Silviase/jgov_v1.4_full_ann huggingface dataset:
of video recorders was originally thought to be “time delay” in watching material recorded from the TV. The pre-recorded market emerged later, first as a market where movies were sold, and later as a movies rental market. The emergence of markets for “movies for sale” and “movies for rent,” which had to be recorded in a particular format, created a significant complementary good for Beta and VHS players. The significant cost of physical distribution of tapes throughout the country and the costs of carrying a significant inventory of titles made the choice of what movies to bring and in what format crucially depended on present and forecasted demand. This forecast was highly correlated with the present and forecast installed base of video players in each format. Thus, although network effects and path dependence played a crucial role in determining the fate of Beta, the outcome was far from predetermined. Early, more aggressive licensing of the Beta format by Sony or the early promotion of low-end Beta players could have reversed the demise of the Beta format. $ ^{11} $

#### 4. Competition Policy Issues in Network Industries 4.1 One-sided Bottlenecks

Interconnection issues in telecommunications, railroads, airline, and other transportation networks are very common. Often one company controls exclusively a part of the network, which is required by others to provide services. We call this network part “a bottleneck.” Generally, bottlenecks can be divided into two categories: one-sided and two-sided. A one-sided bottleneck is monopolized by a firm and this firm does not require the use of a different bottleneck. Such a bottleneck is shown as link AB in Figure 5. An example of such a bottleneck is the connection of local service telecommunications subscribers to a switch. This is typically called “the last mile,” and often called “the local loop.” After the 1984 breakup of AT&T, the local loop has been monopolized by the local exchange carrier, typically a Regional Bell Operating Company (“RBOC”) or GTE. Excluding cellular phones, the local loop is a required input in the production of long distance services, and typically long distance companies do not have a comparable local loop. Similarly, such a one-way bottleneck can arise when a firm monopolizes a railroad track such as AB. In telecommunications, the local exchange bottleneck has traditionally resulted in high prices for use of the bottleneck to originate (“access origination”) or terminate calls (“access termination”).
Figure 5: A one-sided bottleneck

The potential anti-competitive consequences of a one-sided bottleneck are obvious, and have been understood since the early days of the telecommunications network when AT&T enjoyed a monopoly in long distance (say here AB) but faced competition in local markets. In the context of Figure 5, the early AT&T was in possession of links 1 (long distance) and 2 (local), but did not allow an independent firm which possessed link 3 to interconnect at B and provide part of the long distance service CBA. For over two decades in the beginning of the twentieth century, AT&T refused to interconnect independent local telecommunications companies to its long distance network, unless they became part of the Bell System, which essentially meant unless they were acquired. $ ^{12} $

The early AT&T foreclosure of independents through a refusal to interconnect shows the importance of complementarities in networks and the way that companies can leverage dominance in one market to create dominance in a market for complementary goods, especially when the complementary good requires the monopolized input to provide a final service. In this case, AT&T monopolized long distance and was able to leverage its position in long distance (through the refusal to interconnect with independent locals) and gain a dominant position in local telecommunications markets throughout the country.

The continued foreclosure of the independents by AT&T and its “refusal to deal” with them caused regulation to be established at the State and Federal levels in the 1930’s. The 1934 Federal Communications Act (“1934 Act”) imposed mandatory interconnection in an attempt to stop the foreclosure of independents and stabilized the market share of local lines held by AT&T. However, at that point AT&T’s market share of local lines had already reached close to the 89% that AT&T had in 1981, prior to the 1982 agreement to be broken up.
A major revision of the 1934 Act, the Telecommunications Act of 1996 (“1996 Act”), mandates interconnection of all public switched telecommunications networks at any technically feasible point. The 1996 Act and similar European Union regulations attempt to solve the problem of the monopolization of the key parts of local telecommunications network. They impose unbundling of the network and forced leasing to entrants of some of the monopolized parts of the network, including the local loop. The goal is to make “mix and match” entry strategies feasible for local voice telephone service as well as broadband Internet access through digital subscriber lines (“DSL”) that utilizes high frequencies transmission through copper local loops. Thus, they mandate access prices for unbundled parts of the network (unbundled network elements or “UNEs”) at cost-based prices. The FCC and state PUCs accepted the view that lease prices should be based on forward-looking costs rather than on historical, accounting, or embedded costs (which was favored by RBOCs). In setting prices for unbundled network elements, the FCC and state public utility commissions (“PUCs”) also rejected the relevance of prices based on private opportunity cost, such as the “Efficient Components Pricing Rule,” (“ECPR”). Such rules derive prices for components from the monopoly prices of end-to-end services. Thus, the ECPR and its varieties would guarantee the monopolist’s profits despite market structure changes in the markets for components that are used to create final services. $ ^{13} $ To prevent anti-competitive actions in telecommunications, the 1996 Act also imposes a number of rules, such as number portability, mandatory resale of services, transparency, non-discrimination, etc. A full discussion of these rules can be found at Economides (1999). Still, the 1996 Act missed opportunities to define technical standards and require technical compatibility of telecommunications equipment.

Unfortunately, legal maneuvers by the incumbent local exchange carriers and high prices for the unbundled network elements considerably delayed very significant entry in local telecommunications markets.

### 4.2 Two-Sided Bottlenecks

In a two-sided bottleneck, each of two firms is a monopolist, each with a different bottleneck, and each firm requires the other's bottleneck to produce its output. For example, suppose there are two local telephone companies, each customer subscribes only to one local telephone company, and each company requires the other's network to complete calls. This could be represented in Figure 5 with the second link BC (number 3) removed, and considering AB to belong to firm 1, BC to belong to firm 2, firm 1 selling service ABC and firm 2 selling service CBA. In the context of this example, each of firms 1 and 2 buys access termination from the other. If each firm i=1, 2, sells both services ABC and CBA, then each firms buys both access origination and access termination from the other.

Many of the issues of traditional bottlenecks have been dealt by regulation in the United States and the European Union. In monopolized one-way bottlenecks, such as
access origination and termination used in the creation of long distance calls, access prices are regulated and there has been a tendency to decrease the regulated prices. However, prices are still high. In the two-way bottleneck of access used in the creation of local calls by competing local exchange carriers, the Telecommunications Act of 1996 (“1996 Act”) imposes cost-based reciprocal fees and allows the possibility of “bill and keep,” i.e., zero prices. If cost-based reciprocal compensation were not the rule, and firms were able to set termination at profit maximizing levels, Economides, Lopomo and Woroch (1996a,b), have shown that a large network will try to impose very high termination charges on an opponent’s small network so that no calls terminate from the small network to the large one. Without the possibility of such across-networks calls, a small network will only be able to provide within-network calls, and, being small, will be of little value to potential subscribers. As a consequence, large networks are able to provide more value to subscribers, and the small network is foreclosed. Starting from a regime of a large local incumbent and a small potential entrant, the large incumbent can set up termination access fees so that the entrant is kept out of the market. $ ^{14} $

In summary, in the absence of specific regulatory rules, two-sided bottlenecks can lead to foreclosure of competitors, even when each firm requires use of the bottleneck of the other to complete calls or provide a service.

### 4.3 Market Power Creation Specific to Networks: The Importance of Technical Standards

The example of early AT&T’s refusal to deal (interconnect) with independents (and with interconnected networks of independents) can also arise in milder terms when a firm X that has a significant position in its industry insists that firms that provide complementary products Y do not also provide them to X’s competitors. For example, in the mid-1980s Nintendo refused to allow third party games (software) to play on its game console (hardware) unless the software manufacturers agreed not to write a similar game for competing game systems for two years. Faced with this condition imposed by Nintendo, software developers had to make a choice to either write a game for Nintendo or for the competing platforms of Atari and Sega. Clearly this restriction reduced the potential revenue of a game developer who would like, for a small additional cost, to port its game to the alternative systems. But, also, more importantly, the restriction forced developers to predict which game system would have higher sales, and create software just for this system. Thus, Nintendo used its dominance of the game market at that point in time to coerce developers to write software just for its platform, and thereby increased the value of the Nintendo virtual network (of hardware and software). Nintendo abandoned this requirement under antitrust challenge.
Because of the extreme inequality of market shares, prices, and profits in a network industry, restriction of the installed base of a firm in a network industry can be very detrimental. It can push a firm to a lower rank with significantly lower profits, or, in extreme cases, push a firm to such a low market share that it has to close down because it cannot recover its fixed costs.

Another example from the computing industry illustrates a situation of market power creation specific to networks. Suppose that firm A chooses to make its product A incompatible with the products of other firms that perform similar functions, and it also subsidizes firms that produce complementary goods B to its product A. $ ^{15} $ Alternatively, we may assume that firm A subsidizes its own division that sells complementary goods B. As a result

(i) the value of firm A’s product increases;

(ii) the entry hurdle of firm A’s rivals increases;

(iii) there is possible creation of market power.

Firm A’s defense will be that its actions are pro-competitive since their primary cause is the enhancement of the value of product A. From the point of view of A’s competitors, the actions of A look very much like anti-competitive behavior since the abundance of complementary goods B for product A puts them at a competitive disadvantage.

Note that the existence of incompatibility is a necessary condition for possible creation of market power. Moreover, the key to increasing social welfare is to move to compatibility. That is, assuming that innovation and product availability would not be reduced, the best of all worlds is to have public standards and full compatibility. However, it is very difficult for US antitrust authorities to intervene and/or define standards.

Besides the use of technical standards, firms can also use bundling and other pricing strategies as well as non-price discrimination strategies to leverage market power across markets.

### 4.4 Vertical Integration and Vertical Control Issues in Network Industries

In networks, as in other settings, there are potentially anti-competitive issues arising from the possibility of vertical integration and the behavior of vertically integrated firms. These may include, the bundling of components through vertical integration, contract, or manipulation of technical standards so that an entrant must enter both components markets even if it desires to enter only one of the markets. Often firms have expertise or a technical advantage in only one component, and would like to enter only in the market for that component. An incumbent can strategically alter the market environment through acquisition or contract so that the entrant can only be successful if it
enters more than one markets. This increases the financial hurdle for an entrant, and it also forces it to sell components where it does not have expertise. Thus, it makes it more likely that entry will not occur.

A vertically integrated firm can also use discrimination in price charged to a subsidiary compared to the price charged to a downstream competitor, or discrimination in quality provided to subsidiary compared to quality provided to a downstream competitor, that is, raising rivals' costs. These issues are discussed in more detail in Economides (1996b).

Firms in network industries can also use a variety of ways to manipulate technical standards in joint ventures to achieve market power. The issue of market power also arises in “aftermarkets,” where consumers are “locked in” to a service that arises out of commitments of a durable nature. For example, in an important case that reached the Supreme Court, Kodak refused to supply parts to independent firms that serviced Kodak photocopiers. Although one could argue that there was significant competition in the market for new photocopiers and Kodak did not have a dominant position in that market, once customers had bought a Kodak photocopier, they were “locked in,” and faced significant costs to buy a new photocopier of a different brand. So, Kodak’s actions could be anti-competitive in the “aftermarket” for repair services of consumers who have already bought Kodak photocopiers. A similar case of anti-competitive actions can be made in aftermarkets where consumers are locked-in by having made an investment in a durable good that is incompatible with other comparable durable goods, or are locked in other ways. For example, consumers without number portability in wireless cellular and PCS markets may be “locked in” to the service of a particular provider or network. Similarly consumers can be “locked in” to the e-mail service of an Internet Service Provider (“ISP”) since there is no portability of e-mail addresses and many ISPs do not offer forwarding of incoming e-mail messages to another ISP.

### 4.5 B2B and Other Exchanges Issues

The world of business to business exchanges lacks the regulation of traditional financial and commodity exchanges. Many proposed B2B exchanges are run by the firms that also are trading. For example, ENRON was proud of the fact that it was participating as a trading party in B2B exchanges that it organized and ran. Such a situation would be strictly prohibited in traditional financial and commodity exchanges because of the possibility that the organizer of the exchange would take advantage of the information created in the trading process to fashion privately beneficial trades. In another example, COVISINT, an exchange for automobile parts organized by automobile manufacturers has been accused of acting to consolidate the monopsony power of car manufacturers. In general, B2B exchanges can provide substantial benefits by consolidating trades, increasing market liquidity, improving standardization, and reducing search costs. $ ^{16} $ But B2B exchanges also have the potential of creating significant antitrust issues.
### 4.6 Dynamic Efficiency Issues

The world of networks and dynamic effects brings to the forefront the fact that behavior that exhibits static efficiency may lack dynamic inter-temporal efficiency. The possibility exists of a lock-in to a technology and a path which, when decisions are taken in every period, looks optimal given past decisions, but is sub-optimal if earlier investment decisions had been delayed and all the decisions were taken at once. In a world with network effects a “lock in” to an inferior technology can easily occur as firms (and countries) find it more desirable to invest in the technology in which they already invested. This can occur under perfect competition, but the problem can easily become much more important under oligopoly, as firms race to become dominant, given the importance of dominance in a network industry. With rapid technological change, firms in an oligopoly race for dominance can easily get stuck investing heavily in the currently best technology and unable to invest sufficiently in the next technology, thereby placing themselves off the optimal investment path.

### 4.7 Innovation Issues

An important antitrust issue is the speed of innovation in a network industry as affected by strategic decisions of firms and potentially anti-competitive actions. The effects of actions on innovation are important because innovation affects the welfare of future consumers, and this should be taken into consideration in an antitrust decisions. The difficulty in dealing with innovation issues in antitrust arises from the fact that the efficiency and intensity of innovation in monopoly compared to perfect competition and oligopoly are open questions in economics. Thus, it is very hard to make general statements on innovation in an antitrust context.

### 4.8 Criteria to be Used for Antitrust Intervention in Network Industries

When an antitrust intervention is considered in a network industry, a number of considerations that arise out of the nature of network industries have to be taken account. These are explained in detail in earlier sections, primarily in section 3. First, the benchmark of the “but for” world that should be considered should be a network industries equilibrium with significant inequality, rather than a perfectly competitive equilibrium. Second, competitors’ harm should not be a sufficient reason for intervention. The right question is, “were consumers (past, present, future) harmed by specific actions?” Third, uncertainty should be taken into account, and caution should be used in guessing how a high tech industry would have evolved but for the anti-competitive action(s). Fourth, it is possible that monopoly may maximize total surplus. Fifth, it will not be possible to sustain a long-term equilibrium with equal market shares, and a short term equilibrium with equal market shares may have low total surplus. Sixth, path dependence and the value of installed base are limited by Schumpeterian
competition, and upheavals are not uncommon in network industries. Seventh, especially in software industries, the extent and functionality of products is flexible. $ ^{17} $ The definition of the market of a potential antitrust violation may be much harder.

### 4.9 Criteria to be Used for Remedies

When a remedies phase is reached, a liability finding has already been made. The objective of remedies is to stop practices that were found to be illegal, prevent the recurrence of such practices, and restore any recurring threat posed by such practices.

Any intervention by antitrust authorities creates a disruption in the workings of markets. The objective of the remedial relief is to accomplish the objectives mentioned in the previous paragraph without damaging efficient production and competition in the market. The potential damage that antitrust intervention can produce is larger when it is applied to an industry with fast technological change, where leaps to new and more efficient technologies are expected, while the specific nature of the future winning technology is unknown. Often, it is difficult to predict future winning technologies, and therefore it is hard to fashion an antitrust remedy with an accurate prediction of its effect on industry structure and competition a few years down the road. Of course, this uncertainty is multiplied when the remedy creates a significant intervention in the industry. Therefore, lacking the knowledge of the effects of their actions, it is in the public interest that antitrust authorities and courts avoid extensive intervention in industries with fast technological change. It is best to intervene only to the extent that (i) intervention reverses the effects of actions for which liability was established; and (ii) the effects of the intervention are predictable.

In markets with network effects, as I have explained in detail above, the existence of network effects has crucial implications on market structure and the ability of antitrust authorities to affect it. In markets with strong network effects, even in the absence of anti-competitive acts, the existence of network effects in markets, results in significant inequalities in market shares and profits. The resulting equilibrium market structure can be called a “natural oligopoly” where very few firms dominate the market. The structural features of natural oligopoly for a software market cannot be altered by antitrust intervention without significant losses for society. The very nature of markets with network effects implies that the ability of antitrust authorities to alter market structure in such industries is limited, as discussed above.

As an alternative to antitrust and competition law, economic regulation can and has been established in three exceptional cases: (i) for those markets where it is clear that competition cannot be achieved by market forces; (ii) where deviation from efficiency is deemed socially desirable; and (iii) where the social and private benefits are clearly different, since in each of these cases, it is clear that a market without intervention will