The Internet, Regulation and the Market for Loyalties: An Economic Analysis of Transborder Information Flow

Abstract:     
As the Internet has gained prevalence, attention has turned to its regulation. Indeed, regulation proves to be a unique and complex problem, given the Internet's lack of traditional borders and boundaries. Highlighting possible avenues of regulation, the author discusses neo-classical economic theory, specifically Monroe E. Price's market for loyalties theory. Although originally applied to the regulation of broadcasting, the author contends that the market for loyalties theory can also be applied to the Internet. Building on Professor Price's pioneering analysis, the article extends the theory to examine market elasticity's effect on the loss of monopoly control over information flow (as a result of the Internet).

Because the fundamental nature of information defies traditional legal and economic models, regulation of the Internet is problematic. In addition, the sheer scale, social aspects, and functional design of the Internet itself make effective regulation difficult. Governments are also faced with the dilemma of limiting Internet access while still leveraging its economic benefits. Nonetheless, governments have attempted to regulate the Internet through content filtering, Internet surveillance, and self-policing.

By applying the market for loyalties theory, the article analyzes the behavior of states in regulating transborder information flow and predicts the consequences of unsuccessful regulation. After summarizing the theory and setting forth its elements, the author explores the relationship of exchange between identity and the competition for loyalty and identifies factors which destabilize the status quo (in terms of diminished loyalty). Indeed, in the interest of self-preservation, the government asserts monopoly power over the market for loyalties. Thus, regulatory schemes change when the balance of power shifts, or when existing regulation proves inadequate to maintain the status quo.
By comparing the efficiency of two different markets, citing Singapore and China, and considering the role of elasticity in each market, the article details the possible ramifications of a loss of monopoly control for each market. Because elasticity is a function of the prior penetration into the market of competing products (or identities), the author concludes that the most restrictive regimes face the greatest turmoil (as expressed in decline in loyalty resulting from increased competition).

Keywords: Internet, China, Singapore, Market for Loyalties, Information Economics, Information Environment, Media, Monopolies, Freedom of Speech, Freedom of the Press

JEL Classifications: K00, Z1, Z10

Accepted Paper Series