The impact of the internet on distribution

A. Introduction
The Internet was likely the most transformative and disruptive
innovation of the latter part of the twentieth century. Together with the
World Wide Web (WWW) of over a billion interconnected computers, the
Internet allows for extremely cheap transmission of digital information
packets.1 Goods like software and software updates, by their nature digital,
were at the forefront of digital distribution through the Internet. Other
goods, such as songs, movies, and books, became digitized over time, and
created an alternative cheaper and more efficient way of distribution
compared to CDs, DVDs, and books.2 Even for physical goods buying and
selling over the Internet brings many efficiencies, and a large share of
retail commerce has now moved to the Internet.3 These developments
create new challenges for antitrust practice, as the law must recognize both
new opportunities to exploit market power and new efficiencies that
characterize this environment.
1. Timothy Bresnahan, General Purpose Technologies, in HANDBOOK OF THE
ECONOMICS OF INNOVATION VOLUME 2, at 761 (Bronwyn H. Hall & Nathan
Rosenberg eds., 2010) (arguing that information technology represents a
general purpose technology,” a technology that has large effect on the
organization of a large swath of the economy).
2. See, e.g., Joel Waldfogel, Copyright Protection, Technological Change, and
the Quality of New Products: Evidence from Recorded Music since Napster,
55 J.L. & ECON. 715 (2012) (studies the effect of digitization on the
organization of media markets).
3. For a taste of the lively economics literature on e-commerce, see, e.g.,
Jeffrey R. Brown & Austan Goolsbee, Does the Internet Make Markets
More Competitive? Evidence from the Life Insurance Industry, 110 J. POL.
ECON. 481 (2002) and Maris Goldmanis et al., E-commerce and the Market
Structure of Retail Industries, 120 ECON. J. 651 (2010).
476 Antitrust Law and Economics of Product Distribution
This chapter focuses on the antitrust treatment of vertical restraints by
firms that sell over the Internet.4 Many of the issues discussed are about
firms that sell through multiple channels, such as the Internet and brick
and mortar outlets, so the relevant case law is often about multichannel
retailing that may not necessarily involve the Internet. For instance, battles
over brick and mortar versus telephone sales raise many similar issues.
But, as discussed below, the economics of Internet distribution can lead to
scale and concentration that is unprecedented in retailing. A constant
theme in this chapter is the tension between the consumer welfare-
enhancing efficiencies of Internet distribution, the potential for market
power, and how firms have struggled to find the right balance.
B. Economics of Internet Distribution
Platform firms thrive on the Internet. Platform firms are intermediaries
that bring together buyers and sellers, both for digital and nondigital
goods. Platform markets are often called two-sided markets, referring to
the feature that they bring two (or sometimes more) sides together, such
as consumers and advertisers, or buyers and sellers.5 Participants on one
side typically value a platform with more participants on the other side.
Once a platform attracts a critical mass on one side, say sellers, it may
attract many buyers, and then more sellers and so on. This positive
feedback loop is referred to as a network effect. Consumers making a
choice about whether or how to use a platform take account only of their
own benefits and not the benefits to others from the network effect. Thus,
the network effect often implies a network externality, which is not typical
of most traditional markets. Network markets have different competitive
dynamics than traditional industries, often resulting in benefits to
customers and making cooperation among competitors less likely to be
4. See, e.g., Erik Brynjolfsson et al., Competing in the Age of Omnichannel
Retailing, 54 MIT SLOAN MGMT. REV. (Summer 2013), available at
5. For an overview of the literature on platform and two-sided markets, see
Jean-Charles Rochet and Jean Tirole, Two-Sided Markets: A Progress
Report, 37 RAND J. ECON. 645 (2006); Mark Armstrong, Competition in
Two-Sided Markets, 37 RAND J. ECON. 668 (2006); Marc Rysman, The
Economics of Two-Sided Markets, 23 J. ECON. PERSP., no. 3, at 125
(Summer 2009).

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