Riassunti competition and high tech markets, Sintesi del corso di Economia Dell'integrazione Europea

Scarica Riassunti competition and high tech markets e più Sintesi del corso in PDF di Economia Dell'integrazione Europea solo su Docsity! Monopoly and Dominant Firms: Antitrust Economics and Policy Approaches The primary goal of antitrust is limit the market power. For market power we mean the ability of an enterprise or firm to maintain the price at which it sells its product at a level that is significantly above its average unit costs. There are seven ways for antitrust for limit the ability of an enterprise to exercise market power: 1. Prevent/stop agreements among firms that restrict competition among them for continued to exercise market power; 2. Prevent/stop mergers that would allow a new firm with a wrong market power; 3. Prevent/stop predatory behavior by a firm that can enhance its market power by driving rivals out of the market; 4. Prevent/stop exclusionary behavior can enhance its market power (vd. “raising rivals’ costs”); 5. Dismember the firm, so as to create multiple competitive entities where was a single seller before, so that the competitive behavior of the created firm reduces or eliminates the original firm’s market power (vd. Structural approach); 6. Regulate the firm that possesses market power (for example with maximum price); 7. Replacing the firm with a public enterprise that would charge a price that is closer to the firm’s average costs. For monopoly we mean the sole seller of a distinctive product or service In the figure we see that the quantity of gadgets per week is measured on the horizontal axis, while dollar amounts (prices and costs) are measured on the vertical axis. The monopolist sell the gadgets at 10€ for each, while the unit costs (including a normal profit for firm) of producing gadgets are 6€ for gadget. Then the area between the two costs are the monopoly profits. If there were a multiple firms that each produced identical gadgets and that competed on the basis of price, the equilibrium price would be only 6€ per gadget. Then if competition prevails, consumers would be able to buy a price of 6€ the gadgets that they value at 10 €, and there is a “consumer’s surplus” of 4€/gadget; conversely, if monopoly prevails, consumers pay the full 10€ for gadget, and the consumer’s surplus is transferred to the monopolist. One convenient way of measuring and representing the market power of an enterprise is the Lerner Index, which is written as: L = (P – MC)/P Where L is market power, P is the price at which the firm sells its output and MC is the marginal cost of the firm for the volume of output that the firm is selling. If various buyers have different availability to pay for their single gadget per week and/or some buyers may be willing to buy large numbers of gadgets per week when the price is lower, we will a situation when, at higher price fewer gadgets would be bought, while at lower price more gadgets would be bought. The situation is represented in this picture. Again, we will assume that the costs of producing gadgets involve constant unit cost, regardless the volume. The monopolist’s problem is now more complex, in fact if it want maximize the profit can’t practice price discrimination for the consumers. The monopolist must choose between an higher price or a lower price. Also in this case we utilized a calculus: π = P x Q – C Where π is the monopolist’s profit, P the price, Q the quantity produced/sold and C the cost of producing the requisite gadgets. Taking the derivate of this equation with respect to Q, result that the monopolist should sell a quantity of gadgets each week such that the marginal revenue (MR) from selling a slightly larger (or slightly smaller) quantity is equal to the marginal cost (MC) of producing the quantity; or MR = MC. This result is visible in the figure when QM represents the quantity at which MR = MC, PM represents the price at which that quantity can be sold. In this case we can represented the relationship between marginal costs and to the elasticity of demand (ε) with the equation: PM = MC/(1 + 1/ε) Thus, the monopolist’s profit-maximizing price will be higher when its marginal costs are higher and when its demand is less elastic. Thanks to the precedent equation, we can calculated the Lerner Index: L = (P – MC)/P = -1/ε The Lerner Index thus indicates that the monopolist is exercising more market power when its demand curve is less elastic. Suppose that there is a enterprise that has a special production advantage that allows it to produce a distinctive product at lower cost than can other firms. In this case the firm isn’t the sole seller of gadgets, but there are a number of the other firms that can also produce (identical) gadgets, but at higher costs. We will assume that these fringe firms are reactive, in the following sense: rather than action strategically, these firms simply react to a perceived price in the marketplace by supplying a quantity of gadgets that is consistent with simple profit-maximizing behavior: the quantity where MC = MR = P. The dominant firm can use the “limit pricing”: to set a price that is just below the level that would begin to induce a supply response by the fringe. However, with this fringe’s reaction the dominant firm have less earnings, in fact it have the “residual demand” how it represented in the figure. How does the monopoly arise? Usually, for the creation of a monopoly there is need for the presence of “barriers to entry”. Without barriers to entry, above-normal profits of the monopolist could not persist, because there was potential sellers. There are basically three categories of entry barriers: 1. Ownership of a unique resource (es. Unique mineral deposit, unique government franchise, especially distinctive production technology); Definition of a multi-sided platform “A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount; in other words, the price structure matters, and platforms must design it so as to bring both sides on board” (Rochet and Tirole, 2006). Evans and Schmalensee (2007) proposed a less formal definition that captures the key features of platform businesses. A multi-sided platform “has (a) two or more groups of customers; (b) who need each other in some way; (c) but who cannot capture the value from their mutual attraction on their own; (d) rely on the catalyst to facilitate value-creating interaction between them”. The focus of this definition is on the role of the platform in creating value that would not exist. Externalities These are a key aspect of multi-sided platforms and there are two types: a) usage externalities, which exist when two economic agents need to act together, to use the platform, to create value. It’s possible that this externalities are positive for one type of agent and negative for the another one, but if, in the long time, the net value is positive there is a benefit for each economic agents; b) there is membership externalities when the value received by agents on one side increases with the number of agents participating on the other side. The presence of these indirect network externalities has an important implication for economic analysis of multi-sided platforms. Indeed, for multi-sided platforms, the demand by one group of economic agents also depend of the number of each of the other group of economic agents that the platform serves. Pricing This in the two-side platform is more complex than in ordinary multi-product business, and it depends on the nature of the platform. There are two models for studying the pricing: 1. [Rochet and Tirole] in this model a two-sided monopoly platform operates with no membership externalities, only usage externalities, and levies no membership charges, only per-transaction usage charges. The number of transactions that actually occurs is proportional to the product of the groups’ demand in this model. The platform’s profit is given by Rochet and Tirole show that the profit-maximizing prices satisfy the following two optimality conditions: The first of these resembles the classic Lerner condition for monopoly equilibrium; the total markup over cost is lower the higher is either demand elasticity. The second condition makes clear that this is not an ordinary multi-product firm. 2. [Amstrong] in this model a two sided platform operates with no usage externalities, only membership externalities, and levies no usage charge, only membership charges. The demand of each group for membership depends both on the fee it is charged and on the number of members of the other group. The firm’s profit function in this model is given by: Amstrong shows that in the special case where the Di functions are linear, the profit-maximizing prices satisfy the following conditions: Consumer and social welfare For antitrust an important and immediate implication of the multi-sided platform models is that an accurate analysis of the impact of any platform decision on consumer welfare must take into account all interdependent customer groups the platform serves. Another welfare issue concerns the relationship between the profit-maximizing decision by a platform and the social welfare maximizing decisions. There are two potential market failures resulting from multi-sided platforms: 1) the first one is the traditional market power failure. In the absence of perfect competition, the platform will set its overall price level than is socially desirable. It will earn at least short-term profits that exceed the competitive level; 2) the second possible market failure can result from the platform choosing a price structure that does not maximize social welfare. COMPETITION AMONG MULTI-SIDED PLATFORMS One of the major contributions the multi-sided platforms literature has made to industrial organization has been to demonstrate that indirect network effects are important across a wide range of industries. In simple models, indirect network effects can also produced demand-side economic of scale that lead to monopoly: increased participation on one side of the platform makes it more attractive to the other side, leading to increased participation there, making participation by the first side more attractive, and so on. But many of the industries in which indirect network effects are important do not have a single monopoly provider and do not seem to be tending toward monopoly. There are two reasons that explain this apparent discrepancy: A. PRODUCT DIFFERENTATION For one-sided firms, horizontal and vertical differentiation locates the firm near a pool of potential customers and helps determinate pricing. From multi-sided platform, by determining the customers on one side, horizontal and vertical differentiation affect demand on the other sides. Product differentiation is a tactic that firms can use to create value by making it easier for agents to find counterparties for value-increasing exchange. Product differentiation is a key reason why many industries with multi-sided platform have multiple competitors even though indirect network effects and sometimes of scale would seem to propel them to monopolies. B. MULTI-HOMING Amstrong showed the importance of “multi-homing” for competition. Suppose platform in some market create value by having agents of type A and type B as members. If type A agents only join one platform, the type B agents can only gain access to type A agents by joining that same platform. That makes the type A side of a platform what Amstrong called a “competitive bottleneck”. When there is single homing on one side and multi-homing on the other side in his model, Amstrong shows that platform will compete aggressively for the single-homing customer who will therefore pay low prices. With these customers on board, the platform will then earn its profits from the customers who multi-home on the other side. [es. Ciccio regala bottiglia di vino] MARKET DEFINITION AND MARKET POWER The fundamental service provided by multisided platform is the ability of the economic agents on each side to interact in a valuable way with the economic agents on the other side. Market definition and market power analysis are primarily methods for summarizing succinctly the extent to which competitive constraints limit the ability of a firm to engage in various kinds of behavior that may raise antitrust concerns. COMPETITIVE CONSTRAINTS Indirect network effects result in three major considerations for the analysis of competitive constraints: 1. The positive feedback between the sides that indirect network effects produce need to be considered when analyzing the profitability of increasing price. It is possible that these feedback effects are small and could be ignored in any particular setting; 2. The competitive constraints on raising price to one side, or engaging in any other strategy, can come directly or indirectly from any and all side of competing platforms. Platform engaging in any competitive move affecting one group it serves would need to consider counterstrategies aimed at that group or any other it serves; 3. The existence of indirect network effects can also limit supply-side substitutability and increase entry barriers for multi-sided platforms. In practice product differentiation and the possibilities of multi-homing are critical determinants of the degree of difficulty faced by entrants. MARKET POWER Market power is defined as the ability of the firm to raise prices significantly above the competitive level, although there is no consensus on exactly how much above the competitive level constitutes significant market power. The competitive level is generally taker to be price that would prevail under perfect competition. Some models of multi-sided platforms may provide a theoretical rationale for comparing price and marginal cost by computing a multi-sided version of the familiar Lerner Index. But multi-sided price-cost margins face the same difficulties in interpretation as do the single-sided price cost margins, because competitive firms need to recover fixed costs, prices cannot be equal to marginal cost in competitive equilibrium. Also market share, which is used for single-sided firms, it’s no stronger for multi-sided one, because it’s not clear how to compute “share” for multi-sided firms. There I so single reliable method for assessing market power for traditional firms and it is usually recommended that analysis consider multiple sources of evidence to reduce the chances of false positive or false negative. MARKET DEFINITION The purpose of market definition is to the identify the competitive constraints on the supplier of the product under consideration, that is the market forces that reduce the profitability of raising prices above competitive levels or lowering quality. The literature on multi-sided platforms has examined three issues related to market definition: 1. Consequences of applying analytical tools that were developed for single-sided firms to defining markets for a product offered on one side of a multi-sided platform; 2. Determining cases in which it is possible to easily adapt existing tools for market definition to multi- sided platforms. A special case is when the two sided are tied together in a fixed proposition; 3. The third area involving developing general tools that can be used for assessing market definition for multi-sided platforms. These generally involve econometric models that explicitly account for interdependencies in demand between the various platform sides. MERGERS The basic question in a request for merges is if the proposed combination is likely to decrease consumer or social welfare significantly after accounting for unilateral and coordinated effects and efficiency. There are four unilateral effects of multi-sided platform mergers: 1. The “off-the-shelf” (prêt a porter) analytical tools for assessing unilateral effects form mergers between one-side firms may yield incorrect assessments; 2. In some cases it is at least theoretically possible for a merger of two-side firms to result in price reductions to both sides even in the absence of efficiency gains; 3. All else equal a merger of multi-sided platform would ordinarily increase indirect network externalities by increasing the size of all customer groups and thereby provide efficiency benefits. To evaluate the impact of the merger on consumer welfare, analysts need to assess the value of these externalities; 4. To evaluate the impact of a merger of multi-sided platforms on consumer welfare it is necessary to consider the impact of all sides. A merger could benefit consumers on one side but harm those on the other side and the net effect of the merger across all consumer groups could therefore be positive or negative. EXCLUSIONARY CONDUCT Economists have developed a variety of models that analyze if particular business practices are likely to harm consumers as a result of excluding competitors form the market or benefit consumers by reducing prices or increasing quality. Multi-sided platforms may attempt to use exclusionary practices to deter platform entry. To see why, we introduced the concept of critical mass and its role in launching a platform business as developed in Evans. In a nutshell, the negotiation is possible if there is a sufficient volume of bids and asks and therefore both liquidity providers and liquidity takers to incur the expense. If there is enough liquidity, more buyers and sellers will come and the platform grow and the platform will be attractive to market specialist and other • The position of the dominant firm; • The condition on the relevant market; • The position of the dominant firm’s competitors; • The position of the customers or input suppliers; • The extent of the allegedly abusive conduct; • Possible evidence of actual foreclosure; • Direct evidence of any exclusionary strategy. PRICE-BASED EXCLUSIONARY CONDUCT The Commission will examine economic data relating to cost and sales prices, and in particular if the dominant firm is engaging in below-cost pricing. The cost benchmarks that the Commission is likely to use are the average avoidable cost (AAC) and long- run average incremental cost (LRAIC). Failure to cover AAC indicates that the dominant firm is sacrificing profits in the short term and that an equally efficient competitor cannot serve the targeted customers without incurring a loss. Failure to cover LRAIC indicates that the dominant firm is not recovering all the fixed costs of producing the good or service in question and that an equally efficient competitor could be foreclosed from the market. OBJECTIVE NECESSITY AND EFFICIENCIES The Commission will also examine claims put forward by a dominant firm that its conduct is justified. The question of if conduct is objectively necessary and proportionate must be determined on the basis of factors external to the dominant firm. The Commission considers that a dominant firm may also justify conduct leading to foreclosure of competitors on the ground of efficiencies that are sufficient to guarantee that no net harm to consumers is likely to arise. The dominant firm will be expected to demonstrate that the following cumulative conditions are satisfied: • The efficiencies have been realized as a result of the conduct; • The conduct is indispensable to the realization of those efficiencies; • The likely efficiencies outweigh any likely negative effects on competition and consumer welfare in the affected market; • The conduct does not eliminate effective competition. It is incumbent of the dominant firm to provide all the evidence necessary to demonstrate that the conduct concerned is objectively justified. Specific forms of abuse EXCLUSIVE DEALING A dominant firm may try to foreclose its competitors preventing them selling to customers with exclusive dealing. The most important circumstances when Commission may intervene are: Exclusive purchasing A consumer on a particular market must buy exclusively or to a large extent only from the dominant firm. The Commission will focus its attention on those cases where it is likely that consumers don’t have benefit, in particular when this circumstances have the effect of preventing the entry or the expansion of competitors. Conditional rebates These are rebated granted to customers to reward them for a particular form of purchasing behavior. Usually the customer is given a rebate if its purchases exceed a certain threshold. The rebate being granted either on all purchases (retroactive rebates) or only on those made in excess of those required to achieve the threshold (incremental rebates). Retroactive rebates may foreclose the market significantly, as they may make it less attractive for customers to switch to an alternative supplier for small amounts of demand. If the rebate system is capable of hindering expansion or entry even by competitors that are equally efficient by making it more difficult for them to supply part of the requirements of individual customers. In this context the Commission will estimate what price a competitor would have to offer in order to compensate the customer for the loss of conditional rebate if the latter would switch part of its demand (“the relevant range”) away from the dominant firm. Where the effective price is below AAC, as a general rule the debate scheme is capable of foreclosing even equally efficient competitors. Where the effective price is between AAC and LRAIC, the Commission will investigate if other factors point to the conclusion that entry or expansion even by equally efficient competitors is likely to be affected. TYING AND BUNDLING A dominant firm may try to foreclose its competitors by tying and bundling. Tying refers to a situations where customers that purchase one product are required also to purchase another product from the dominant firm. Tying can take place on a technical or contractual basis. Bundling refers to the way products are offered and priced by the dominant firm. In the case of pure bundling the products are only sold in fixed proportions, while in the case of mixed bundling, the products are also made available separately, but the sum of the prices when sold separately is higher than the bundled price. The Commission will normally take action under art.82 where a firm is dominant in the tying market and where, in addition, the following conditions are fulfilled: a. The tying and tied products are distinct products. Two product are product are distinct if, in the absence of tying or bundling, a substantial number of customers would purchase or would have purchased the tying product without also buying the tied product from the same supplier; b. The tying practice is likely to lead to anti-competitive foreclosure: the risk of anti-competitive foreclosure is expected to be greater where the dominant firm makes its tying or bundling strategy a lasting one. In the case of bundling, the firm may have a dominant position for more than one of the products in the bundle. The tying may lead to less competition for customers interested in buying the tied product, but not the tying product. PREDATION The Commission will intervene where there is evidence showing that a dominant firm engages in predatory conduct by deliberately incurring losses or foregoing profits in the short term, so as to foreclose or be likely to foreclose one or more of its actual or potential competitors with a view to strengthening or maintaining its market power, thereby causing consumer harm. Sacrifice If the conduct will involve a sacrifice, with a lower price or output over for relevant period, may be a predation. The Commission will take AAC as the appropriate starting point for assessing if the dominant firm incurred or is incurring avoidable losses. Pricing below AAC will thus in most cases be viewed by the Commission as a clear indication of sacrifice. The Commission may also investigate if the predatory conduct led in the short term to net revenues lower than could have been expected from a reasonable alternative conduct. Anti-competitive foreclosure The Commission does not consider that it is necessary to show that competitors have exited the market in order to show that there has been anti-competitive foreclosure. Consumers are likely to be harmed if the dominant firm can reasonably expect its market power, after the predatory conduct, will be greater if firm don’t had been a predatory conduct. Likely consumer harm may be demonstrated by assessing the likely foreclosure effect of the conduct, combined with consideration of other factors, such as entry barriers. REFUSAL TO SUPPLY AND MARGIN SQUEEZE Typically competition problems arise when the dominant firm competes on the “downstream” market with the buyer whom it refuses to supply. For example, halting supplies in order to punish customers for dealing with competitors or refusing to supply customers that do not agree to tying arrangements, will be examined by the Commission in line with the principles set out in the sections on exclusive dealing and tying and bundling. The concept of refusal to supply covers a broad range of practices, such as a refusal to supply products to existing or new customers, refusal to license intellectual property rights, including when the license is necessary to provide interface information, or refusal to grant access to an essential facility or a network. Instead of refusing to supply, a dominant firm may charge a price for the product on the upstream market which, compared to the price it charges on the downstream market, does not allow even an equally efficient competitor to trade profitably in the downstream market on lasting basis (“margin squeeze”). The Commission will consider these practices as an enforcement priority if all the following circumstances are present: • The refusal relates to a product or service that is objectively necessary to be able to compete effectively on a downstream market; • The refusal is likely to lead the elimination of effective competition on the downstream market; • The refusal is likely to lead to consumer harm. Objective necessity of the input An input is indispensable where there is no actual or potential substitute on which competitors in the downstream market could utilize so as to counter the negative consequences of the refusal. Elimination of effective competition The Commission considers that a dominant firm’s refusal to supply is generally liable to eliminate effective competition in the downstream market. Consumer harm The Commission considers that consumer harm may arise where the competitors that the dominant firm forecloses are, as a result of the refusal, preventing from bringing innovative goods or services to market and/or where follow-on innovation is likely to be stop. Google the Conqueror Google and competition: how may click away? The characteristics of the Google’s sector lead the dominance of self-sustaining. In fact it represented 90% of the search in the network. But this 90% it is quite for represented a dominant position? We know that for the European Commission it is quite a 40%, but this sector, with strong network externalities and new technologies, the firms compete “for” the market and not “in” the market, and in a static situation you will see a monopoly, but in a dynamic situation there will be many competitors competing for a single well: end users’ attention. So if the competition is very close, in fact just click another search engine, there is no independence from competitors, principle characteristic of dominant position. So the Google’s dominance does not depend by the market share, like think the European Commission, but for its high market share in three relevant markets adjacent and connected: prevision of services base on algorithm (algorithmic search); prevision of services of intermediation for the search (search intermediation) intra-platform competitive pressure exerted from players that provide competing services in a nomadic way, and inter-platform competition by players that propose themselves as platform operators; 3. How to define relevant market; 4. Modern broadband platforms exhibit the features of two-sided, or better multi-sided markets. No player can succeed to conquer the attention of new users in those markets without good network connectivity, a large participation of application and content providers, one or more compatible device producers, and of course an established population of users. Some countries (USA for example) have decided to move to a more regulatory approach by lifting mandatory network sharing obligations for high-speed broadband networks, while other countries have maintained their original focus on network sharing, also due to constraints exerted by the EU regulatory framework in some cases. Today, the fact that unbundling practices must changes in a NGN (next generation network) environment is uncontroversial, and was confirmed by several regulators and field experts in the past years. The main differences that are likely to emerge for what concerns the application of the ladder of investment are: • The ladder of investment is different compared to copper networks. In fact access points and conditions of replicability change dramatically from copper to all-IP networks; • The functioning of the ladder depends on the type of network and the specific technology used. The challenge for policymakers has now become essentially fourfold, as they must seek to: 1. Preserve the incumbent’s incentive to invest; 2. Preserve the incentives of those that have already purchased LLU (Local Loop Unbundling); 3. Preserve the incentive and viability of “new new entrants”; 4. Keep prices down for end consumers. If policymakers wishing to embark in this endeavour will be able to strike the balance between these four objectives is the matter for the future evaluation. Understanding the value chain The development of IT markets is leading to an increased commoditization of lower layers, which become increasingly standardized and/or interoperable, and a shift of end users’ attention and of market players on higher layers, especially applications and content. The delivery of interactive content over a digital platform requires the participation of a number of different players situated along the value chain. Each of the players faces specific challenges in operating on each of the markets: • Copyright owners can deliver content and applications on a number of alternative platform. Platform operators have to choose which content and which applications to allow on its platforms, unless it keeps the platform entirely open to third-party content and applications. [ex. Apple store]; • Network operators, on the other hand, possess the technology for data transmission. They face high sunk investment costs for the scope of developing such enabling technology and can support more than one platform; • Consumers (end-users) choose to use the platform based on a number of different variables: 1) they seek content and killer apps; 2) they base their choice on the overall cost of system use; 3) consumers choose platforms that enable interactivity with both the content and application provider and other consumers, and as such allow for the exploitation of direct network effects; • Advertisers attempt to allocate resources to maximize the “click-through” ratio and choose platforms by exploiting the indirect network effects; • Original Equipment Manufacturers (OEMs) are those players that produce hardware complementors necessary to enable access to interactive content by final users. [ex. Firms that produced decoders]; • National Regulatory Authorities (NRAs) issue licenses and authorizations to operate in single national markets, and are in charge of issues such as spectrum management and frequency allocation. They also monitor the conduct of market players by applying sector-specific regulations and legal rules and imposing sanctions; • National Competition Authorities (NCAs) also affect incentives of the industry players and the viability of business models based on proprietary architectures; • Platform operators are the players that provide interactive multimedia content to final users. Given the position they hold, they are called to balance the interests of different players involved in the value chain. In the Internet market, everybody can became a platform operator, and this in the most aggressive form of competition seen today. Two and multi-sided platform The successful platform operator will be the one that strikes the most optimal balance between the interests of all the players involved, including of course end users. PLATFORM OPERATOR’S DECALOGUE 1. The “3Cs”: content/apps, consumers, capacity 2. Collect data on end users 3. Create/acquire the product/content 4. Choose a viable system architecture 5. Create a co-opetition model 6. Manage end user expectations 7. Create the end user experience 8. Formulate a pricing and bundling strategy 9. Formulate a versioning strategy 10. Choose the revenue-mix As regards the pricing and the revenue policy, the following issues must be highlighted: • IT platform operators often depart from standard cost-based pricing rules when setting the price of their multiple services; • A viable pricing strategy for multi-sided platforms under competitive conditions may well include both price discrimination and differential pricing; • The role of advertising is key, and control of ads is essential in order to reap sufficient revenues and avoid charging excessive prices to end users or other platform users. In conclusion, the convergence between separated market has create a common area where players of the most disparate origin end up competing. Those that manage to capture the attention of end users have a better chance to win the race. Several variants of these business models have emerged in cyberspace, but all of them are aimed at conquering the most scarce resource of internet ecosystem: users’ attention. Gateways of cyberspace The telecom-IT interface: convergence and collision The telecom-IT interface became key for end users with the emergence of the World Wide Web in the mid- nineties. It is the most example of an area where the physical infrastructure (telecommunications network) sublimates into the intangible Internet. Convergence became collision in 2005, when a small telecom operator, named Madison River, decided to use this degree of control to avoid that its subscribers could choose a competing VoIP provider (Vonage) once on the internet. In order for ISPs (Internet Service Providers) to really have an incentive to contemplate restrictive rules to stakeholders active at higher layers, and for a mandatory net neutrality rule to be reasonably grounded in economics, the following market outcomes would have to be observed: • ISPs must have market power in the provision of Internet access to end users; • ISPs must also hold market power along the value chain. This means that they have control of their users, and can dictate conditions to players located at all higher layers; • ISPs must be dominant platform operators, meaning that no other platform governed by any other player can exert competitive pressure on the ISP’s behavior; • Users must be homogeneous and must not demand different quality of service for different prices; • There no congestion problems and all applications can easily co-exist on the same network. If all these conditions are satisfied at the same time, and for a reasonable amount of time in the future, then net neutrality legislation may be justified in economic terms. Google’s and Verizon’s legislative statement First signs of agreements along the value chain are coming from Google’s and Verizon’s joint work on net neutrality, which started from a shared statement of principles in October 2009 and evolved into a joint filing to the FCC, and was translated into a concrete legislative proposal in August 2010. The main pillars of this agreements are: 1) preserving the freedom, for end users, to choose what content, applications, or devices they use; 2) the need to encourage both investment and innovation to support the underlying broadband infrastructure. The statement is articulated along seven main proposals: 1. Users’ rights. Consumers should have the right to: send and receive all lawful content on their choice; run all lawful applications and use lawful service on their choice; connect their choice of legal devices that do not harm the network or services, facilitate theft of service, or harm other users of the service; 2. Non-discrimination. A BIAP (Broadband Internet Access Providers) would be prohibited from engaging in discrimination against any lawful Internet content, application, or service that causes harm to competition or to users; 3. Transparency. BIAPs should inform end users of any traffic management practice they engage in on their network, in order to enable an informed user choice; 4. Network management. BIAPs are permitted to engage in reasonable network management; 5. Freedom to launch additional online services. BIAPs that comply with the above obligations and guarantee basic user rights can offer also any additional or differentiated services, separate from broadband Internet access, which can also make use of or access Internet content, applications or services and could include traffic prioritization; 6. “No wireless Carterfone”. Wireless broadband should not be subject to all these rules, with the exception of the transparency principle; 7. Enforcement. The FCC (Federal Communication Commission) would enforce the consumer protection and non-discrimination requirements through case-by-case adjudication, but would have no rulemaking authority with respect to those provisions. Future gateways: clouds and cloud computing With the development of communication technologies and broadband platforms, has led to the emergence of clouds of applications, which anticipate what will soon become the dominant paradigm of cloud computing. The key example are Apple and Google. Apple has managed to developed an Application store based on its successful series of devices, such as the iPod touch, iPhone and iPad, and by vertical integration, which leads to bundling the device with the DRM, the operating system and the service layer. All this has led to the emergence of a system in which Apple effectively decides who can belong to the cloud, and who cannot. For Odlyzko in 2009, cloud computing, as an extreme form of vertical integration, may end up creating even stronger forms of discrimination and similarly strong calls for neutrality and regulation. Respect to the layered architecture, cloud computing proposed a system design that shifts computing resources and software applications to the network and data storage centres, and organizes delivery along different modalities, which entail different degrees of control by the customer. Layered competition The Internet ecosystem is evolving towards a competitive arena in which some big players, having reached a strong position in the provision of a key gateways service, try to extent their control over the value chain to secure a bigger share of the value that is created by the whole system architecture. There is sufficient evidence that market developments have been quicker and more effective than antitrust decisions in fixing those problems. Some of emerging lessons for future policymaking are: • Convergence is leading to aggressive competition between players originally dominant in different relevant markets; • Market definition and the assessment of market power must take into account the whole ecosystem, and in particular countervailing buyer power along the value chain; • Multi-sidedness, multi-homing and externalities must be take even more seriously when assessing the competitive effects of market developments; • The players that are most likely to evolve into key platform operators are those that can conquer the attention of end users and establish a direct relationship with them; • Creating a neutral and efficient policy framework is essential for all the layers of ecosystem, including the emerging cloud computing architecture. Conclusion: avoiding the winner’s curse With the evolution of the cybermarket, policymakers have shows many limits: