal Trade Commission Broadband Connectivity Competition Policy Workshop (Feb. 13, 2007), available at http://www.ftc.gov/opp/workshops/broadband/presentations/sidak.pdf
13. (cited in FEDERAL TRADE COMMISSION STAFF REPORT, BROADBAND CONNECTIVITY COMPETITION POLICY (June 2007), available at http://www.ftc.gov/reports/broadband/v070000report.pdf.).
14. ("It bears repeating that the stakeholders whose interests should weigh most heavily in the deliberations of policy makers are consumers, not any particular constituency of competitors.").
15. Preserving the Open Internet; Broadband Industry Practices, Notice of Proposed Rulemaking, GN Dkt. No. 09-191, WC Dkt. No. 07-52, ¶¶ 60-80 (2009) [hereinafter Network Neutrality NPRM].
16. See, e.g., William J. Baumol, Martin Cave, Peter Cramton, Robert Hahn, Thomas W. Hazlett, Paul L. Joskow, Alfred E. Kahn, Robert Litan, John Mayo, Patrick A. Messerlin, Bruce M. Owen, Robert S. Pindyck, Scott J. Savage, Vernon L. Smith, Scott Wallsten, Leonard Waverman & Lawrence J. White, Economists' Statement on Network Neutrality Policy (AEI-Brookings Joint Center Working Paper No. RP07-08, Mar. 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=976889#PaperDownload (last visited Mar. 10, 2010) [hereinafter Economists' Statement].
17. See Declaration of Gary S. Becker & Dennis W. Carlton, In the Matter of Preserving the Open Internet, Broadband Industry Practices, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of Verizon Jan. 14, 2010).
18. See Richard A. Epstein, Net Neutrality at the Crossroads, FT.COM, Oct. 27, 2009, available at http://www.ft.com/cms/s/0/d9611768-c310-11de-8eca-00144feab49a.html?nclick_check=1.
19. See Gerald Faulhaber & David J. Farber, The Open Internet: A Consumer-Centric Framework, GN Dkt. 09-191, WC Dkt. 07-52 (filed with the FCC on behalf of AT&T Jan. 14, 2010).
20. David Farber & Michael Katz, Hold Off on Net Neutrality, WASH.POST, Jan. 19, 2007, at A19.
21. See Thomas W. Hazlett, Broadbandits, WALL ST. J., Aug. 12, 2006, at A9, available at http://online.wsj.com/article/SB115533922506533851-search.html.
22. See C. Scott Hemphill, Network Neutrality and the False Promise of Zero-Price Regulation, 25 YALE J. ON REG. 135 (2008).
23. See Alfred E. Kahn, Statement of Alfred E. Kahn, Robert Julius Thorne Professor of Political Economy, Emeritus, Cornell University, before the FTC Workshop on Broadband Connectivity Competition Policy, (delivered Feb. 13, 2007), http://www.ftc.gov/opp/workshops/broadband/presentations/kahn.pdf (Feb. 21, 2007 rev.).
24. See Robert Kahn, Remarks at An Evening with Robert Kahn in Conversation with Ed Feigenbaum (Computer History Museum Jan. 9, 2007), available at http://www.computerhistory.org/events/index.php?id=1162920599
25. see also Andrew Orlowski, Father of the Internet Warns Against Net Neutrality, THE REGISTER, Jan. 18, 2007, http://www.theregister.co.uk/2007/01/18/kahn_net_neutrality_warning/ (last visited Mar. 10, 2010) ("Robert Kahn, the most senior figure in the development of the internet, has delivered a strong warning against 'Net Neutrality' legislation.").
26. See Michael L. Katz, Maximizing Consumer Benefits from Broadband, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of Verizon Jan. 14, 2010).
27. See Bruce M. Owen, Antecedents to Net Neutrality, 30 REG. 14 (2007).
28. Bruce M. Owen & Gregory L. Rosston, Local Broadband Access: Primum Non Nocere or Primum Processi? A Property Rights Approach, in NET NEUTRALITY OR NET NEUTERING: SHOULD BROADBAND INTERNET SERVICES BE REGULATED? 163 (Thomas M. Lenard & Randolph J. May eds., 2006).
29. See Gregory L. Rosston & Michael D. Topper, An Antitrust Analysis of the Case for Wireless Network Neutrality (Stanford Inst. for Econ. Policy Research, Discussion Paper No. 08-040, July 2009)
30. See Declaration of Marius Schwartz, In the Matter of Preserving the Open Internet, Broadband Industry Practices, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of AT&T Jan. 14, 2010) [hereinafter Schwartz Declaration].
31. See DANIEL F. S PULBER &CHRISTOPHER S. YOO, NETWORKS IN TELECOMMUNICATIONS: ECONOMICS AND LAW (Cambridge Univ. Press 2009).
32. See Leonard Waverman, Comments on Network Neutrality, 2 J. COMPETITION L. & ECON 475 (2006). This list is only partial.
33. See, e.g., Michael D. Topper, Broadband Competition and Network Neutrality Regulation, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of Verizon Jan. 14, 2010)
34. Gerald Faulhaber, David Farber, Michael Katz & Christopher Yoo, Common Sense on Net Neutrality (2006), available at http://www.interesting-people.org/archives/interesting-people/200606/msg00014.html (last visited Mar. 10, 2010)
35. William E. Kennard, Spreading the Broadband Revolution, N.Y. TIMES, Oct. 21, 2006, at A13.
36. Robert Pepper, Net Neutrality Debate Sets Out a False Choice, NETWORK WORLD, June 12, 2006, available at http://www.networkworld.com/columnists/2006/061206-net-neutrality-no.html (last visited Mar. 10, 2010).
37. Faulhaber and Farber observe that, "during ten years of experience without network neutrality regulations, there are just two incidents (the tiresomely familiar Madison River and Comcast cases) of any actual misbehavior by broadband ISPs."
38. see also Jeffrey H. Reed & Nishith D. Tripathi, The Application of Network Neutrality Regulations to Wireless Systems: A Mission Infeasible, GN Dkt. No. 09-191, WC Dkt. No. 07-52, at 5 (filed with the FCC on behalf of AT&T Jan. 14, 2010).
39. See, e.g., Jon M. Peha, The Benefits and Risks of Mandating Network Neutrality, and the Quest for a Balanced Policy,1 INT'L J. COMM. 644 (2007).
40. Howard A. Shelanksi, Network Neutrality: Regulating with More Questions than Answers,6J.TELECOMM.&HIGH TECH. L. 23 (2007).
41. Joseph Farrell & Phil Weiser, Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age, 17 HARV. J.L. & TECH. 85 (2003).
42. See, e.g., Robin S. Lee & Tim Wu, Subsidizing Creativity Through Network Design: Zero Pricing and Net Neutrality, 23 J. ECON.PERSP. 61, 73-74 (2009) ("network management and quality of service inherently requires some form of packet discrimination or content co-location, and are practices with which we do not necessarily take issue").
43. Second En Banc Hearing on Broadband Network Management Practices before the FCC, Dkt. 07-52 (Apr. 17, 2008) (testimony of Lawrence Lessig), available at Testifying @ FCC @ Stanford, Lessig Blog (posted Apr. 18, 2008), http://lessig.org/blog/2008/04/testifying_fcc_stanford. html [hereinafter Lessig 2008 FCC Testimony].
44. FCC, Policy Statement, Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Dkt. No. 02-33, Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services, CC Dkt. No. 01-337, Computer III Further Remand Proceedings: Bell Operating Company Provision of Enhanced Services; 1998 Biennial Regulatory Review-Review of Computer III and ONA Safeguards and Requirements, CC Dkt. Nos. 95-20, 98-10, Inquiry Concerning High-Speed Access to the Internet over Cable and Other Facilities, Internet over Cable Declaratory Ruling, GN Dkt. No. 00-185, Appropriate Regulatory Treatment for Broadband Access to the Internet over Cable Facilities, CS Dkt. No. 02-52, 20 F.C.C. Rcd. 14,986 ¶ 4 (2005).
45. Seeking to "encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet," the FCC declared that consumers possess entitlements "to access the lawful Internet content of their choice," "to run applications and use services of their choice, subject to the needs of law enforcement," "to connect their choice of legal devices that do not harm the network," and to benefit from "competition among network providers, application and service providers, and content providers."
46. But see Comcast Corp. v. FCC, No. 08-1291 (D.C. Cir. Apr. 6, 2010) (depriving FCC of authority to enforce Internet policy statement).
47. The "nondiscrimination" rule can best be regarded as a "no priority access fee" rule. Nevertheless, in what follows, we will use the FCC's "nondiscrimination" language.
48. Nicholas Economides, Why Imposing New Tolls on Third-Party Content and Applications Threatens Innovation and Will Not Improve Broadband Providers' Investments, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of Google Jan. 14, 2010) [hereinafter Economides, Imposing New Tolls on Third-Party Content].
49. Christiaan Hogendorn, Spillovers and Network Neutrality, GN Dkt. No. 09-191, WC Dkt. No. 07-52 (filed with the FCC on behalf of Google Jan. 2010).
50. Inimai M. Chettiar & J. Scott Holladay, Free to Invest, The Economic Benefits of Preserving Net Neutrality (N.Y.U. Sch. of Law Institute for Policy Integrity, Report No. 4, Jan. 2010).
51. See Cisco Systems, Paul Sanchirico, Vice President, Service Provider Systems Unit, A Discussion with the FCC on the Open Internet (Dec. 8, 2009).
52. see also Clarence Filsfils & John Evans, Deploying Diffserv in Backbone Networks for Tight SLA Control, IEEE INTERNET COMPUTING 58 (Jan.-Feb. 2005).
53. Vinton G. Cerf & Robert E. Kahn, A Protocol for Packet Network Intercommunication, 22 IEEE TRANSACTIONS ON COMM. 637 (1974).
54. IBM Global Technologies, Business Benefits of Converged Communications (Oct. 2006), available at http://www-935.ibm.com/services/uk/igs/pdf/converged-communications-pov_ 0906.pdf.
55. Comments of Google Inc., In the Matter of Preserving the Open Internet, Broadband Industry Practices, GN Dkt. No. 09-191, WC Dkt. No. 07-52, at 35 (filed with the FCC Jan. 14, 2010) [hereinafter Google Comments].
56. See, e.g., A Fairer Faster Internet Protocol, IEEE, Dec. 2008, available at http://spectrum.ieee.org/telecom/standards/a-fairer-faster-internet-protocol (last visited Mar. 11, 2010).
57. Friedrich A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 519 (1945).
58. One example of enhanced end-to-end delivery is virtual private networks (VPN) service, which businesses commonly use to enable employees to connect to the enterprise's network from offsite
59. See, e.g., Connect:Direct® Over a VPN Connection, http://www22.verizon.com/wholesale/lsp/connguide/1,5133,4-East-Billing-dialup,00.html; AT&T Virtual Private Networks, http://www.business.att.com/enterprise/Portfolio/vpn-services-enterprise/.
60. See FCC, CONNECTING AMERICA: THE NATIONAL BROADBAND PLAN 15 (2010) [hereinafter NATIONAL BROADBAND PLAN] ("Networks, devices and applications drive each other in a virtuous cycle. If networks are fast, reliable and widely available, companies produce more powerful, more capable devices to connect to those networks. These devices, in turn, encourage innovators and entrepreneurs to develop exciting applications and content. These new applications draw interest among end users, bring new users online and increase use among those who already subscribe to broadband services. This growth in the broadband ecosystem reinforces the cycle, encouraging service providers to boost the speed, functionality and reach of their networks.").
61. The FCC may be proposing to allow ISPs to provide CDN-like QoS services to content providers. If so, clarification of that policy, together with a clear explanation of why prioritized or enhanced delivery by an ISP should be treated differently, would be welcome.
62. Comments of the Ass'n for Competitive Tech., In the Matter of Preserving the Open Internet, Broadband Industry Practices, GN Dkt. No. 09-191, WC Dkt. No. 07-52, at 13-20 (filed with the FCC Jan. 14, 2010) [hereinafter ACT Comments].
63. About ACT, ACT, http://www.actonline.org/na/about/.
64. These business models are often called "freemium business models."
65. See David J. Teece, Business Models, Business Strategy and Innovation, 43 LONG RANGE PLANNING 172, 178 (2010).
66. Although large content and applications developers can purchase local caching services such as those provided by Akamai to enhance their applications' QoS, many small developers may lack the scale to purchase such services efficiently or may prefer the functionalities that ISPs could offer
67. See Morgan Reed, Executive Director, Ass'n for Competitive Tech., Statements at the Information Technology & Innovation Foundation Panel Discussion, Preserving the Open Internet: Is a Consensus Emerging? (Feb. 23, 2010), available at http://www.itif.org/index.php?id=335.
68. See, e.g., Anne Marie Knott, Persistent Heterogeneity and Sustainable Innovation, 24 STRATEGIC MGMT. J. 687 (2003).
69. See, e.g., Ron Adner & Daniel Levinthal, Demand Heterogeneity and Technology Evolution: Implications for Product and Process Innovation, 47 MGMT.SCI. 611, 612 (2001) (concluding that "[i]n a heterogeneous demand environment, early technological development is motivated by the drive to meet market requirements").
70. The "long tail" is the concept that businesses target multiple niche markets instead of trying to achieve a few mass-market hits
71. See CHRIS ANDERSON, THE LONG TAIL: WHY THE FUTURE OF BUSINESS IS SELLING LESS FOR MORE (2006)
72. Erik Brynjolfsson, Yu Jeffrey Hu & Michael D. Smith, From Niches to Riches: Anatomy of the Long Tail, 47 MIT SLOAN MGMT. REV. 66 (2006).
73. A Pareto efficient outcome is one resulting in an "[a]llocation of goods in which no one can be made better off unless someone else is made worse off." ROBERT S. PINDYCK &DANIEL L. RUBINFELD, MICROECONOMICS 584 (6th ed. 2005).
74. See, e.g., David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 YALE J. on REG. 325 (2003).
75. Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 4 J. EUR. ECON. ASS'N 990 (2003).
76. The seminal article on two-sided markets is William F. Baxter, Bank Interchange of Transactional Paper: Legal and Economic Perspectives, 26 J.L. & ECON. 541 (1983).
77. See Press Release, Dep't of Justice, Yahoo! Inc. and Google Inc. Abandon Their Advertising Agreement (Nov. 5, 2008), http://www.justice.gov/opa/pr/2008/November/08-at-981.html (reporting Google's 70 percent market share in both the Internet search advertising and Internet search syndication markets)
78. Press Release, Yahoo!, Yahoo! and Microsoft to Implement Search Alliance (Feb. 18, 2010), http://finance.yahoo.com/news/Yahoo-and-Microsoft-to-bw-2356666634.html?x=0. As of December 2009, Google had 67.3 percent of the Internet search market, compared with 65.4 percent in November 2009. Don Reisinger, Google Rules Search in December
79. Bing Drops, CNET NEWS, Jan. 13, 2010, http://news.cnet.com/8301-13506_3-10434099-17.html (citing The Nielson Company).
80. Spillovers, known more generally in economics as externalities, are benefits (or detriments) that accrue as unpriced side effects of other actions of an individual or firm. Spillovers are ubiquitous. For example, a beekeeper who keeps bees for their honey confers an external benefit on nearby farmers because the bees pollinate the surrounding crops. The farmer does not pay the beekeeper, but nonetheless benefits from the presence of his bees-thus, the beekeeper is the source of a positive spillover.
81. MICHAEL L. KATZ & HARVEY S. ROSEN, MICROECONOMICS 398 (3d, The McGraw Hill Companies, Inc., 1998).
82. We note also that the redistribution alternative is a taking of private property for what is ostensibly, but not obviously, a public purpose. Consequently, it raises a Fifth Amendment question of whether the taking is made with or without just compensation.
83. See U.S. CONST., amend. V.
84. See generally J. GREGORY SIDAK & DANIEL F. SPULBER, DEREGULATORY TAKINGS AND THE REGULATORY CONTRACT: THE COMPETITIVE TRANSFORMATION OF NETWORK INDUSTRIES IN THE UNITED STATES 118 (Cambridge Univ. Press 1997).
85. See, e.g., Erick Schonfeld, Kleiner Perkins Announces $100 million iFund for iPhone Applications, TECHCRUNCH, Mar. 6, 2008, http://www.techcrunch.com/2008/03/06/kleiner-perkins-anounces-100-millioin-ifund-for-iphone-applications/.
86. Press Room, Facebook Factsheet, Facebook, http://www.facebook.com/press/info.php?timeline#!/press/info.php?factsheet (last visited Feb. 16, 2010).
87. TM REPORT, DATA: THOMSON REUTERS (Jan. 22, 2010), available at http://www.nvca.org/index.php?option=com_docman&task=cat_view&gid=57&Itemid=317.
88. Samuel Kortum & Josh Lerner, Assessing the Contribution of Venture Capital to Innovation, 31 RAND J. ECON. 674 (2000).
89. TM REPORT, DATA: THOMSON REUTERS (Jan. 22, 2010), available at http://www.nvca.org/index.php?option=com_docman&task=cat_view&gid=57&Itemid=317.
90. See R.G. Lipsey & Kelvin Lancaster, The General Theory of the Second Best, 24 REV. ECON. STUD. 11 (1956).
91. Brett M. Frischmann & Mark A. Lemley, Spillovers, 101 COLUM.L.REV. 257, 258 (2007).
92. (emphasis added). Although the authors have attempted to excuse network neutrality from the implications of their findings, their arguments are unpersuasive. Dismissing spillover benefits from network infrastructure innovation as "not known or even knowable," and claiming that optional QoS transactions would reduce innovation on the content side and that "application-level innovation may be more important than encouraging additional innovation in the network itself.".
93. See GOOGLE INC., ANNUAL REPORT (FORM 10-K), at 35 item 6 (Feb. 12, 2010), available at http://www.sec.gov/Archives/edgar/data/1288776/000119312510030774/d10k.htm [hereinafter GOOGLE FORM 10-K 2009] (reporting $23.7 billion in revenues for the year ending December 31, 2009). Advertising revenues constituted 99 percent of Google's revenues in 2007, and 97 percent in 2008 and 2009
94. (reporting $2.8 billion in R&D costs in 2009, up from $0.6 billion in 2005)
95. GOOGLE INC., REGISTRATION STATEMENT (FORM S-1), at 64 (Apr. 29, 2004), available at http://www. sec.gov/Archives/edgar/data/1288776/000119312504073639/ds1.htm (last visited Feb. 22, 2010) ("We strive to hire the best computer scientists and engineers to help us solve very significant challenges across systems design, artificial intelligence, machine learning, data mining, networking, software engineering, testing, distributed systems, cluster design and other areas. We work hard to provide an environment where these talented people can have fulfilling jobs.... We employ technology whenever possible to increase the efficiency of our business and to improve the experience we offer our users.").
96. Jan Krämer & Lukas Wiewiorra, Network Neutrality and Congestion-Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation (Mar. 15, 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1444423 (last visited Mar. 25, 2010).
97. Nicholas Economides & Jaocim Tåg, Net Neutrality on the Internet: A Two-Sided Market Analysis (NET Institute Working Paper No. 07-45, May 2009), available at http://papers. ssrn.com/sol3/papers.cfm?abstract_id=1019121.
98. See David D. Haddock, Irrelevant Internalities, Irrelevant Externalities, and Irrelevant Anxieties 1, 20 (Northwestern Law & Economics Research Paper No. 03-16, 2003) ("those with the most extensive demands will if necessary pay for so much of it that those with less extensive demands lose interest in having more. Those with inframarginal demands value the good-perhaps they enjoy few things more keenly-but they are satiated before their preferences have any impact on optimal provision.") (citations omitted).
99. George S. Ford, Thomas Koutsky & Lawrence J. Spiwak, The Efficiency Risks of Network Neutrality Rules 4 (Phoenix Center Policy Bull. No. 16, 2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=925347&download=yes (last visited Mar. 25, 2010).
100. Daniel F. Spulber & Christopher S. Yoo, Rethinking Broadband Internet Access, 22 HARV. J.L. & TECH. 1, 52 (2008).
101. See John Horrigan, Home Broadband Adoption 2009, PEW INTERNET &AMERICAN LIFE PROJECT 7 (32 percent of American dial-up users said that broadband prices would have to fall for them to switch to broadband; 20 percent said nothing would get them to switch; 17 percent cited availability as the obstacle to switching, 16 percent said they did not know what would get them to switch; and 13 percent cited some other reason)
102. J. Gregory Sidak & Daniel F. Spulber, Cyberjam: The Law and Economics of Internet Congestion of the Telephone Network, 21 HARV. J. L. & PUB.POL'Y 327 (1998).
103. Press Release, Apple Inc., iPhone 3G on Sale Tomorrow (July 10, 2008), http://www.apple.com/pr/library/2008/07/10iphone.html (last visited Mar. 26, 2010).
104. Press Release, Apple Inc., Apple's App Store Downloads Top 1.5 Billion in First Year (July 14, 2008), http://www.apple.com/pr/library/2009/07/14apps.html.
105. See Press Release, Apple Inc., iPad Available in U.S. on April 3 (Mar. 5, 2010), http://www.apple.com/pr/library/2010/03/05ipad.html (last visited Mar. 22, 2010).
106. Hogendorn argues that network operators would "block or degrade certain services in violation of ICE" because: (1) they seek to "charge different prices to different customers in order to increase profits;" (2) they want to "make it harder for other firms to enter the market;" (3) "there may be bargaining problems that prevent internalization;" (4) "firms may not fully realize the benefits of all externalities;" or (5) "if Internet applications have other spillover benefits, it may make it easier to capture (but in the process reduce) those spillovers."
107. See, e.g., JEAN-JACQUES LAFFONT &JEAN TIROLE, ATHEORY OF INCENTIVES IN PROCUREMENT AND REGULATION 172-73 (MIT Press 1993).
108. See William J. Baumol & Daniel G. Swanson, The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power, 70 ANTITRUST L.J. 661, 662 (2003).
109. See also Hal R. Varian, Price Discrimination and Social Welfare, 75 AM. ECON. REV. 870 (1985).
110. Hal R. Varian, Price Discrimination, in HANDBOOK OF INDUSTRIAL ORGANIZATION 597, 599 (Richard Schmalensee & Robert Willig, eds., Elsevier Science Publishers B.V. 1989).
111. See also Richard Schmalensee, Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination, 71 AM. ECON. REV. 242 (1981).
112. Marius Schwartz, Third-Degree Price Discrimination and Output: Generalizing a Welfare Result, 80 AM. ECON. REV. 1259 (1990).
113. Farrell and Weiser cite Microsoft-which "exposes many of its application programming interfaces (APIs) to independent developers, spending money and resources to cooperate with complementary (applications) providers"-and Intel as examples
114. Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal-Why Aspen and Kodak Are Misguided, 68 ANTITRUST L.J. 659, 667 (2001).
115. In re Madison River Commc'n, L.L.C. and Affiliated Companies, 20 F.C.C. Rcd. 4, 295 (Enforcement Bureau, Mar. 3, 2005).
116. In re Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, Broadband Industry Practices Petition of Free Press et al. for Declaratory Ruling that Degrading an Internet Application Violates the FCC's Internet Policy Statement and Does Not Meet an Exception for "Reasonable Network Management," 23 F.C.C. Rcd. 13,028 (2008), vacated, Comcast Corp. v. FCC, No. 08-1291 (D.C. Cir. Apr. 6, 2010).
117. It is important to recognize that all regulation is costly-both in terms of the direct costs of enforcement and in terms of the potentially damaging effects on incentives to invest and innovate. Daniel Spulber and Christopher Yoo observe that government-imposed solutions often fall short of efficient outcomes, even when they are implemented to correct a market failure.
118. Not only can a regulatory access regime harm allocative efficiency if access prices are set at inefficient levels, regulation can also harm dynamic efficiency by causing investment incentives to fall below efficient levels and by creating de facto entry barriers
119. Daniel F. Spulber & Christopher S. Yoo, Network Regulation: The Many Faces of Access,1 J. COMPETITION L. & ECON. 635, 675 (2005).
120. Fox TV Stations, Inc. v. FCC, 280 F.3d 1027, 1051 (D.C. Cir. 2002), in which it addressed the FCC's proposal to institute new nondiscrimination regulation for cable, the D.C. Circuit Court said: "[T]he Commission has not shown a substantial enough probability of discrimination to deem reasonable a prophylactic rule as broad as the cross-ownership ban, especially in light of the already extant conduct rules.
121. A single incident since the must-carry rules were promulgated-and one that seems to have been dealt with adequately under those rules-is just not enough to suggest an otherwise significant problem."
122. Craig Moffett et al., Bernstein Research, Broadband: Are We Reaching Saturation?, at 4, at exhibit 2 (reporting monthly churn rates for cable broadband at 2.4 to 3 percent).
123. Contrary to the claims of some, in industries with a large proportion of fixed costs, supramarginal cost pricing does not indicate any market failure or the presence of market power
124. Thomas W. Hazlett & Dennis L. Weisman, Market Power in U.S. Broadband Services 8 (Geo. Mason U. Law and Econ. Research Paper Series No. 09-69, Nov. 2009).
125. see also David J. Teece & Christopher Pleatsikas, Economic Fallacies Encountered in the Law of Antitrust: Illustrations from Australia and New Zealand, 9 TRADE PRAC. L.J. 73 (2001).
126. The FCC acknowledged this point in its recently released National Broadband Plan: "Building broadband networks-especially wireline-requires large fixed and sunk investments. Consequently, the industry will probably always have a relatively small number of facilities-based carriers, at least for wireline service."
127. However, the FCC continued, "the lack of a large number of wireline, facilities-based providers does not necessarily mean competition among broadband providers is inadequate."
128. Dennis L. Weisman, When Can Regulation Defer to Competition for Constraining Market Power?: Complements and Critical Elasticities, 2J. COMPETITION L. & ECON. 101, 102 (2006).
129. Alex Goldman, Top 23 U.S. ISPs by Subscriber: Q2 2008, ISP PLANET, Dec. 2, 2008, http://www.isp-planet.com/research/rankings/usa.html).
130. Vertical Foreclosure in Video Programming Markets: Implications for Cable Operators
131. See also John M. de Figueredo & David J. Teece, Mitigating Procurement Hazards in the Context of Innovation, 5 INDUS. & CORP. CHANGE 537 (1996).
132. See AUGUSTIN COURNOT, RESEARCHES INTO THE MATHEMATICAL PRINCIPLES OF THE THEORY OF WEALTH 99-116 (Nathaniel T. Bacon trans. 1971) (1838).
133. DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 238-42, 526 (2d ed. 1994).
134. Guiseppe Dari-Mattiacci & Francesco Parisi, Substituting Complements, 2 J. COMPETITION L. & ECON. 333 (2006).
135. Although Hogendorn does not discuss explicitly the vertical foreclosure argument, his second proposed exception to ICE is a vertical foreclosure argument, as explained in Part III
136. See, e.g., Janusz A. Ordover, Alan O. Sykes & Robert D. Willig, Nonprice Anticompetitive Behavior by Dominant Firms Toward the Producers of Complementary Products, in ANTITRUST AND REGULATION: ESSAYS IN MEMORY OF JOHN J. MCGOWAN 119 (Franklin M. Fisher ed., 1985).
137. See also Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837, 838 (1990).
138. For a further critique of van Schewick's exceptions, see Testimony of George S. Ford, Ph.D., Chief Economist, Phoenix Center for Advanced Legal & Economic Public Policy Studies, Before the Federal Communications Commission Open Meeting on Network Neutrality and Broadband Network Management, Stanford University, at 19-20 (Apr. 17, 2008).
139. See, e.g., iPhone Dev. Center, http://developer.apple.com/iphone/index.action (last visited Mar. 11, 2010).
140. Apple's App Store Downloads Top Three Billion, Apple, (Jan. 5, 2010), available at http://www.apple.com/pr/library/2010/01/05appstore.html.
141. JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM and DEMOCRACY 83 (1942).
142. See William J. Abernathy & James M. Utterback, Patterns of Industrial Innovation, 80 TECH. REV. 40 (1978).
143. See, e.g., Steven Klepper & Elizabeth Grady, The Evolution of New Industries and the Determinants of Market Structure, 21 RAND J. ECON. 27 (1990).
144. James M. Utterback & Fernando Suarez, Innovation, Competition, and Industry Structure, 22 RES. POL'Y 1 (1993).
145. Franco Malerba & Luigi Orsenigo, The Dynamics and Evolution of Industries, 5 INDUS. & CORP. CHANGE 51 (1996).
146. Michael Mussa & Sherwin Rosen, Monopoly and Product Quality,18 J. ECON. THEORY 301 (1978).
147. Eric Maskin & John Riley, Monopoly with Incomplete Information, 15 RAND J. ECON 171 (1984).
148. JEAN TIROLE, THE THEORY of INDUSTRIAL ORGANIZATION 149-50 (1988)
149. Hal Varian, Price Discrimination and Social Welfare, 75 AM. ECON. REV. 870 (1985)).
150. See, e.g., Press Release, AT&T, AT&T to Invest More Than $17 Billion in 2009 to Drive Economic Growth (Mar. 10, 2009), available at http://www.att.com/gen/press-room?pid=4800&cdvn=news&newsarticleid=26597&mapcode=
151. Press Release, Verizon, Verizon's $17 Billion Network Investment in 2009 Pays Off (Dec. 29, 2009), available at http://newscenter.verizon.com/press-releases/verizon/2009/verizons-17-billion-network.html. In addition, AT&T's triple-play platform is all-IP and already involves prioritization of voice and video packets.
152. See, e.g., FCC Fifth Report, Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 23 F.C.C. Rcd. 9,651 ¶ 74 (2008) (telecommunications industry planned to spend $50 billion in capital expenditures in 2008 and 2009)
153. NCTA, Industry Data, http://www.ncta.com/Statistics.aspx (citing that more than 120 million homes have access to cable broadband service and industry capital investments of $161.2 billion since 1996).
154. See Linda Haugsted, Turtles that Win the Race: Comcast's 'Slowskys' Back Cable Modems Via TV Spots, MULTICHANNEL NEWS, June 22, 2006, available at http://www.multichannel.com/article/CA6336326.html.
155. Lance Whitney, U.S. Broadband Speeds Rise in 2009,CNET NEWS, Feb. 10, 2010, http://news.cnet.com/8301-1023_3-10450784-93.html?tag=mncol.
156. Verizon, FiOS Internet, Plans, http://www22.verizon.com/Residential/FiOSInternet/Plans/Plans.htm (last visited Feb. 18, 2010).
157. See Chloe Albanesius, Comcast Rolling Out 'Xfinity' Brand to 11 Markets, PCMAG.COM, Feb. 4, 2010, http://www.pcmag.com/article2/0,2817,2358807,00.asp.
158. ISPs are not entitled, under Title II of the Communications Act or other law, to file tariffs for delivering packets over their broadband networks. Consequently, ISPs have no ability to act like a "terminating access monopoly" that threatens not to deliver traffic to its customers unless its posted price is paid. To the contrary, ISPs exchange broadband Internet traffic through peering and transiting agreements that are voluntarily negotiated on commercial terms.
159. See DAVID M. KREPS, ACOURSE in MICROECONOMIC THEORY 503-05 (Princeton Univ. Press 1990).
160. HAL R. VARIAN, MICROECONOMIC ANALYSIS 269-71 (W.W. Norton 3d ed. 1992).
161. Anatol Rapoport, Prisoner's Dilemma, in 3 THE NEW PALGRAVE DICTIONARY of ECONOMICS 973, 974 (John Eatwell, Murray Milgate & Peter Newman, eds., Macmillan 1987) ("Perhaps the most interesting result of Prisoner's Dilemma experiments with iterated play is that even if the number of iterations to be played is known to both subjects, nevertheless a tacit agreement to cooperate is often achieved.").
162. In a traditional prisoner's dilemma framework, prosecutors offer two prisoners the option of confessing to a crime (defecting) or staying silent (cooperating with the other prisoner), offering leniency if a prisoner "turns state's evidence" by confessing and implicating his colleague, and threatening to "throw the book" at a prisoner if he stays silent while his partner confesses. Each prisoner finds it worthwhile to confess, which makes the prisoners themselves worse off than they would have been if both had remained silent. But to say that such an outcome is "inefficient" ignores the interests of society in inducing criminals to confess to (and pay for) their crimes.
163. See, e.g., J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. COMPETITION L. & ECON. 581 (2009).
164. Dennis L. Weisman, A "Principled" Approach to the Design of Telecommunications Policy, 6 J. COMPETITION L. & ECON. (forthcoming 2010).
165. During 2009, Akamai's share price increased almost 70 percent, or more than double the increase of the market index
166. See Yahoo! Finance, Akamai Technologies Inc. (AKAM): Historical Prices, http://finance.yahoo.com/q/hp?s=AKAM (last visited Mar. 25, 2010).
167. At the same time, Akamai achieved a 31.9 percent share of professional video views.
168. See AccuStream Research, CDN Account Growth at 23.3% in 2009,WIRELESS NEWS, 2009.
169. Jay Pil Choi & Byung-Cheol Kim, Net Neutrality and Investment Incentives (NET Institute, Working Paper No. 08-03, Sept. 2008), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1285639#
170. Economides actually cites the Choi-Kim article for this point (he lists the Economides-Tåg article in his bibliography, but does not cite it for this point), as well as two other articles, by Lee and Wu and Peha. A review of the last two papers shows that Economides has seriously mischaracterized their results. Contrary to Economides' contention, Lee and Wu assert that "the impact [of allowing termination fees] on the marginal incentive to invest is indeterminate."
171. A careful reading of Peha indicates that he does not express any opinion as to whether total ISP investment would be greater or less with the option of business-to-business transactions for QoS than under a "nondiscrimination" regime. He does not develop any formal model and does not make any predictions, other than to say that "if network operators were prohibited from this practice [of 'intentionally degrad[ing] QOS for some traffic, even when there is excess capacity to provide excellent QOS'], they might have incentive not to increase the capacity of the network."
172. It may well be true that different content providers who offer similar types of offerings (for example, different Internet search providers) may have similar QoS needs, though that is itself open to question (for example, some content providers may have self-provided enhanced delivery or contracted with CDN providers, although their competitors may not have). But that would not eliminate the fact that the Internet involves many different types of packets with very different QoS needs.
173. Economides and Tåg initially assume that there is a single "monopoly" ISP (they then extend the model to a "duopoly" model), that there are two content providers who "are independent monopolists, each in its own markets, and therefore do not compete with one another", and that ISPs charge content providers a "lump sum fee... to gain access to users."
174. Moreover, the level of investment per se is economically less significant than the effect of the combination of investment and prioritization rules on the effective delivery speed of different classes of traffic. Suppose, for example, that with the option of business-to-business QoS transactions, ISPs have an incentive to allocate resources to packets that are more valuable and/or more time-sensitive and away from packets that are less valuable and/or less time sensitive. Holding total resources constant, such a resource allocation rule will increase in consumer welfare relative to an alternative allocation rule that treats all packets equally.
175. (citing Jules Dupuit, De la Mesure de L'Utilité des Travaux Publics, ANNALES DES PONTS ET CHAUSSÉES (2d Ser.) 8 (1844), translated as Jules Dupuit, On the Measurement of the Utility of Public Works, 2INT'L ECON. PAPERS 83 (1952) (trans. R.H. Barback). The correct citation for this quote is Jules Dupuit, De l'Influence des Péages sur l'Utilitié des Voies de Communication,ANNALES DES PONTS ET CHAUSSÉES (2d Ser.) 17 (1849), translated as Jules Dupuit, On Tolls and Transport Charges,11INT'L ECON.PAPERS 7 (1962) (trans. Elizabeth Henderson)).
176. JAMES M. HENDERSON &RICHARD E. QUANDT, MICROECONOMIC THEORY 25-35 (McGraw-Hill 3d ed. 1980).
177. In addition, capital markets are available to place cash-poor companies with good business plans on a par with cash-rich companies
178. New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921) (Holmes, J.).
179. See FRANK DOBBIN, FORGING INDUSTRIAL POLICY: THE UNITED STATES, BRITAIN, AND FRANCE in the RAILWAY AGE 114 (Cambridge Univ. Press 1994).
180. See, e.g., The Development of the British Railway Carriage, Bluebell Railway Preservation Society, http://www.bluebell-railway.co.uk/~zhaa009/bb/car_fs1.html.
181. See, e.g., ROGER PRICE, THE ECONOMIC MODERNISATION OF FRANCE, 1730-1880 36 (1975).
182. See W. O. H ENDERSON, THE INDUSTRIAL REVOLUTION ON THE CONTINENT: GERMANY, FRANCE, RUSSIA 1800-1914 113 (1961).
183. Frank Dobbin, Why the Economy Reflects the Polity: Early Rail Policy in Britain, France, and the United States, in 2 THE SOCIOLOGY of ECONOMIC LIFE 401, 413 (Mark Granovetter & Richard Swedberg eds., Westview Press 2001).
184. See Jerry A. Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 1997 BROOKINGS PAPERS ON ECON.ACTIVITY: MICROECONOMICS 1.
185. We believe that this assumption makes it unlikely that the Deneckere-McAfee damaged-goods model is particularly relevant to the Internet, as typically one would expect that it would be more costly for an ISP to supply higher QoS to a content provider than it would be to supply a lower QoS, especially if one measures cost in terms of opportunity cost rather than only out-of-pocket cost
186. Moreover, the proposition that firms generally charge higher prices for products that are more costly to supply than for products that are less costly to supply is both uncontroversial and not a cause for policy concern