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Regulation of Digital Businesses with Natural Monopolies Or Third-Party Payment Business Models: Antitrust Lessons from the Analysis of Google University of Pennsylvania ScholarlyCommons Finance Papers Wharton Faculty Research 2010 Regulation of Digital Businesses with Natural Monopolies or Third-Party Payment Business Models: Antitrust Lessons from the Analysis of Google Eric K. Clemons University of Pennsylvania Nehal Madhani Follow this and additional works at: https://repository.upenn.edu/fnce_papers Part of the Finance and Financial Management Commons Recommended Citation Clemons, E. K., & Madhani, N. (2010). Regulation of Digital Businesses with Natural Monopolies or Third- Party Payment Business Models: Antitrust Lessons from the Analysis of Google. Journal of Management Information Systems, 27 (3), 43-80. http://dx.doi.org/10.2753/MIS0742-1222270303 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/fnce_papers/80 For more information, please contact [email protected]. Regulation of Digital Businesses with Natural Monopolies or Third-Party Payment Business Models: Antitrust Lessons from the Analysis of Google Abstract Some digital business models may be so innovative that they overwhelm existing regulatory mechanisms, both legislation and historical jurisprudence, and require extension to or modification of antitrust law. Regulatory policies that were developed in response to nineteenth- or twentieth-century antitrust concerns dealt principally with economies of scale leading to monopoly power and may not be well suited to the issues of network effects or third-party payer online business models such as sponsored search. From the perspective of information systems economics, we investigate if such third-party payer digital systems require intervention as profound as the government's innovative approach to the problems posed by AT&T in the 1913 Kingsbury Commitment, establishing the first private regulated monopoly. Google provides an example of a company whose innovative digital business model is difficulto t fit into current regulatory frameworks, and may provide examples of the issues that might require an extension to regulatory policy. Keywords antitrust, bundling and tying, contestability, deterred market entry, digital business strategies, essential facilities doctrine, Google, key word auctions, online search, relevant market share, sponsored search Disciplines Business | Finance and Financial Management This journal article is available at ScholarlyCommons: https://repository.upenn.edu/fnce_papers/80 Regulation of Digital Businesses with Natural M onopolies Or Third Party Payment Business Models: A nti trust Lessons f rom the A nal ysi s of G oogl e Eric K. Clemons The Wharton School, University of Pennsylvania Philadelphia, PA 19085 ([email protected]) N ehal M adhani Kirkland & Ellis LLP N ew York, N Y 10022 (nehal [email protected]) D r af t JM I S 8.11 29 June 2010 A bstract So m e digital business models may be so innovative that they overwhelm existing r egul atory mechanisms, both legislation and historical jurisprudence, and require extension to or modification of antitrust law. Regul ator y pol i ci es that w er e d ev el oped i n r esponse t o 19th or 20th century antitrust concerns dealt principally with economies of scal e l ead i ng to monopol y pow er , and may not be w el l sui ted to the i ssues of netw or k effects or third-par ty pay er onl i ne busi ness mod el s l i k e sponsor ed sear ch. Fr om the per specti v e of i nfor mati on sy stems economi cs we investigate if such third party payer digi tal sy stems r equi r e i nter v enti on as pr ofound as the Gov er nment’ s innovative approach to the problems posed by AT&T in the 1913 Kingsbury Commitment, establishing the first private regulated monopoly. Googl e pr ov i d es an exampl e of a company w hose innovative digital business model i s difficult to fit into current regulatory framew orks, and may pr ov i d e examples of the i ssues that might require an extensi on to r egul ator y policy. K ey w or d s: Digital Business Strategies, Sear ch , Sp o n so r ed Sear ch , Keyword Auctions, Antitrust, Contestability, Rel ev ant M ar k et Shar e, Essential Facilities Doctrine, Bundling and Tying, Deter r ed M ar k et Entr y , Di gi tal Busi ness Str ategi es, Googl e Regulation of Digital Businesses with N atural Draft 8.11 // 29 June 2010 Monopolies or Thi r d Par ty Pay ment Busi ness M od el s page 2 BRI EF BI OS OF TH E AUTH ORS Eric K. Clemons ([email protected]) i s Pr of essor of Oper at i ons and Information Management at the Wharton School of the University of Pennsylvania. His education includes an S.B. in Physics from MIT, and an M.S. and Ph.D. in Operations Resear ch fr om Cor nel l U ni v er si ty . H e has been a pi oneer i n the sy stemati c stud y of the transformational effects of information on the strategy and practice of business. His r esear ch and t eachi ng i nt er est s i ncl ud e st r at egi c uses of i nf or mat i on sy st ems, t he changes that IT enables in the competi ti v e bal ance betw een new entr ants and established industry participants, transformation of distribution channels, the structure and governance of the IT functional area, and the impact of IT on the risks and benefits of outsourcing and strategic alliances. Industries of focus include international securities markets and financial services firms, consumer packaged goods retailing, and travel. He specializes in assessing the competitive implications of IT, and in managing t he r i sk s of l ar ge-scal e i mpl ementati on effor ts. Dr . Cl emons i s the f ound er and pr oject director for the Wharton School’s Sponsored Research Project on Information: Strategy and Economics Within the Program for Global Strategy and Knowledge Intensive Organizations. H e participated in the World Economic Forum in Davos, Switzerland in February 2009. H e is currently a member of the editorial boards of the Journal of Management Information Systems and International Journal of Electronic Commerce. Dr . Cl emons has 35 y ear s’ exper i ence on the faculties of Wharton, Cornell, and Harvard, and consulting experience in the private and public sectors both domestically and abroad. N ehal M adhani ([email protected]) is currently a restruct ur i ng associ at e i n the New York office of Kirkland & Ellis, LLP. At Kirkland & Ellis, Nehal focuses on financial restructuring matters, with an emphasis on debtor representation. H i s r epr esentati ons hav e encompassed a v ar i ety of i nd ustr i es, i ncl ud i ng d i rect marketing, specialty chemical and homebuilding and construction. Pr i or to joining Kirkland & Ellis, he founded an online classifieds service for college students and advised small busi nesses and nonpr of i t s on l egal and st r ategi c consi d er at i ons. H e holds a B.A . from Northwestern University in biology and economics and a J.D. from the University of Pennsylvania. CONTACT INFORM ATION FOR THE AUTHORS Eric K. Clemons, Operations and Information Management, The Wharton School of the University of Pennsylvania, Philadelphia, PA 19104 USA , telephone: 215-898-7747, Email: [email protected]. N ehal M adhani, Kirkland & Ellis LLP, 601 Lexington A venue, N ew York, N Y 10022 U.S.A. Telephone: 212-446-4936, Email: [email protected]. Regulation of Digital Businesses with N atural Draft 8.11 // 29 June 2010 Monopolies or Thi r d Par ty Pay ment Busi ness M od el s page 3 Introduction Objectives of the Paper Thi s paper ad d r esses t he r egul at or y pr ospect s f aci ng any t r ul y successf ul f i r m i n an age of Internet technology, “winner take all” economics [43], and integrated platform-based competition. The major i ssue ad d r essed i n the paper how well suited American legal practice, especially commercial and antitrust statutes and jurisprudence, are for dealing with modern digital business strategies. A merican commercial and regulatory legal practice w as largely formulated during an i nd ustr i al er a, w hen the d anger s of monopol y mar k et pow er w er e associ ated w i th manufacturing giants. Of cour se, the cour ts hav e cr eati v el y constr ucted the pr esent antitrust doctrine to keep it as relevant as possible, and much of what is appl i ed t o cases today is the result of the courts’ interpretations of the Sherman Act rather than the Sherman Act itself. Still, the courts ar e always to some extent constrained by the original legislation that defines the issues before them and by the history of jurisprudence, which itself often lags behind industrial practices. Manufacturers note that the courts are much better at regulating them than they are at regulating giant retailers like Wal-Mart and Home Depot; of course, at the time that the Sherman Act was drafted, antitrust was far more concerned with the very real prospect of giant manufacturing trusts than it was with the then-unimaginable problems caused by giant r etai l er s. This leads us to ask how appropriate existing regulatory framew orks are to competition among busi nesses w i t h mod er n, post -industrial digital business models.
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