1. Information Rules: A Strategic Guide to the Network Economy Information Policy Carl Shapiro Hal R. Varian Modified by: Shakeb Syed & Yatindra Naik

2. Information Rules Spring 98 2 Agenda Introduction and Overview Differential Pricing Competition Policy Implications for Strategy Single Firm conduct Government Interventions Universal Services Discussion Questions

3. Information Rules Spring 98 3 Introduction - We will see how the economy analysis used to examine strategic choices in private sector can be used to analyze public policy choice. - Instead of looking at strategies to increase profitability, we look at strategies to increase the net social benefits.

4. Information Rules Spring 98 4 Continued… What do we mean by antitrust laws? Antitrust or competition laws are laws which seek to promote economics and business competition by prohibiting anti-competitive behavior and unfair business practices. FTC ( Federal Trade Commission ) : - an independent agency of the United States federal government that maintains fair and free competition. Justice Department : - department responsible for enforcing federal laws.

5. Information Rules Spring 98 5 Jim Barksdale “… working with the government is far more productive than trying to ignore it.” - Jim Barksdale is the president and chief executive officer Netscape Communications Corporation.

6. Information Rules Spring 98 6 Policy Overview Differentiation of products and prices Ex : Stock market quotations. Lock-in Ex : Sony digital cameras using memory sticks. Positive feedback Ex : Microsoft

7. Information Rules Spring 98 7 Price Differentiation Robinson-Patman Act, 1936 – price discrimination is illegal if it “effectively lessens competition” Example: Pharmaceutical drug manufacturers – facing antitrust actions. Legal arguments that work –Can set lower prices resulting from lower costs –Set differential prices to meet competition –Pricing only questionable if it “lessens competition”

8. Information Rules Spring 98 8 Price Differentiation Differential Pricing allows the producers to sell to markets. Example: Film Producers

9. Information Rules Spring 98 9 Competition Policy Sherman Act (1890) –First US federal govt. action to limit the monopolies. “It is illegal to monopolize a market” Usage: President Taft used it to split and divide the American Tobacco Company in 1907. Clayton Act (1914) – Passed by US congress as an amendment to clarify and supplement the Sherman Act. “Prohibits mergers and acquisitions where the effects may substantially lessen competition or looks like forming a monopoly.” This act is enforced by the Federal Trade commission and the antitrust division of the US department of justice.

10. Information Rules Spring 98 10 Principles of Competition Policy Protects competition as a process Gaining a monopoly based on fair means will spur economic growth and protects consumers interests. Policy is intended to ensure a fair fight, not to punish winners or protect losers. Example: Thurmond Arnold (Antitrust enforcer) likened the role of the Antitrust division to that of the referee in a boxing match, whose job is to make sure that the fight is fair.

11. Information Rules Spring 98 11 Government Choices Do nothing Act on basis that monopoly was illegally obtained –Break up –Prohibit suspect practices or merger blocked Regulate the monopolist Example: “Local telephone” “Electricity”

12. Information Rules Spring 98 12 Implications for Strategy Monopoly may be inhibited from using strategies that are legal for other firms. Ex : Microsoft But even small firms may be accused of antitrust violations. Ex : Iomega Role of treble damages*

13. Information Rules Spring 98 13 Be Aware Virtually any acquisition or merger will be reviewed. Watch out for meeting with rivals. Document your compliance. Establish the lack of genuine and lasting monopoly power.

14. Information Rules Spring 98 14 Definitions Price Fixing : Most agreements between business competitors regarding the pricing of a product are called price fixing. It is considered anti competitive, and are illegal in many countries. Ex : Japanese chipmaker Elpida, accused of setting prices of DRAMs ( http://www.ecommercetimes.com/story/48597.html ). http://www.ecommercetimes.com/story/48597.html Predatory Pricing: It is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market. Ex : Microsoft giving IE for free ( http://www.usdoj.gov/atr/cases/f2600/2613l.pdf ) http://www.usdoj.gov/atr/cases/f2600/2613l.pdf

15. Information Rules Spring 98 15 Mergers Mergers which lessen the competition are illegal. Mergers are reviewed by the Justice Department or the FTC. Mergers are blocked if they are found to harm consumers, owing to either higher prices or lower quality. Ex: Successful - WorldCom/MCI Blocked/Modified – Adobe/Aldus Microsoft/Intuit Silicon Graphics/Alias/Wavefront

16. Information Rules Spring 98 16 Cooperative Standards Setting Standards setting…or cartel? -Antitrust authorities must differentiate between a standard setting process or a cartel. Ex : Compressed digital video standard - MPEG Watch out for prices and terms agreements. - Standard setting does not involve prices and terms agreements. - Set the rules, play a fair game. Performance standards as barrier to entry. -Products need to overcome the performance barrier to enter the market. - Ex : Steel manufacturers and trade association conspiracy

17. Information Rules Spring 98 17 Continued… Patent cross licenses. - Cooperative standard setting also leads to agreements on patent cross licenses. Ex : Standardizing compressed digital video and audio data - MPEG Interconnection agreements - Conditions for interconnection or joining an existing network. - Right to choose with whom to connect and terms they agree on. - Exclusivity rules. - Ex : ATM’s and Credit Card Networks. - Discover’s lawsuit against VISA ( http://www.cardweb.com/cardtrak/pastissues/aug00.html).

18. Information Rules Spring 98 18 Single Firm Conduct Exclusive dealing - A monopolist prohibiting its customers from dealing with its competitors. Ex : Sony Digital camera’s using memory sticks. Tying - A monopolist who insists that the customers take another product if they want the monopolized item. Ex : –Ford shipping cars with tires on them and also putting radios in the car. – Microsoft including Internet Explorer as a part of an integrated operating system.

19. Information Rules Spring 98 19 Direct Government Intervention Governmental intervention is NEEDED when: –Competitive processes breaks down Example: Telecommunication’s Act of 1996, Rate of Adoption of Cell phones in US and Europe –Becomes evident that genuine monopoly power will NOT be eroded by competitive pressures. Example: Telephone rates by state public utility commission, Cable rates by Municipalities –There is a New entry into monopoly markets Example: Cellular phone carriers (For cell-phones), Direct broadcast satellite spots (for multichannel video distribution)

20. Information Rules Spring 98 20 Achieving Critical Mass Government can finance, endorse, and adopt technology to speed their widespread use. Example: “Defense Sector” – Pentagon is the sole customer of a Weapon systems and the same principles apply to the government as merely a large and influential buyer of a commercial systems. It Plays important role in helping industries to obtain the critical mass. Example: “Internet” Private sector can be creative about network externalities –Video stores (Rent VCR’s with video cassettes) –CD Players (Sony and Philips agreed to license their CD technology widely to get the CD bandwagon rolling)

21. Information Rules Spring 98 21 Universal Service Network goods should be universally provided to improve value of network. Example: “Telephone” Not only government, the private sector also provides the goods with network externalities. E.g., VCR/ Video cassettes. Geography –Incorporated into land prices Income level –Merit goods Example: Food, Shelter, health care

22. Information Rules Spring 98 22 Lessons Don’t expect government’s role to diminish Every company needs to know the rules You can usually use differential pricing Policy should ensure fair fight, not punish winners or protect losers Mergers are subject to review by DoJ

23. Information Rules Spring 98 23 Lessons, continued Cooperate to set standards and develop new technologies, so long as efforts benefit consumers If you gain a leading share of market, conduct audit of your practices Don’t expect government regulation of telecom to diminish any time soon

24. Information Rules Spring 98 24 Discussion Questions Which of the following software’s should be integrated with the Microsoft’s Windows Operating System, justify your self Address Book, Notepad, Remote Desktop Protocol, Browser, Antivirus Justice Department and FTC gave a green signal to the merger of WorldCom and MCI. On the other hand several software mergers have been challenged and abandoned or modified, Adobe/Aldus (graphics software) and Microsoft/Intuit (Personal Financial software). Why do the antitrust authorities have this step-motherly attitude towards software mergers? Do you think that in near future the following commodities will become Public utilities? Internet Access, Goggle Search Engine