INSTITUTIONAL ARRANGEMENTS AND INTERNET ARCHITECTURE
Market and non-market production are embedded in multiple layers of formal and non- formal institutional arrangements. Moreover, the technical architecture and protocols of the Internet influence information flows and outcomes like other types of institutional arrangements (Reidenberg, 1998; Lessig, 1999).
Some institutional arrangements, such as regulations and voluntary governance agreements, adapt more frequently to changing technological and economic circumstances but others such as norms and broader cultural conventions may evolve rather slowly (Williamson, 2000). Important institutional arrangements affecting the Internet include competition and antitrust policies, intellectual property rights, legal protections of privacy, and provisions governing cybersecurity. Of similar importance are standards and protocols, the overall network architecture, and provisions governing interconnection. These are the topics addressed in Part III.Internet-based markets show remarkable concentration tendencies, fueled by the unique economic characteristics of the online world (Noam, 2009). The effects of high supplier concentration in technology industries, including the Internet, are highly controversial. While there is some evidence that high concentration is an outcome of Schumpeterian competition, and hence superior efficiency, there are also increasing concerns about its detrimental effects. Consequently, competition concerns (e.g., regarding Microsoft, Google and Apple) and related antitrust cases are gaining prominence in the public and academic debate. Starting with an economic analysis of competition in the Internet, Justus Haucap and Torben Stuhmeier discuss major competition concerns and recent European and US antitrust cases in Chapter 9. The authors also analyze the net neutrality debate driven by concerns about incentives of network operators to discriminate against competing application and content providers.
Standards, and the occasional ‘wars’ surrounding them, are an important topic of competition policy in the Internet era. Internet standards influence the degree of compatibility of services and products from different vendors and thus affect the relevance and impact of network effects and switching costs. Given this high economic importance the best institutional model for promulgating standards (e.g., markets, voluntary committees, government) of standardization processes is disputed. Stanley M. Besen and George Sadowsky explain in Chapter 10 the basics of the economics of standards, and provide a case study of the Internet standardization process, mainly under the auspices of the Internet Engineering Task Force (IETF). The conflict between nations supporting stronger leadership for the International Telecommunication Union (ITU) and supporters of the existing decentralized, private sector-driven approach highlights the importance of institutional arrangements for the future development of the Internet.
Although challenged on multiple grounds, copyright has long been considered an essential intellectual property right and a precondition for deriving sustainable income streams in creative industries. Fast-growing Internet applications change business models for creative works, not only value propositions and production conditions, but also revenue models for creators and the copyright-based industries. In Chapter 11, Sacha Wunsch-Vincent reassesses the economics of copyright in light of these changes. He explains and transposes the baseline model of copyright economics to the online world. The absence of data for empirical research, new online intermediaries, and complex financial and legal linkages between the various agents involved are identified by Wunsch-Vincent as obstacles to progress in the copyright debates.
Fast-growing social online networks and the mass customization of Internet products and services contribute to the rising importance of personal data, often called the ‘new oil’ of the information economy.
Awareness of the risks of privacy violations and surveillance grew considerably in the wake of the American National Security Administration (NSA) scandal of 2013, which revealed that the agency had collected data on millions of Americans’ electronic communications. The economic analysis of privacy data protection and surveillance, presented in Chapter 12 by Ian Brown, looks at the cost, benefits and incentives of all parties involved, and at the aggregate social welfare impacts. It seeks to explain the voluntary disclosure and commercial use of personal data with the help of behavioral and industrial economic approaches. Differences and problems of corporate and public privacy policies in the US and Europe, and of companies like Facebook, Google and Apple, are also explored.Chapter 13 by Hadi Asghari, Michel van Eeten and Johannes M. Bauer focuses on the economic research on cybercrime. Protecting cyberspace from relentless attacks by criminals and hostile state actors faces daunting challenges. Recent research has made great strides in understanding the patterns of criminally motivated cyber attacks through the lens of security economics. Integrating engineering and economic perspectives to examine the incentives of interrelated players in the Internet ecosystem to invest in security has proven a particularly fruitful approach to understanding patterns of success and failure in securing the Internet economy.
By also emphasizing the importance of the technical architecture of the Internet, the cybersecurity chapter is a bridge to the theme addressed by Barbara van Schewick in Chapter 14. Her detailed examination of the effects of architectural choices on innovation in the Internet summarizes and expands her pioneering work in this area. Starting with a review of the basic design principles upon which the Internet is built, van Schewick proceeds to discuss the architecture of the Internet and examines in detail its effects on the amount and quality of application innovation.
Chapter 15 by Cristiano Antonelli and Pier Paolo Patrucco is also dedicated to an analysis of innovation, but the authors focus on the users and uses of ICT. The Internet is seen as an enabler of platforms, organizational innovations that are enabled by and instrumental for the further generation of technological knowledge. Platforms facilitate the generation and exploitation of knowledge and innovation, seen as a recombinant process of existing yet often distributed knowledge. They allow their members to internalize externalities and hence help overcome some of the public good problems associated with knowledge, including partial appropriability and divisibility, non-excludability, non-exhaustibility and intrinsic tacitness. Building on a thorough and original theoretical framework, the chapter also discusses cases that illustrate the variety and dynamics of Internet-enabled platforms.
David D. Clark, William H. Lehr and Steven Bauer in Chapter 16 focus on interconnection in the Internet. Historically, and different from other telecommunications networks, two principal models have been used by Internet service providers (ISPs) to interconnect: peering and transit. The chapter discusses these models and the current pressures to move toward more differentiated forms of interconnection, including forms of asymmetric and paid peering. The discussion is anchored in the need to find new and innovative arrangements in a network environment that is increasingly dominated by real-time entertainment traffic.
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