The impact of the internet on distribution

• Pages: 475-495

CHAPTER X

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).

475

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

anticompetitive.

4. See, e.g., Erik Brynjolfsson et al., Competing in the Age of Omnichannel

Retailing, 54 MIT SLOAN MGMT. REV. (Summer 2013), available at

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

retailing/.

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).