Information PolicyAgendaIntroductionContinued…Jim BarksdalePolicy OverviewPrice DifferentiationSlide 8Competition PolicyPrinciples of Competition PolicyGovernment ChoicesImplications for StrategyBe AwareDefinitionsMergersCooperative Standards SettingSlide 17Single Firm ConductDirect Government InterventionAchieving Critical MassUniversal ServiceLessonsLessons, continuedDiscussion QuestionsInformation Rules:A Strategic Guide to the Network EconomyInformation PolicyCarl ShapiroHal R. VarianModified by: Shakeb Syed & Yatindra NaikInformation RulesSpring 982Agenda•Introduction and Overview•Differential Pricing•Competition Policy•Implications for Strategy•Single Firm conduct•Government Interventions•Universal Services•Discussion QuestionsInformation RulesSpring 983Introduction- We will see how the economy analysis used to examine strategic choices in private sector can be used to analyze public policy choice.- Instead of looking at strategies to increase profitability, we look at strategies to increase the net social benefits.Information RulesSpring 984Continued… What do we mean by antitrust laws? Antitrust or competition laws are laws which seek to promote economics and business competition by prohibiting anti-competitive behavior and unfair business practices.•FTC ( Federal Trade Commission ) : - an independent agency of the United States federal government that maintains fair and free competition. Justice Department : - department responsible for enforcing federal laws.Information RulesSpring 985Jim Barksdale•“…working with the government is far more productive than trying to ignore it.” - Jim Barksdale is the president and chief executive officer Netscape Communications Corporation.Information RulesSpring 986Policy Overview•Differentiation of products and pricesEx : Stock market quotations.•Lock-inEx : Sony digital cameras using memory sticks.•Positive feedbackEx : MicrosoftInformation RulesSpring 987Price Differentiation•Robinson-Patman Act , 1936– price discrimination is illegal if it “effectively lessens competition” Example: Pharmaceutical drug manufacturers – facing antitrust actions.•Legal arguments that work–Can set lower prices resulting from lower costs–Set differential prices to meet competition–Pricing only questionable if it “lessens competition”Information RulesSpring 988Price Differentiation•Differential Pricing allows the producers to sell to markets. Example: Film ProducersInformation RulesSpring 989Competition Policy•Sherman Act (1890) –First US federal govt. action to limit the monopolies. “It is illegal to monopolize a market” Usage: President Taft used it to split and divide the American Tobacco Company in 1907.•Clayton Act (1914) – Passed by US congress as an amendment to clarify and supplement the Sherman Act. “Prohibits mergers and acquisitions where the effects may substantially lessen competition or looks like forming a monopoly.” This act is enforced by the Federal Trade commission and the antitrust division of the US department of justice.Information RulesSpring 9810Principles of Competition Policy•Protects competition as a process•Gaining a monopoly based on fair means will spur economic growth and protects consumers interests.•Policy is intended to ensure a fair fight, not to punish winners or protect losers. Example: Thurmond Arnold (Antitrust enforcer) likened the role of the Antitrust division to that of the referee in a boxing match, whose job is to make sure that the fight is fair.Information RulesSpring 9811Government Choices•Do nothing•Act on basis that monopoly was illegally obtained–Break up–Prohibit suspect practices or merger blocked•Regulate the monopolist Example: “Local telephone” “Electricity”Information RulesSpring 9812Implications for Strategy•Monopoly may be inhibited from using strategies that are legal for other firms.Ex : Microsoft•But even small firms may be accused of antitrust violations.Ex : Iomega•Role of treble damages*Information RulesSpring 9813Be Aware•Virtually any acquisition or merger will be reviewed.•Watch out for meeting with rivals.•Document your compliance.•Establish the lack of genuine and lasting monopoly power.Information RulesSpring 9814DefinitionsPrice Fixing : Most agreements between business competitors regarding the pricing of a product are called price fixing. It is considered anti competitive, and are illegal in many countries.Ex : Japanese chipmaker Elpida, accused of setting prices of DRAMs (http://www.ecommercetimes.com/story/48597.html). Predatory Pricing: It is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market. Ex : Microsoft giving IE for free (http://www.usdoj.gov/atr/cases/f2600/2613l.pdf)Information RulesSpring 9815Mergers•Mergers which lessen the competition are illegal.•Mergers are reviewed by the Justice Department or the FTC.•Mergers are blocked if they are found to harm consumers, owing to either higher prices or lower quality.• Ex: Successful - WorldCom/MCI Blocked/Modified – Adobe/Aldus Microsoft/Intuit Silicon Graphics/Alias/WavefrontInformation RulesSpring 9816Cooperative Standards Setting•Standards setting…or cartel?-Antitrust authorities must differentiate between a standard setting process or a cartel.Ex : Compressed digital video standard - MPEG•Watch out for prices and terms agreements.- Standard setting does not involve prices and terms agreements.- Set the rules, play a fair game.•Performance standards as barrier to entry.-Products need to overcome the performance barrier to enter the market.- Ex : Steel manufacturers and trade association conspiracyInformation RulesSpring 9817Continued…•Patent cross licenses.- Cooperative standard setting also leads to agreements on patent cross licenses.Ex : Standardizing compressed digital video and audio data - MPEG •Interconnection agreements- Conditions for interconnection or joining an existing network.- Right to choose with whom to connect and terms they agree on.- Exclusivity rules.- Ex : ATM’s and Credit Card Networks. - Discover’s lawsuit against VISA (http://www.cardweb.com/cardtrak/pastissues/aug00.html).Information RulesSpring 9818Single Firm Conduct•Exclusive dealing- A monopolist prohibiting its customers from dealing with its