Electronic Commerce and Economic Policy

Policy Issues Antitrust Policies –Promotion of competition –Regulation of uncompetitive markets Information Policies –Copyright –Privacy –Trust –Cryptography Global Policy –Business cycles Role of financial markets –Labor markets –Political issues

Antitrust U.S. Law –Sherman Act (1890) –Clayton Act (1914) –Various regulatory acts (Federal Trade Commission Act of 1914, Telecommunications Act) Economic Rationale –Monopolist will produce output to the point where MR=MC. –When demand is downward sloping, the MR schedule is always below the demand curve, so that at any output, consumer willingness to pay for an additional unit exceeds the MR that producing the unit gives the monopolist

Antitrust At the monopoly output, the social marginal value (i.e. willingness to pay for an additional unit) exceeds MC, so increased output would improve social welfare. Social marginal benefit is maximized when p= MC, i.e. at the competitive equilibrium.

Antitrust –This result holds more generally in so-called general equilibrium models, where reduced competition results in an equilibrium allocation of all goods and services which is not socially optimal. Natural Monopoly –As we saw in our discussion of the dominant firm model, a declining average cost structure (which makes being large advantageous) coupled with network externalities can lead naturally to the emergence of a dominant firm. –This market configuration is generally socially optimal since the dominant firm can best supply society with the products it wants (the externality effect) at the cheapest possible cost (via the declining average cost).

Antitrust Antitrust issues with natural monopoly –Under-provision of product, over-pricing –Anti-competitive business practices Bundling of competitive products with monopolized ones Exploiting common carrier status to vertically integrate a market Collusive behavior with rival firms (cartel formation)

Antitrust Price Regulation –Public utility review and approval authority over prices and extent of service

Antitrust Regulating Business Practices –Require government approval of changes in business practices –Formalize common carrier status of monopoly Legal Remedies –Civil suits –Divestiture Social Consequences of Antitrust Actions –Positive Restored competitiveness of the market Enhanced innovation –Negative Potential loss of scale/scope economies associated with natural monopoly

Information Policy Copyright –Balancing social benefit against the need for incentives –Role of technology in undermining this balance –Public Goods Non-excludable –Impossible to prevent someone from consuming the good once it has been provided Non-rival –Social marginal cost of consuming one additional unit of the good is zero Public Provision

Information Policy Taxation –For provision of public goods and services Benefit Principle –As an economic policy lever Capital formation issues –Organizational capital Privacy –New Applications Digital cash Electronic signatures Electronic contracts –Regulatory Issues Protection of personal information –Credit histories and ratings –Health status –Personal history (past criminal records, employment history)

Information Policy An economic rock and a hard place –Adverse selection revisited: Health Insurance –Two risk classes, healthy people and sick people –Monopoly insurance company (separating equilibrium) »Policies targeted to healthy generate incentives for sick to mimic healthy »If costs of covering illness are sufficiently high, insurance company loses money »Only policies targeted to sick make a profit »Healthy don’t buy insurance »Since only healthy people don’t have insurance, entrants can make a profit providing insurance targeted to healthy. »Go back to bullet 1 »Market fails Protection from unwanted marketing –Spam –Unwanted advertising –Price discrimination

Information Policy Globalization –Comparative Advantage and Free Trade

Information Policy –Business Cycles –Role of financial markets Free movement of capital Contagion –Similarity to bank runs –Self-fulfilling prophecies –Labor Markets and Migration Economic migrations are demand-pull Political migrations Wage equalization

Information Policy Political Issues –Free speech –Linkages between democracy and development –International agreement on copyright protection –National security and control of cryptography