GEI Newsletter Issue No. 4 - Report

Also in this issue:

Editorial

‘The New Commercial Policy Agenda: Strengthening or Overburdening the WTO?’, 30 May 1996 at RIIA, Chatham House
Workshop on Subsidiarity in the Governance of the Global Economy

Report on the CEPR/GEI Workshop ‘Competition, Regulation, Standards and Trade Policy for Information and Telecommunications Services’
by Paul A David and Todd Shaiman

All Souls College and Institute of Economics and Statistics, Oxford

The first day of this CEPR/GEI Workshop, held under the CEPR auspices at the London Business School, 2/3 May 1996, was concerned primarily with standards and their relationship to trade, regulation, and more generally competition policy.

The morning session, chaired by Peter Swann (Manchester University), was devoted to the presentation and discussion of the background paper by Paul David (All Souls College, Oxford, and Stanford University) and W Edward Steinmueller (MERIT, University of Limburg) on ‘Standards, Trade and Competition in the Emerging Information Infrastructure Environment’. The presentation was made by Steinmueller.

I. The Global Information Infrastructure

David and Steinmueller's paper commences with a description of the global information infrastructure (GII) ‘vision , which includes not only voice telephony but also advanced communications services such as data networking and multimedia content delivery. The authors point out that the potential impact of the GII is enormous; its full realization, requiring a significant upgrading in the present telecommunications infrastructure, would stimulate a global ‘virtual marketplace for information and telecommunications services’.

They identify three essential attributes of the envisioned GII:

the ability to deliver new services — including video-on-demand, multimedia, and video-telephony – which demand considerably larger bandwidth than exists at present

the capacity to support inter-networked data communications, including those based on the Internet and new generations of value-added network services

the encouragement and acceleration of competitive entry into all facets of the telecommunications industry.

Each of these GII objectives necessitates some sort of technical compatibility and interface standards throughout the network. The envisioned infrastructure thus differs radically from the traditional model of monolithic PTT or regulated monopoly control of national telecommunications networks. Nonetheless, Steinmueller's presentation emphasized the need to recognise such historical constraints when considering the emergence of the GII.

II. Technical Compatibility and Interface Standards

Steinmueller explained that technical compatibility and interface standards provide for the connection of heterogeneous services and equipment, which when linked together constitute an integrated network. Ideally, such standards sidestep the potential trade-off between service quality and variety. In reality, however, there exist various technical and economic complications which tend to discourage the emergence of such standards.

The technical complications, for example, frequently arise as consequences of rapid technological change. Because it is difficult to anticipate, such change can lead to incompatibilities within the network, ultimately prompting an undesired trade-off between variety and service quality (which in this context is construed as inter-operability).

Steinmueller suggested that the economic complications emanate from the basic incentives of producers and users. He noted three issues. First, producers traditionally innovate in order to create differentiated (hence incompatible) products which provide advantages vis-à-vis rivals, either in the form of first-mover advantages or in terms of intellectual property rights. Second, large-scale adoption mechanisms such as bandwagon effects (whereby users deal with technological uncertainty by imitating one another) and network externalities (whereby users benefit from the previous adoption decisions of other users) encourage de facto or market-driven standardization, locking users into particular technological trajectories, and thus tending to retard more radical innovations. Although such mass adoption processes can improve inter-operability, they may either standardize on a technologically-inferior standard, or lead to the ‘orphaning’ of users of existing networks made obsolete by the subsequent emergence of an incompatible, technologically-dominant alternative. Third, producers may adopt a strategy of ‘super-setting’, in which they create product differentiation by maintaining compatibility with incumbent standards while simultaneously offering value-added features, in essence perpetuating a distinct network of incompatible services.

In view of these technical and economic complications there exists significant potential for coordination failure. At the same time, Steinmueller pointed out, intervention into the process is problematic. In order to introduce socially-beneficial standards, the policy-maker must be able to accurately assess the social opportunity cost of mandating the standard and thereby suppressing future innovative variety, the difficulty of which increases when markets are rapidly evolving and unpredictable. Moreover, the standards-setter must be capable of enforcing the mandatory standard, lest users exit the public network when confronted with an unwanted mandate.

It was noted that voluntary standardization arrived at, through negotiations among key participants, was another viable option, but Steinmueller argued that– as the following paper by Paul David and Mark Shurmer detailed – such processes often suffer from long delays, failures to achieve closure, inability to anticipate future technological trajectories, and the threat of complete bypass via private consortia. He maintained that, whatever the method, the development of universal inter-operability standards for the GII is bound to be an unrealistic and elusive goal. Still, he suggested, it may be possible in certain cases for policy-makers to affect the standardization process in ways that would improve social welfare.

Jim Rollo (Foreign & Commonwealth Office and GEI Steering Committee) wondered what the appropriate policy response should be, inasmuch as the authors' argument was that neither the market nor the voluntary formal standard-writing institutions appear able to successfully overcome complications in the standardization process. Steinmueller replied that economists have yet to address the issue from a policy direction. Paul David suggested that it is more constructive to consider not simply if governments should intervene, but rather to ask, from a dynamic perspective, when it is that the policy-maker knows enough about the industry and the standards to intervene wisely and at feasible cost. He pointed out that it in some cases intervention might entail procurement policies that provided negative feedback to stabilize a market that was moving toward de facto standardization. The policy-maker could thus preserve 'societal options', by preventing the premature development of a market 'bandwagon' that could effectively select one (available) standard before alternative technologies that better matched long-term user-needs had time to become established. A credible policy of that sort might discourage wasteful strategies through which companies sought to gain installed base advantages and raise users' switching costs. David also mentioned the option of adopting a restricted 'menu' of standards, (or 'meta-standard') that would facilitate the development of efficient converters and gateways ex post.

Nicholas Argyris (CEC) concurred that the dichotomy of market processes versus intervention is overly simplistic. He likewise agreed that at times it may be possible to achieve compatibility ex post. But Michael Davies (BellSouth, NZ, and GSM MoU Association) emphasized the difficulty in developing inter-operability ex post, citing the case of incompatible mobile communications networks in New Zealand. He believed moreover that future visions often must give way to pragmatic considerations in the present.

Andrew Graham (Balliol College, Oxford) stressed that, in terms of the GII, policy-makers must be exceptionally forward-looking. He pointed out that intervention in standards-setting has its greatest impact in situations where technologies are uncertain and where it is possible to mandate effectively. Michael Davies asked Steinmueller his opinion of informal specification committees. Steinmueller responded that informal private consortia emerge as an industry response to delays and non-responsiveness within the traditional standards organizations. He argued that governments, nonetheless, still have a crucial function in the articulation of inter-operability standards.

Continued - III. The Internet and the GII

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