Economic Policy Analysis and the Internet: Coming to Terms with a Telecommunications Anomaly

The significant set of public policy issues for economic analysis that arise from the tensions between the ‘special benefits’ of the Internet as a platform for innovation, and the drawbacks of the “anomalous” features of the Internet viewed as simply one among the array of telecommunications systems, is the focus of discussion in this chapter. Economists concerned with industrial organization and regulation (including antitrust and merger law) initially found new scope for application of their expertise in conventional policy analyses of the Internet’s interactions with other segments of the telecommunications sector (broadcast and cable television, radio and telephone), and emphasized the potential congestion problems posed by user anonymity and flat rate pricing. Policy issues of a more dynamic kind have subsequently come to the fore. These involve classic tradeoffs between greater efficiency and producer and consumer surpluses today, and a potential for more innovation in Web-based products and service in the future. Many such tradeoffs involve choices such as that between policies that would preserve the original ‘end-to-end’ design of the original Internet architecture, and those that would be more encouraging of market-driven deployment of new technologies that afforded ISPs with greater market power the opportunity to offer (and extract greater profits from) restricted-Web services that consumers valued highly, such as secure and private VOIP.