Regulating Networks in the ‘New Economy’: Organizing competition to share information and knowledge

Abstract

The regulation of network industries has been profoundly transformed in the past twenty years. First, the “object of regulation” is no longer the same. Network industries have been opened to new dynamics, which have overwhelmed their industrial, technological and marketing frameworks. The relationships between players, of whom there are now significant numbers, and the interaction between users and suppliers have been totally reshaped. Beyond economic structures, these industries have been involved in significant societal changes. In short, networks are the infrastructure of our postmodern societies, the necessary conditions for the provision of a large set of “facilities” that form the foundation of both the economy and sociability. Second, “practicable” regulations are no longer the same (Laffont and Tirole, 1993; Armstrong, Cowan and Vickers, 1994; Joskow, 2002). In a knowledge-based economy, characterized in particular by extensive innovation, regulatory models designed in the nineteenth century to manage investments and the pricing of transportation infrastructures are no longer relevant. They are unable to handle the new central issues: the interactive dynamics of innovation in the areas of technology, uses and markets (Noam, 2001; Langlois, 2002). Third, Western societies have been evolving dramatically. Governance, specifically, has become more interactive, as suggested by the development of both lobbying and “public opinion” tyranny, which, to a large extent, are both symptoms and causes of the crisis facing traditional representative democracy. In this chapter, we suggest that the regulation of network industries is no longer a question of “command and control,” in which the main issue for the regulator is to design “optimal” regulations, given information constraints both ex ante (when rules have to be designed) and ex post (at the implementation stage). Instead, it has become an issue of knowledge-sharing and the alignment of stakeholders' perspectives to guarantee a “satisfying” level of interoperability within a system decentrally managed, open to continuous innovation and characterized by strong systemic consistency constraints. In such a context, the regulator's role is to promote the sharing of knowledge among market participants, both to favor the spontaneous matching of plans and to limit monopoly capture, the latter tending to be more problematic on account of asymmetries of cognition between suppliers and users, leading competitors and followers, and suppliers and regulating entities.