Internet Governance: A Rent-Seeking Analysis

Journal of Private Enterprise, Fall 2000 by Abbott, Alden F, Brady, Gordon L

There is the notion that free market countries will do well in attracting capital only if they recognize the increased options that the Internet makes available. However, a tax policy that does not unduly damage incentives and efficiency is but one ingredient for wealth creation and economic growth. Progress requires that institutions define and enforce these property rights and promote unrestricted competition through free trade, sound money, and sound banking practices. The institutions of freedom should not be taken for granted and there are reasons to be concerned about restrictions on the Internet. This paper uses public choice analysis to examine the institutions that will affect efforts to tax and regulate the Internet. In this paper we argue that rentseeking is a positive influence due to rapid changes which continue to take place in information technology.

The Internet has developed largely as a "spontaneous order," without a central coordinating authority, in part because government regulators have simply failed to anticipate the pace of technology in this area and thus have been slow to introduce regulatory supervision. In his 1944 book The Road to Serfdom, Hayek writes that "as the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of this directing power." That is, lobbying tfor special privilege, which public choice economists call rentseeking, will be the only activity that matters.

The actors

Government intervention in the Internet, as in so many other areas, is explained by the incentives facing various groups of people who constitute different sets of interests. First, there are the competitors of successful firms that want to hamstring their rivals by creating entry barriers, appropriating part of their rivals' businesses, or simply mitigating unfavorable (to them) market outcomes. second, there are the bureaucrats and politicians whose interest lies in an ever-expanding government. Third, there are the trial lawyers engaged in redistribution through lawsuits. Prominent examples include actions against the tobacco industry, drug manufacturers, and gun manufacturers. In January 2000, perhaps using the Internet to recruit plaintiffs, a class action was filed against e-toy retailers for failure to make Christmas deliveries. And, we may soon see similar suits against high-fat food purveyors. Finally, a list of interested parties must include the various non-governmental organizations, including the advocacy groups favoring free Internet access in the name of addressing the so-called "digital divide" allegedly limiting minorities' access to the Internet. By shedding light on the incentives facing individuals and how these incentives will affect the development of the Internet, public choice analysis helps one identify institutional arrangements that would enable us to overcome these forces or to take advantage of them.

The evolution of e-commerce - an interest group model

One would expect virtual markets to reduce consumer search costs relative to conventional markets, although not necessarily to reduce the prices charged. We should expect prices to vary much more when search costs are relatively high. It simply doesn't pay for consumers to search for low-priced items, but if the Internet allows consumers more easily to ascertain retailers' prices, then we should expect electronic commerce to cause prices to converge. It might be argued that e-commerce more nearly approximates the model of perfect competition in which information is costless, the barriers to entry are low, and there is a large number of buyers and sellers who are price takers. In this model the total cost to consumers, which includes the price paid and the search costs they bear, will tend to decline. However, we should also keep in mind that for certain types of goods (antiques, collectibles, commodities in fixed supply), the decrease in search costs may very well lead to a shift in demand to the right and consequently higher prices rather than lower prices. The retailers that choose not to sell online or whose products do not benefit from e-commerce will be among the groups seeking to shape regulations in their favor.

This section looks at the gainers and losers from e-commerce in order to predict behavior. An area of major savings is likely to be in business-to-business online purchasing. For example, in November 1999, both General Motors and Ford announced plans to publish online specifications for components. Ford's joint venture, AutoXchange, is with Oracle while GM's TradeXchange is a joint venture with Commerce One. The supply base for GM and Ford is $500 billion from over 30,000 different suppliers. Expected savings from the ventures are on the order of 10-20% of total expenditures. Similar estimates were made for BP-Amoco's efforts to streamline the procurement process. BP-Amoco predict a savings of $200 million as it uses the Internet to deal with its 100,000 suppliers. Its goal is that 95% of procurement take place online. For BP-Amoco, a 5% overall saving can translate into a 5-20% increase in operating profits.2