Unintended Consequences

Five years ago, Penn State was an early adopter of USA Today's Collegiate Newspaper Readership Program to provide selected free newspapers to all students, in consideration of a blanket payment to be paid out of pre-existing student fees. The move has been emulated by several hundred other universities, though some student publications have complained that it hurts their sales and advertising revenues. The Cornell Daily Sun noted concerns that the free distribution of certain newspapers could create or foster a monopoly and subsidize their competition. The concerns were debated last year in the student government body, which approved the program pilot.

A 1999 feature article in the Chronicle of Higher Education discussed the pros and cons of the newspaper program, including the concerns about the impact upon student-run publications if universities use student funds to make commercial competition "free." See "Free Newspapers Prompt Boom in Campus Readership-- But competition from 'USA Today' and 'The New York Times' may threaten student papers" (subscription required). It cited concerns by College Media Advisors, an association of faculty and staff working with student publications.

The president of CMA, Chris Carroll, was quoted by the Chronicle as saying: "The huge concern of advisers is that this presents a threat to the survival of student newspapers on these campuses, and we're not included in these discussions." John K. Hartman, a journalism professor at Central Michigan University, and author of two books about USA Today, saw the program as a positive, and was quoted as saying that: "If colleges across the country would widely adopt this daily-in-the-dormitory program, it would give young adults a chance to develop a newspaper habit while they're in the formative stage, and it's a way for the newspaper industry to dramatically increase newspaper readership."

Commentators have contended that the music industry was shortsighted in killing Napster instead of getting control over it to sell licensed music. The central directory structure of the Napster system affords more control over users than does the decentralized system used in Kazaa, Gnutella and others that now have more users than old Napster ever had. This move may indicate that Roxio has capitalized upon the controversial 2002 purchase of the Napster name and technology out of its bankruptcy estate.

The move also fits in with some aspects of recent economic analysis concluding that providing a low-cost, high-membership system of licensed music distribution in unencrypted MP3 format is the only effective way to depopulate unlicensed P2P networks, and could increase recording industry profitability. See Shuman Ghosemajumder, "Advanced Peer-Based Technology Business Models: A new economic framework for the digital distribution of music, film and other intellectual property works," MIT Sloan School of Management (2002) (pdf).

Ghosemajumder's ideal system varies in some ways from the Napster/PSU model. His comprehensive article is worthwhile reading just for the statistics on file sharing and music industry profitability, as well as historical notes on copyright enforcement and antitrust controveries involving the music industry in the recent past.

One question not clear from the announcements is the relative scope of music that will be available through the system. 500 thousand titles are mentioned, but it is unclear what percentage that is of a selection of current popular titles that most students would regard as complete.

Other questions:

Posner on Exclusionary Practices in the New Economy

Court of Appeals Judge Richard A. Posner has for decades spoken for the "Chicago School" of economic analysis of antitrust law, and views with skepticism charges that unilateral firm action violates antitrust law. In his 2001 edition of Antitrust Law, he analyzes exclusionary practices in the "new economy." In the new economy, he includes software companies, Internet-service companies and the communications providers that enable them.

The new economy is different from industrial economies. Much of its product is intellectual property and it enjoys economies of scale in consumption ("network effects"). These characteristics of the new economy, "tug it toward monopoly yet, oddly, also toward competition. The paradox is dissolved by remembering that competition to obtain a monopoly is an important form of competition." Posner (2001) p. 248.

"A firm that will have the protection both of intellectual-property law and of economies of scale in consumption if it is the first to come up with an essential component of a new-economy product or service will have a lucrative monopoly, and this prospect should accelerate the rate of innovation, just as, other things being equal, the more valuable a hoard of buried treasure is, the more rapidly it will be recovered. What is more, the successful monopolist is likely to be a firm that initially charges a very low price for the new product that it has created. ... The prospect of obtaining a network monopoly should thus induce not only a high rate of innovation but also a low-price strategy that induces early joining and compensates the early joiners for the fact that eventually the network entrepreneur may be able to charge a monopoly price." Posner (2001) p. 249.

The Chicago School accepts the burden of temporary monopoly prices as a cost of attracting new entrants seeking to replace the current monopolist. Judge Posner sees societal benefit in a Schumpterian "gale of creative destruction." Posner (2001) p. 249. Yet, even the Chicago School admits that unilateral acts of a monopolist may rise to the level of exclusionary practices violative of the antitrust laws.

As an example, Judge Posner points to the Supreme Court decision in Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1922). Standard Fashion created popular dress patterns and sold them through thousands of retailers or "pattern agents." Competitors imitated or copied the most popular dress styles and sold them more cheaply than did Standard Fashion, which called the competitors "style pirates." To counter them, Standard Fashion required all of its pattern agents to contract to sell no patterns other than those made by Standard Fashion. Through these exclusive dealing contracts, it controlled about 40% of all pattern agents in the country. The Supreme Court struck down those provisions as violative of Section 3 of the Clayton Act due to their tendency to create a monopoly.

In its exclusive dealing requirements, Standard Fashion was leveraging its economies of scale in distribution, to increase its monopoly power, as Judge Posner analyzed it. By forcing pattern agents to choose between the dominant provider's full line of products and any new entrant's more limited line, Standard Fashion dramatically increased the business risk to its competitor at little risk to itself, effectively excluding it from competition. In later years, scholars have examined this "raising rival's cost" analysis as a means of excluding competition.

Judge Posner suggests that the new economy may be in a state of development like that of the retail trade in 1922, "where distribution facilities may be sufficiently limited to create bottlenecks that monopolists can exploit to perpetuate monopoly." Posner (2001) p. 252.

To test practices that may serve both efficiency and exclusion (such as anti-piracy measures), Judge Posner suggests a comparison of the practice to those employed in markets recognized as competitive. Use of the practice in competitive markets would raise a presumption that it is available to a monopolist. A challenger could rebut that presumption, however, by a showing that the social harm from the practice exceeds the cost to the monopolist of denying its use.

Roxio/Napster is implementing a methodology already in use at over 200 universities without legal challenge for several years. Besides being potentially successful and effective in deflating music piracy where it is most damaging, it may also fit Judge Posner's comparison test. As the intended effect is to counter copyright violations and widespread music piracy, it has a strong argument that the social merit balance is in its favor.

For a further exposition of Judge Posner's views, see:

See also:

DougSimpson.com/blog