Re: [wg-c] Switching costs: a proposal

[Milton Mueller <mueller@syr.edu>]

The US Federal Trade Commission produced a very interesting report on domain
name competition.
http://www.ntia.doc.gov/ntiahome/domainname/130dftmail/scanned/FTC.htm

(tip of the hat to Jim Fleming for sending me this URL)

The FTC is an organization whose primary mission includes consumer protection.

It has numerous professional economists on staff and a great deal of expertise
on competition policy questions.

The FTC report debunks the arguments for non-profit registries and puts the
"lock-in" arguiment in proper perspective. The report notes that the problem
of "switching cost" is extensively explored in empirical and theoretical
economic literature--it was not invented with the Internet.

Here are some choice bits:

"The economic analysis of markets with switching costs has identified a number
of factors that, in appropriate circumstances, can diminish the ability and
the incentive of a supplier to act opportunistically with respect to its
locked-in customers.(16) As we discuss below, important to this analysis are:
(1) the extent to which prospective customers are aware of the possibility of
supplier opportunism; (2) the extent to which customers have effective means
(e.g., enforceable long-term contracts) to protect themselves against
opportunism; (3) the intensity of competition among suppliers; and (4) the
importance of reputation and repeat business to suppliers' current and future
profits."

.....

"If prospective buyers are concerned about the future prices as well as
current prices, and
have reasonably good information about vendors' pricing policies towards their
existing locked-in customers, then vendors will have a reduced incentive to
engage in opportunism, for it will diminish their ability to attract new
customers.(20) This incentive will be amplified, the greater the growth rate
of the relevant market, for then the costs of opportunism to suppliers
(forgone profits from lost future sales) will weigh more heavily against the
corresponding benefits (profits from opportunism against existing locked-in
customers).(21)"

.....

"[N]either economic theory nor available empirical evidence establishes a
presumption that not-for-profit entities would forbear exploiting locked-in
customers, assuming that it would be profitable to do so. Theoretical analyses
have yielded ambiguous predictions as to whether not-for-profit firms are less
likely than their for-profit counterparts to exploit market power. Similarly,
empirical tests of this proposition have yielded ambiguous outcomes; some
studies
claim to find that not-for-profit entities leave market power unexploited,(22)
while numerous others find the contrary.(23) At present, there is insufficient
evidence to conclude that organizing registries on a not-for-profit basis
would solve any problems arising from customer lock-in."

.....

[Here's my personal favorite--MM:]
"Many of the benefits of industry self-regulation can be lost if competitors
use otherwise legitimate industry forums to undermine competition. When this
occurs, it is usually because some party has a vested interest in a particular
standard. The FTC generally is concerned when competitors use self-regulation
mechanisms to inappropriately limit choices available to consumers or to
forestall welfare-enhancing innovation.(26) In the context of the RFC, several
types of conduct could raise antitrust concerns. These include discriminatory
allocation of number blocks; exclusionary conduct against companies desiring
to provide registry or registrar services; and adoption of technical protocols
that anticompetitively disadvantage competitors of board members."

These crisp, theoretically informed and empirically tested propositions from
professional economists make for a great contrast with the homespun wisdom of
the would-be economists and policy analysts of the POC.