The Internet: Still Wide Open and Competitive?

Abstract

For years now, the Internet seemed to be open, free, and competitive. Entrepreneurialism was high, financing easy, and entry barriers were low. But now, in the wake of the Internet’s bursting bubble, the reality of that competitiveness deserves a second look: is the Internet still as open and competitive as it used to be, or is it becoming concentrated and dominated by a few firms with market power? And what are the implications of a greater concentration of the Internet?

To even ask this question often raises emotional responses, so deep is the self- image of openness and competitiveness, in contrast to the stodginess the of telecom, print, and TV industries.

Some participants in the Internet have difficulty even with the concept of looking at it as an industry. And it is true that the early phases of the medium were dominated by government, universities, and non-profit entities, all operating outside the market. Even when the Internet became commercialized it was frequently asserted that the bit economy operated on fundamentally different principles than the atom economy. Today, a more balanced perspective has become possible. This includes the recognition, first, that the Internet is a set of interacting activities provided by a variety of commercial firms operating in a set of interacting sub-markets. The structure of those market affects, in the classic paradigm of industrial economics, the behavior and hence the performance of these firms. A prime measure for market structure is the extent of market concentration; it is an indicator and predictor of competitive behavior. Since the Internet has been in recent years arguably the major force for economic, societal, and cultural innovation in society, the extent of competitive forces driving it is significant far beyond the sector itself.