The impact of the internet on distribution

• Pages: 475-495

CHAPTER X

THE IMPACT OFTHEINTERNETON

DISTRIBUTION

A.Introduction

The Internet waslikely the mosttransformative and disruptive

innovation of thelatterpart of the twentiethcentury.Togetherwith the

WorldWideWeb(WWW) of over a billioninterconnectedcomputers, the

Internet allows for extremelycheaptransmissionofdigitalinformation

packets.1 Goods likesoftware and software updates, by their nature digital,

wereattheforefront of digitaldistributionthrough the Internet. Other

goods, suchas songs, movies,andbooks,becamedigitizedovertime, and

createdanalternativecheaperandmoreefficientway of distribution

comparedtoCDs,DVDs,and books.2Even for physical goods buying and

sellingover the Internet bringsmanyefficiencies,and a largeshare of

retailcommercehas now movedto the Internet.3Thesedevelopments

create new challenges for antitrustpractice,as the lawmust recognize both

new opportunities to exploit market power and newefficienciesthat

characterizethis environment.

1. TimothyBresnahan,GeneralPurposeTechnologies, in HANDBOOKOFTHE

ECONOMICSOFINNOVATIONVOLUME2,at761(BronwynH.Hall & Nathan

Rosenbergeds.,2010)(arguingthatinformationtechnologyrepresents a

“generalpurposetechnology,” a technologythathaslargeeffectonthe

organizationof a largeswathoftheeconomy).

2. See,e.g., JoelWaldfogel, CopyrightProtection,TechnologicalChange,and

theQualityofNewProducts:EvidencefromRecordedMusicsinceNapster,

55J.L.&ECON. 715(2012)(studiestheeffectofdigitizationonthe

organizationofmediamarkets).

3. For a tasteofthelivelyeconomicsliteratureon e-commerce, see,e.g.,

JeffreyR.Brown & AustanGoolsbee,DoestheInternetMakeMarkets

MoreCompetitive?EvidencefromtheLifeInsuranceIndustry, 110J.POL.

ECON. 481(2002)andMarisGoldmanisetal.,E-commerceandtheMarket

StructureofRetailIndustries, 120 ECON.J.651(2010).

475

476AntitrustLawandEconomicsofProductDistribution

Thischapterfocuses on the antitrusttreatment of verticalrestraints by

firmsthatselloverthe Internet.4Many of the issuesdiscussedareabout

firmsthatsellthroughmultiplechannels, suchas the Internet and brick

and mortar outlets, sotherelevantcaselawisoften about multichannel

retailingthatmay not necessarilyinvolve the Internet. For instance,battles

overbrick and mortarversus telephone salesraisemanysimilarissues.

But,asdiscussed below, the economics of Internet distributioncanleadto

scale and concentrationthatis unprecedented inretailing. A constant

themeinthischapteris the tensionbetween the consumer welfare-

enhancing efficienciesof Internet distribution, thepotentialformarket

power, and how firmshavestruggledtofind the rightbalance.

B.Economics ofInternetDistribution

Platformfirmsthriveon the Internet. Platformfirmsareintermediaries

that bring together buyers and sellers, both fordigital and nondigital

goods. Platformmarketsareoftencalledtwo-sidedmarkets,referringto

the featurethatthey bring two(orsometimesmore)sides together, such

asconsumers and advertisers,orbuyers and sellers.5Participantson one

side typicallyvaluea platform withmoreparticipants on the otherside.

Oncea platformattracts a criticalmass on one side,saysellers,itmay

attractmany buyers, and thenmoresellers and so on. This positive

feedbackloop isreferredtoas a networkeffect. Consumers making a

choice about whetherorhowtouse a platformtake account only of their

own benefits and not the benefitstoothersfrom the network effect.Thus,

the network effectoftenimplies a networkexternality,whichisnottypical

of mosttraditionalmarkets.Networkmarketshavedifferentcompetitive

dynamics than traditionalindustries,oftenresultinginbenefitsto

customers and making cooperation among competitorslesslikelyto be

anticompetitive.

4. See,e.g.,ErikBrynjolfssonetal.,CompetingintheAgeofOmnichannel

Retailing, 54MITSLOANMGMT.REV. (Summer2013),availableat

http://sloanreview.mit.edu/article/competing-in-the-age-of-omnichannel-

retailing/.

5. Foranoverviewoftheliteratureonplatformandtwo-sidedmarkets,see

Jean-CharlesRochetandJeanTirole,Two-SidedMarkets: A Progress

Report, 37RANDJ.ECON. 645(2006);MarkArmstrong,Competitionin

Two-SidedMarkets, 37RANDJ.ECON. 668(2006);MarcRysman,The

EconomicsofTwo-SidedMarkets, 23J.ECON.PERSP.,no.3,at125

(Summer2009).