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7
The Impact of Global E-Commerce on
Local Values
7.1 INTRODUCTION
Given the great potential that the Internet offers for commercial ap-
plications, it is hardly a surprise that e-commerce has become a subject of
intense interest. There is a growing literature on market opportunities,
business strategies, transaction efficiency and security, electronic cur-
rency, intellectual property, tax policy, trade policy, and other regulatory
issues related to doing business electronically. Indeed, the National Re-
search Council has itself produced a number of reports relevant to several
aspects of e-commerce.
This chapter does not aim to re-cover all this ground. What is of con-
cern is the extent to which e-commerce affects the values of a society (and
vice versa) a more limited task, but still no small challenge. Indeed, there
are at least three ways in which interactions between e-commerce and
local or regional values might come about:
· To the extent that e-commerce encourages new business models,
changes the relationship between seller and buyer, and challenges exist-
ing regulatory structures, it has the potential to alter certain traditional
commercial values. Those values are often locally, regionally, and nation-
ally specific, so that the effect of e-commerce on commerce itself can also
be local, regional, or national.
· The continued growth of e-commerce raises the possibility that,
either directly or through the institutions developed to regulate (or stimu-
late) the commercial uses of the global network, e-commerce may alter
170
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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
171
the structure and/or operation of the Internet. These changes may affect
the Internet's noncommercial uses as well. For example, the control of
portals, the organization of browsers, the legal protections afforded to
operating-system and application software, and even the control over
URLs can have significant implications for all users. Indeed, the changes
can alter the culture and values that characterized the "network of net-
works" during its formative stages.
· To the extent that commerce itself has a role in defining a local
society, the changes brought about by e-commerce may affect some of the
other local political and social values discussed in this report.
7.2 COMMERCE AND VALUES
Economic activity is often assumed, particularly in neoclassical mod-
els, to be largely or entirely driven by individual profit-maximizing be-
havior. In this utilitarian view, commerce is essentially a value-free activ-
ity. As long as institutions are properly designed to provide efficient
markets with adequate property rights, freedom to enter into contracts,
and strong protection against monopolies, competition and self-interest
will do the rest.
The utilitarian assumption is useful for many purposes, but most ob-
servers (including economists) recognize that it is an incomplete descrip-
tion. The individual and group values and attitudes that are the subject of
this report manifest themselves in the rich network of informal social in-
stitutions in which a market-oriented economic system is embedded. At
the heart of these institutions is what might be called commercial values:
personal motivation, the material dimensions of social status, and per-
haps most important various aspects of trust. Buyers and sellers know
the great value of trust and have developed ways of judging whom to
trust. They understand that an untarnished reputation, credit rating, and
reliability are essential to commercial success.
Although these fundamental values are, on the surface, much the
same in most successful market economies, they manifest themselves in
different ways in different nation-states. For example, Germany and the
United States have very different concepts of contract. When a German
firm sells a complex piece of equipment or system to another, the contract
is typically no more than a few pages in length. In the United States, the
contract for the same transaction might run to hundreds of pages. This
difference arises, as a legal matter, out of the distinction between the civil
law rules in Germany and the common law rules in the United States.
The former tend to be broad and abstract, the latter quite specific as they
are derived from case analysis and precedent. However, the very preva-
lence of those two different traditions reflects a profound value difference
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GLOBAL NETWORKS AND LOCAL VALUES
in the two countries. Germans appear more willing to trust the courts to
"fill in the gaps" in a contractual relationship. Americans may look to the
courts for redress, but expect the entire contractual relationship to be ex-
plicitly stated; what's written is what counts, and few would expect (or
trust) the courts to go beyond a strict reading of the language of the con-
tract.
Another difference in the manifestation of values between the two
countries lies in how they define intellectual property. In the United States,
patents and copyrights are property rights granted by the society. In Ger-
many, they are innate or moral rights earned by an individual as a reward
and recognition for his or her creation. Moreover, because it views intel-
lectual property rights primarily as an effective stimulus to economic ac-
tivity, the United States has been more flexible in defining what kinds of
creative ideas are worthy of protection and has tended to extend intellec-
tual-property protection to more and more activities, such as business
processes. German law has been more cautious in allowing such exten-
sions, perhaps coupling the deeper respect and greater protection for in-
dividual innovation with a narrower definition of what constitutes a cre-
ative act. In effect, the German system may place somewhat less emphasis
on intellectual-property protection as a stimulus to economic activity and
approach the issue primarily as a balance between individual rights and
the rights of the public to have access to new ideas.
This governmental responsibility and concern for protecting the rights
of the public is also evident in German attitudes and law concerning com-
petitive practices. Germany places severe constraints on borderline mar-
keting practices and exaggerated advertising claims, and competitors are
quick to seek judicial relief when it appears that the line has been crossed.
The consumer is assumed to be vulnerable and entitled to protection, and
there are a host of default and mandatory rules in commercial law to pro-
vide that protection. In the United States, there is much less interference
with market transactions, per se, and the order of the day is caveat emp-
tor. On the other hand, the United States has product-liability laws that
are much more severe than in Germany, and liability suits leading to very
large jury awards are much more common in the United States.
These examples illustrate the values of commerce that relate to com-
merce itself. But commerce also provides some of the glue for a society. Its
form and dynamics shape a society as much as commerce is shaped by it.
Exchanging goods and services is a means by which people connect. The
suburban malls and chain restaurants of most U.S. cities build different
kinds of community relationships than the pedestrian-oriented, city shops
and cafes of most European cities. And businesses are not only commer-
cial but also social organizations. The GE employee who carries a lami-
nated card enunciating the company's principles and commitments has
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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
173
not merely entered a business relationship but has become part of a defin-
ing social system. The German worker who has built a relationship with a
specific corporation since his or her apprenticeship days has developed a
social structure as well as a stable employment situation.
E-commerce enters the picture in two ways. First, network-related
commercial values differ, at least in emphasis, from other commercial val-
ues. Second, by competing with local commercial systems and wresting
market share from them, e-commerce can weaken their embedded values.
7.3 THE IMPACT OF E-COMMERCE ON LOCAL
COMMERCIAL VALUES
7.3.1 The Globalization of Markets
Because global networks reduce the distance-related transaction costs
of certain kinds of business, they may clearly increase the magnitude of
international commerce and change the cast of participants. Electronic
commerce may be of several kinds. Business-to-consumer traffic encom-
passes the range of transactions between firms and end users, from pur-
chase of goods to information and financial services. Business-to-business
transactions offer opportunities to develop efficient auction-based plat-
forms for procurement and supply-chain management systems that are
very attractive to large corporations. Business-to-government exchanges
make it practical for many new and smaller players to enter the interna-
tional market.
Commercial opportunities on the Internet both arise from and are lim-
ited by the fact that only digitized information moves through the net-
work. This makes it a natural medium for activities that depend on the
movement or manipulation of information including words, numbers,
symbols, and descriptors or digital representations of shape, color, and
sound. Databases and the tools for using them, as well as many other
kinds of software programs, obviously fit this description, and it is not
surprising that a large fraction of Internet trade occurs in these "soft
goods." But other kinds of digital content are fast catching up. Financial
services are expanding and, as bandwidth increases, so is the flow of real-
time audio and video files. Search engines have pioneered new ways of
allowing interactive information retrieval. Furthermore, customized ad-
vice and support are increasingly being provided through the Internet.
Many kinds of tangible goods are also traded on the Internet, though
still constituting a relatively small fraction of total activity. The advan-
tages of the Net for hard goods come into play in different phases of the
value chain: price-setting mechanisms, including auction formats, can be
set up; procurement can be carried out electronically; and billing and
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GLOBAL NETWORKS AND LOCAL VALUES
maintenance services can be executed. These services are becoming more
attractive as technical and regulatory issues related to security and ano-
nymity are resolved.
The globalizing effect of networks on these types of commerce differs
markedly. Trade in hard goods is less likely to be globalized than soft
goods because the merchandise needs to be physically transported and is
subject to the same delays and border controls as non-e-traded goods.
Even for soft goods, globalization can be hindered by bandwidth capacity
in different parts of the world. In this latter case, however, technical im-
provements in physical networks and wireless communications, and po-
litical developments that increase the openness of certain societies, will
markedly reduce the barriers to global e-commerce.
One of those barriers is the difficulty of establishing the level of trust
that has always been an important part of commerce generally and that
has been built up in particular ways within local regions and nations.
Some have argued that the problem is exacerbated when information
products are involved because of the lack of "transparency" of informa-
tion. That is, it is difficult to judge a priori how well the product will serve
the purpose for which it was purchased. In that sense, information goods
can be categorized as "experience" or even "credence" goods. Experience
goods are those whose quality can be judged only by use i.e., after the
purchase has become binding. With credence goods, the purchaser can
never really assess the quality of the good.2
Technical approaches to credit validation, seals of approval, and co-
operation among national governments can help to develop new ap-
proaches to trust building. Producers also spend a great deal on market-
ing, providing free information about the good, as well as samples or
demonstration versions. Large firms in business-to-business transactions
can use initial face-to-face meetings to establish the trust basis for an on-
going business relationship. Firms marketing branded goods or services
over a long period of time will also have little trouble. But small busi-
nesses will not necessarily have these and other mechanisms available for
generating trust across large distances and national borders. Intermediar-
ies such as eBay, that solicit and publish the ratings of buyers and sellers,
will undoubtedly have a greater role.
iSee Bradford DeLong and Michael Froomkin, 2000, "Speculative Microeconomics for
Tomorrow's Economy," in Brian Kahin and Hal R. Varian, eds., Internet Publishing and Be-
yond, Cambridge, MA: MIT Press.
2These concepts have been developed by G.A. Akerlof, 1970, "The Market for 'Lemons.'
Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84:488-500.
They have been applied to information in M. Kretschmer, G. Klimis, and J.C. Chong, 1999,
"Increasing Returns and Social Contagion in Cultural Industries," British Journal of Manage-
ment 10:61 ff.
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7.3.2 Business on the Internet
175
There is an ongoing debate concerning the extent to which produc-
tion and distribution decisions in the information economy differ from
those in manufacturing industries.3 But the emerging consensus is that e-
commerce leads to fundamentally different "business models."
Network Effects
The spread of a hardware or software standard is accompanied by an
exponential increase in the usefulness of that standard for its users, as
more and more elements can be connected to an interactive system. Ac-
cording to "Metcalfe's Law," the value of a network increases in approxi-
mate proportion to the square of its numbers of users or, to be more
precise, the potential value, V, is proportional to n~n-1~.4 While some may
disagree about the magnitude of the effect or the precise functional rela-
tionship between number of users and value, the benefit of communica-
tions technologies depends crucially on the number of those participating
in their use. This effect has been observed in many consumer-product
markets. Often, it leads to veritable "standards wars," as in the case of the
two video recorder standards VHS and Betamax. It also applies in the
production sector.
In every case, we find a shift away from competitive equilibria, in
which there are many suppliers, and toward single-firm equilibria. These
monopolists have a strong interest in locking customers into network re-
lationships. Concepts like trust, reputation, loyalty, and commitment play
a key role in the business strategies of online companies.5 We also find
new strategies for price setting, from giving away products to complex
schemes of price discrimination.6 Although it can be argued that compe-
tition remains intact because of a fierce contest for the maintenance and
eventual replacement of such network monopolies the recent evidence
3Among the two leading contributions, Shapiro and Varian take a more conservative view,
whereas Kelly foresees sweeping changes for fundamental concepts such as property and
scarcity. See Kevin Kelly, 1998, New Rules for the New Economy. 10 Radical Strategies for a
Connected World, Harmondsworth: Viking Penguin; and Carl Shapiro and Hal R. Varian,
1998, Information Rules: A Strategic Guide to the Network Economy, Cambridge, MA: Harvard
Business School Press.
4For a survey of the literature, see Shapiro and Varian, 1998, p. 184.
5AOL, for instance, has launched a long-term campaign to increase customers' trust in its
. . .
provlcler services.
6Shapiro and Varian offer the most detailed advice to the aspiring information entrepre-
neur, while at the same time demonstrating the economic logic behind the new strategies.
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GLOBAL NETWORKS AND LOCAL VALUES
from the Microsoft case has shown that there is considerable potential for
weakening the competitive process.
Production by Copy
In traditional markets, firm size is constrained by the ultimately in-
creasing marginal cost of material resources. In markets for digital prod-
ucts, few material resources are needed for reproduction which essen-
tially consists of copying a file of binary digits. Once initial hardware costs
are paid, digital copying costs are next to nothing. The largest supplier
will have the lowest marginal cost and thus appear to be a "natural mo-
nopoly."
Obviously, the low cost of copying increases the incentive to com-
mand the largest share of a digital good market. It also poses problems for
the protection of information products. Though the cost of assembling the
original good may be very high, as in the case of new operating-system
software or a movie, its digital reproduction involves a simple operation
that can be carried out with little technical skill and equipment. In conse-
quence, there is an incentive to "trespass."7
Properties of Information
Only information can be transformed into the digital signals that travel
through global networks. Information makes its impact on users in a very
specific manner: it does not change their physical state or modify their
physical circumstances. Instead, it affects the users' thoughts, knowledge,
or feelings. Users learn something new, or they gain pleasure, or they re-
ceive instructions to behave in ways that make them more successful.
The receipt of such signals by individuals does not destroy or alter
the original message. In consequence, there is no rivalry in consuming an
information good. This is the core reason why information is considered a
public rather than a private good. In many cases, it is still easy to exclude
those who do not pay for the consumption of the good, either through
electronic walls, legal sanctions against unauthorized copying, or techni-
cal copyright-management systems (see below). Such interventions may
meet the goals of an individual producer, but from a social-welfare per-
spective, there are inevitable losses in potential utility associated with
them. That is the reason why patent and copyright statutes try to strike a
tenuous balance between the temporary protection of exclusive property
7For a discussion of problems associated with a lack of excludability, see Bradford DeLong
and Michael Froomkin, "Speculative Microeconomics for Tomorrow's Economy," 2000.
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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
177
rights and the subsequent free use of new inventions, be they technical or
artistic in nature.
The particular nature of information also accounts for its lack of trans-
parency.8 The qualities or potential defects of material goods are some-
times immediately visible. In the case of information goods, nothing can
be gleaned from the appearance of a CD-ROM or a pdf file.
Producers react to this situation with a massive increase in the pro-
portion of total expenses devoted to marketing. Prospective buyers re-
ceive free information about the good, or samples, or even demo versions
in order to decrease their perceived risk. This amount of free publicity
poses a problem in itself the much-discussed "information overload"-
when the entire public is exposed to these messages. On the other hand,
the basic lack of transparency of information goods provides incentives to
try out various schemes in order to reduce the likelihood of fraud or the
delivery of inferior-quality products.
7.4 EFFECTS ON LOCAL COMMERCIAL VALUES
To the extent that global networks lead to significant increases in e-
commerce, some local business ventures will clearly be subjected to com-
petitive pressures, particularly where the transactions involve tangible
goods. Of greater concern for purposes of this report, however, is the value
competition the degree to which Internet-based business creates ten-
sions with local commercial values.
Because business conducted through the Internet has such different
characteristics from local commerce, it requires a somewhat different set
of commercial values. This is as true of e-commerce conducted within a
single nation as it is of global e-commerce. In principle, individuals can
adapt to operating with two sets of values, one for local commerce and
another for e-commerce. But the more that traditional values become a
burden or disadvantage in e-commerce, the less likely the separation can
be rigidly maintained.
Globalization of e-commerce enters the picture in several ways. The
degree of tension between Internet-commerce values and more traditional
local ones is at least in part a function of the local value system which, of
course, differs from nation to nation. In effect, each nation faces a differ-
ent challenge in resolving the discrepancies between local and Internet
values. Moreover, if e-commerce transactions are global that is, do
bridge different nations there must be some harmonization between the
accommodations adopted by each of the nations.
2000.
See DeLong and Froomkin, "Speculative Microeconomics for Tomorrow's Economy,"
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GLOBAL NETWORKS AND LOCAL VALUES
Commercial values, as noted earlier, are implicit in the design of the
laws and the formal and informal institutions that give meaning and shape
(and a regulatory framework) to such concepts as intellectual property,
contracts, and competition. It is useful to examine how each of these is
affected by e-commerce.
7.4.1 Intellectual Property
The recognition of intellectual property provides a means for soci-
eties to grant monopoly rights to an individual (or corporate entity) for
some specified period of time. As pointed out earlier, these rights are
granted to recognize and reward the inventor's creativity as well as to
stimulate the creative process for the benefit of society at large. These two
goals are balanced differently in each society, as a function of laws, formal
and informal institutions, and other practical factors.
The legal institutions that have been developed to protect intellectual
property include patents, copyrights, and trademarks.9 Patents grant
temporary rights to the inventor of a product or process that meets certain
criteria of originality, usefulness, and non-obviousness. Copyrights grant
temporary rights to the author or owner of a work of human expression.
Traditionally, works of art, music, and literature were protected by copy-
right. Today, both copyright and, increasingly, patent protection has been
extended to software programs and databases. Patents for software in
particular have been controversial, and the practice is also not followed in
all countries. Trademarks protect a visual symbol or label used as an
identifying mark.
The growth of digital information and communications technologies
has created a number of knotty intellectual-property problems, particu-
larly with respect to copyright law.~° A comprehensive discussion of the
issues is presented in a separate CSTB report. The comments that follow
here are therefore quite brief and intended only as a summary and to
touch on some recent developments.
Information and communications technologies raise issues in copy-
right law for several reasons. The technological capacity to manipulate,
organize, and transmit information allows the generation of a large num-
9For completeness, one should include trade secrets in this group, as companies can take
legal action against misappropriation of such secrets. But it is a category that is much less
dependent on a specific legal structure than the others, and therefore is not treated here.
i°In contrast, advances in molecular and cellular biology have had much greater impact
on patent law.
iiComputer Science and Telecommunications Board, National Research Council. 2000.
The Digital Dilemma. Intellectual Property in the Information Age. Washington, D.C.: National
Academy Press.
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THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
179
her of new information products whose producers need (and, in many
cases, deserve) intellectual-property protection. However, these products
do not easily fit into one or another of the traditional intellectual-property
categories. Copyright is attractive to most producers because protection
can be obtained much more quickly and easily than is the case with pat-
enting, and this has been of great value to them in a rapidly changing
environment. But copyright protects only the expression of an idea, not
the idea itself, leaving producers rather vulnerable to misappropriation.
For example, copyrighting the lines of code in a software program
still leaves the program owner vulnerable; code can be altered to avoid
copyright infringement, while the underlying design of the program is
exploited. As another example, the organization of a database into a for-
mat that is much more usable than the raw (often public) data on which it
is based adds value worthy of protection. But again, if the protection
comes through copyright, small reformations of the data would allow oth-
ers to avoid copyright infringement.
The problem is exacerbated in e-business because the same digital
technologies that offer so many opportunities to create new information
products and market them at very low marginal costs also make it ex-
tremely easy for others to copy those products. Indeed, they could make
copies in such numbers that it might seriously reduce the size of the origi-
nal producer's market. The producer's vulnerability is thus all the greater.
There are technical countermeasures, however. Copyright manage-
ment systems technologies that enable copyright owners to regulate and
automatically charge for access to digital works are now available.
They make it considerably easier to control the distribution of informa-
tion and to trace who uses it (as well as when and how often), who copies
it (legally or illegally), and who redistributes it.
Taken together, these factors are exerting pressure to change tradi-
tional attitudes toward copyright and traditional strategies for protecting
it. Although copyright is a well-established element in intellectual-prop-
erty protection, legal institutions have provided for "fair-use exceptions "
and "first-sale limitations." In adopting these provisions, society and the
law have recognized the practical limitations on monitoring every pos-
sible copyright violation and the relatively small damage to the value of
intellectual property that limited and sporadic violations represent. In
addition, by making the barrier to the public's unfettered use of informa-
tion covered by copyright slightly porous, the system has achieved a
somewhat better balance between private and public interests.
i2See Julie E. Cohen, 1997, "Some Reflections on Copyright Management Systems and
Laws Designed to Protect Them," Berkeley Technology Law Journal 12.
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GLOBAL NETWORKS AND LOCAL VALUES
With the increased vulnerability that producers feel and the new tools
available to them, copyright owners have generally become much less
willing to tolerate the porosity that has, up until now, indirectly acknowl-
edged and accommodated the communal property aspects of informa-
tion. For example, source codes for programs are much more closely
guarded than in the earlier days of information technology.~3 In addition,
although database producers may only own the form of the data they
market, they make efforts to restrict the easy availability of the (often)
public data on which their information product is based. Major copyright
holders, particularly the U.S. film industry, initially invoked provisions of
international treaties in order to eliminate private copying, or fair use;
these efforts were denounced as "copyright grab."~4 The issue is hardly
settled, however, as the recent Napster controversy illustrates.~5 It has
become clearer that illicit copying may not be as simple and inexpensive
to monitor as originally thought; when such copying involves networks
with several million users representing a considerable potential market
for property such as music files copyright holders are aggressively seek-
ing legal remedies. Thus, whether the solution ultimately lies in law or
technical architecture remains to be seen.
The suddenness of the changes has led to turbulence both in the dip-
lomatic and judicial arenas. The Copyright Treaty adopted within the
framework of the World Intellectual Property Organization (WIPO) by
the Diplomatic Conference on December 20, 1996, requires contracting
parties to provide "adequate legal protection and effective legal remedies
against the circumvention of effective technological measures that are
used by authors in connection with the exercise of their rights." This has
given rise to a strong political reaction by groups committed to protecting
i3A significant exception is the rise and continued growth of "open source" (OS) software
development. OS development is a process in which many individual programmers collabo-
rate to maintain, refine, and upgrade software. The primary example of OS development is
LINUX, an operating system that is widely regarded as a highly robust operating platform.
See, for example, Steve Weber, 2000, The Political Economy of Open Source Software, BRIE
Working Paper 140.
i4Pamela Samuelson. 1997. "Confab Clips Copyright Cartel," Wired 5.3, March.
i5The Napster controversy concerned a service provided by Napster that the music re-
cording industry believed operated in violation of copyright law. Napster did not copy
copyrighted files; instead, it provided an index of titles, many of which were copyrighted,
and enabled "matchmaking" between a person wanting a particular title and another per-
son who already had that title. The latter would provide the former with the requested title,
usually without compensation. In February 2001, the U.S. Court of Appeals for the Ninth
Circuit upheld an injunction issued in the U.S. District Court for the Northern District of
California that effectively shut down Napster. See A&M Records, Inc. v. Napster, Inc., 239
F.3d 1004 (9th Cir. 2001), available at .
i6Lawrence Lessig, 2000, "Architecting for Control," preprint, Stanford University.
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Representative terms from entire chapter:
global networks
THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
181
free access to ideas and preventing interference with the "flourishing of
cultural life."
The arguments have been joined in the discussions and debates sur-
rounding the U.S. and EU legislation implementing the WIPO Treaty (the
U.S. Congress has enacted the Digital Millennium Copyright Act
(DMCA),~7 and the European Union promulgated Directive 2001/29/EC
on the harmonization of certain aspects of copyright and related rights in
the information society ). But these arguments have made clear that there
are some significant differences between the European Union and the
United States on some of the values underlying the current conflicts. The
Europeans tend to emphasize the "moral rights" of the author. In contrast
to pecuniary rights, moral rights are inalienable personal rights allowing
an author to claim authorship and to prevent the mutilation or distortion
of the work. Moral rights are rooted in natural law principles recognized
by a number of European nations in civil law and in the Berne Treaty.~9
Although the United States signed the Berne Treaty in 1989, it has
been quite reluctant to grant such sweeping moral rights to authors and
artists.20 First (as the Napster case has shown), many in the U.S. public
perceive that what is at issue is often the rights of owners rather than of
authors or artists. Second, the United States has focused on the public
value of information and the damage to research that excessive restric-
tions on "fair use" might cause.
The conflict is an excellent illustration of the challenge to local values
that the new technologies represent. Moral rights are a component of con-
tinental European law that, if compromised, would certainly be perceived
as the destruction of an important value. Indeed, an artist or writer's moral
rights to a voice in all transactions involving a work of art have been in-
troduced into the EU code. On the other hand, freedom of information
has always been extremely important in the United States, and laws that
i7P.L. 105-304, 112 Stat. 2860 (October 28, 1998~.
i8See
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GLOBAL NETWORKS AND LOCAL VALUES
might compromise it would also be perceived as the destruction of an
important value.
Still, it now appears that e-commerce is leading to modifications in
the underlying values of both the European Union and the United States.
Where the final compromises will lead and what steps can be taken to
ameliorate the perceived losses, however, are difficult to predict.
7.4.2 Contract and Consumer Protection
Successful market economies have always recognized the need to "level
the playing field" between seller and buyer, particularly where the buyer is
an individual consumer at a great power disadvantage with respect to typi-
cal producers and sellers. Governments have seen it as their role to provide
this leveling by regulating advertising, contracts, and liability.
In an online economy, the fundamental issue is much the same over-
coming the power differential between seller and buyer but a number of
circumstances make it a somewhat more challenging task. Internet trans-
actions will increasingly involve buyers and sellers in different nations
with different commercial-law regimes. Of course, international trade is
not, in itself, a new concept, and mechanisms for resolving jurisdictional
disputes have long been in place. What renders the Internet situation dif-
ferent is that many of the buyers (and sometimes the sellers) are relatively
unsophisticated, and they are not supported by the kind of legal structure
that has allowed large commercial ventures to deal with such issues in the
past. Thus it is likely that governments will be pressed to improve the
transparency, efficiency, and reach of their mediation processes.
More than process is at issue, however. As pointed out earlier in this
chapter, there are considerable differences between the European Union
and the United States regarding consumer protection and the role of con-
tracts. Europeans are more severe in restraining false advertising claims
than are Americans. For their part, Americans are more literal in inter-
preting (and relying on) the specific wording of contracts to define and
limit the obligations of seller and buyer. Yet Americans give consumers
much more latitude to seek judicial relief and are more likely to hold pro-
ducers financially liable for mishaps involving their products.
Thus the resolution of the different contract and consumer-protection
approaches is more than a procedural problem. It begins with the need to
establish the extent to which the parties have voluntarily consented to the
terms of the contract. In the Internet world, with hypertext or icon-linked
Web pages, contract terms may not be obviously and explicitly apparent
to the buyer. Moreover, certain actions far less conscious than an explicit
signature (box or button clicks online, opening a shrink-wrapped soft-
ware package offline) may be taken as constituting acceptance of contrac-
THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
183
tual terms. In certain cases, these terms may create continuing obligations
related to the use of the product that contravene other laws in one of the
constituencies involved.
The problem continues with the need to resolve differences in views
about the appropriate role of government in enforcing or supplementing
contracts to protect consumers, which would appear to make the issue
more complicated than merely one of negotiating the proper application
of commercial law. Furthermore, which nation's values should apply in
determining what is appropriate advertising? Should one take into ac-
count that a consumer in a country where advertising has previously been
more constrained might be more vulnerable to exaggerated claims? Or,
on the other hand, should a seller be expected to alter what amounts to a
cultural standard by exhibiting more restraint when operating in the in-
ternational setting? And should a seller be considered as "operating in an
international setting" even before an actual transaction occurs? Finally, to
what extent do competitors have standing to challenge, on the basis of
laws (and their underlying values), the practices of sellers who are not in
their country?
The technology of the Internet also enables a number of practices re-
lated to e-commerce that have no obvious equivalent in the non-Internet
world. The practice of spamming, the use of cookies, the involuntary
opening of other Web pages when one connects to a particular URL ad-
dress, are all far more intrusive than sales and advertising practices offline.
Therefore, each practice raises new challenges to governments in balanc-
ing the rights of sellers and consumers. Although attempts can be made to
extend present law to cover these new practices, they appear to be suffi-
ciently different from existing situations that a deeper consideration of
the underlying conflicting values should first take place.
7.4.3 Competition
The Internet changes the competitive environment of commerce. Be-
cause the information space is unlimited and the entry cost is low, small
entrepreneurs can enter the marketplace easily. And because direct com-
munication between customer and entrepreneur is enhanced, transaction
costs are lower. For both these reasons, the Internet appears to facilitate
greater variation and diversity. Most importantly, as new niches of prom-
ising business activity are identified, large numbers of (initially) small
business entities may occupy them.
2iSee Margaret J. Radin, 2000, "Humans, Computers and Binding Agreements," Indiana
Law Review 75:1125.
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On the other hand, the Internet especially facilitates enterprises whose
success depends on network effects "winner-takes-all" situations for
companies with significant market share which further facilitate their
growth and market dominance.
This effect leaves competition and antitrust policy in a quandary: can
market domination continue to be viewed as a threat to competition if
gaining a (temporary) monopoly is the central strategic guideline for com-
petitors in information-goods markets? The only actions likely to continue
to be viewed as violations will be "unacceptable practices" by the tempo-
rary-monopoly holder to perpetuate that position. Even then, it may be
difficult to agree on what is "unacceptable," given the long tradition of
practices like tie-in sales and product bundling.
The obvious illustrative case for such violations, U.S. v. Microsoft,22 is,
of course, still not quite settled. However, it has already provided both
the legal and the economic fields with a wealth of new insights.
Among other issues, an important aspect of the case was Microsoft's
behavior during the market introduction of its Web browser, Internet Ex-
plorer. The techniques it used to push the then-incumbent standard
browser, Netscape's Navigator, out of the market led to the claim that
Microsoft extended its operating-system monopoly by unfair means. The
trial proceedings have developed at length the arguments around "tem-
poral natural monopolies," and the case illustrates two major controver-
sies: whether, and how much, the use of market power should be limited;
and the extent to which antitrust law should be restraining.
The network nature of global communication gives rise to another
major current issue. Because the networks of competing firms are con-
nected into larger nets, interconnection can be successively leveraged in
ways that effectively exclude specific competitors. Of course, such mea-
sures can be billed (or even deliberately designed) as technical incompat-
ibilities.23 Exclusion can also be practiced at the basic hardware level. For
example, in the absence of regulation preventing the restriction of access
to last-mile telephone lines and cable networks, companies can preserve
monopoly positions despite fierce price and service competition.24
22United States Court of Appeals for the District of Columbia Circuit, June 28, 2001, United
States of America v. Microsoft Corporation; appeal on District Court of Columbia Circuit, 97 F.
Supp. 2nd 59 (D.D.C. 2000) Final Judgment; see also 84 F. Supp. 2nd 9 (D.D.C. 1999)-
Findings of Fact and 87 F. Supp. 2nd 30 (D.D.C. 2000) Conclusions of Law.
23There is also an OECD report on various countries' responses to related questions:
"Competition Issues in Electronic Commerce," DAFFE7CLP (2000~32, January 2001.
24See Francois Bar et al., 1999, "Defending the Internet Revolution in the Broadband Era:
When Doing Nothing Is Doing Harm," Berkeley: BRIE Working Paper N. 0137, August.
THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
185
In the United States, antitrust has in recent years focused on economic
policy, and has been aimed at enhancing efficiency. Germany has always
shared that goal, but influential politicians believed that antitrust policy
should also serve to protect the political process from excessive economic
influence and power.25 In the United States, on the other hand, there has
been a great reticence to mix economic and political issues, as well as a
greater willingness to let the market work. However, there are signs that
the two systems may be converging, at least where the Internet is con-
cerned. Still, given the track record on recent U.S.-European controver-
sies concerning civil-aviation subsidies, airlines' landing-rights policies,
and in the major differences between U.S. and European authorities on a
proposed GE-Honeywell merger it would be a mistake to assume that
the two systems are converging rapidly.
7.5 THE IMPACT OF E-COMMERCE ON GLOBAL NETWORKS
The second chapter of this report reviewed the history of the Internet
and emphasized how its growth and structure were influenced by the
interests and attitudes of its developers and by the "Netizen" culture,
which influenced the form of this network of networks and, in turn, was
supported and reinforced by that network architecture. This history illus-
trates the nature of technology development an interaction between
technology's "push" and the "pull" exerted by its users and adapters of a
technology, an example of both "soft determinism" and "path depen-
dence."
But the evolution of a technology does not stop at some arbitrary
point. As the user community changes, the "pull" factors change, and the
architecture and operating systems continue to evolve. One important
current question is the extent to which the explosion of e-commerce will
so shift the makeup of the user community, and so influence the structure
and operation of global networks, that network values will be substan-
tially affected.
The commercial opportunities offered by the Internet are largely re-
lated to the privatization of digitized information and, to a lesser extent,
the means for obtaining and using it. On the other hand, one of the great
strengths of the Internet is its ability to support and encourage public uses
of information for a range of political, social, cultural, and personal pur-
poses obtaining it, using it, sharing it, and being able to accomplish those
functions quickly, unthreateningly, and inexpensively. These are not en-
Law.
25For a comparative view, see several articles by David Gerber, Chicago-Kent School of
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tirely conflicting goals (and they together explain, in part, why there are
markets for information products). However, it certainly seems prudent
to be alert to ways in which e-commerce could drive alterations in archi-
tecture, hardware, software, and regulation that could inhibit other
Internet activities and their related values. Some of these are outlined in
the following paragraphs.
One of the more obvious areas of potential conflict concerns privacy,
the subject of Chapter 6. Many of the commercial opportunities offered by
new technologies are based on obtaining and using more complete infor-
mation about consumers their needs, tastes, and patterns. Having such
information allows sellers to locate individuals who may want their ser-
vices and to customize those services; developing databases that aggre-
gate such information helps companies to plan marketing strategies. The
motivation to acquire such data stimulates development of the requisite
technologies cookies, analysis of purchase records, data mining and
matching but their availability increases the potential threat to privacy.
It is important to keep in mind that this is not merely a conflict be-
tween the interests of information-product producers (or traders) and of
individuals whose concern is protecting their own privacy. In fact, the
individual may well realize that having the benefit of products and ser-
vices customized to his or her needs depends on some other person or
corporation gaining access to his or her personal information. For ex-
ample, individuals may want the convenience of online booksellers call-
ing certain new books to their attention, and they might appreciate the
life-saving potential of a hospital's emergency room having easy access to
records of their blood type and allergies.
Given the recognized usefulness of these new commercial services
and their enabling technologies, the response has been not so much to
preclude the gathering of information as to regulate its misuse (or its use
without an individual's permission). But there are those who argue that
in the long run we may actually see a devaluation of privacy per se; that
is, there may be an increased willingness to relinquish certain control over
one's private data in return for the perceived value of services based on
the easy availability of that data.
Another area of potential conflict concerns freedom of information. It
is, of course, the enormous growth in the availability of information
through the Internet that has created many of the market opportunities
for new kinds of Net-based intermediaries. The search engines, the de-
rived databases, the rapid official-document publication services, and the
news-scanning services all help users to sort through the information
overload in order to find what they actually want. These products truly
enhance the availability of information, and they reinforce one of the most
significant values offered by a networked world.
THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
187
But these products can also compromise freedom of information in
two ways. First, there is a constant pressure on the system to protect and
increase the value of a product that uses an underlying data set or open
information source by extending intellectual-property protection to the
underlying information, thereby making it less available to the public
generally. The protests of many in the scientific community about the
WIPO Copyright Treaty and the Digital Millennium Copyright Act
stemmed from this kind of concern about restrictions on the availability
of scientific data for use in research.
Second, there is concern that the commercial availability of derived
data products will reduce the incentive for public agencies to make the
same data available in convenient alternative forms. For example, if pri-
vate entities mine the census data in various ways and sell the resulting
products, the raw data may still be available to the public; but the incen-
tive for government agencies to develop intermediate products (which
might be inferior to the private products but still a lot more useful than
the raw data) will be much reduced. And if the full, searchable text of
judicial decisions or legislative actions is available from a commercial firm
for a fee, these texts may still be available to the public in hard copy, but
there will be less incentive for the government to provide this information
online or as quickly.
Another area of potential conflict arises from the development of tech-
nologies to monitor the distribution and use of commercial information
products. The purpose of these technologies is to trace who accesses such
products, how often they do so, and what they do with them for purposes
of billing (and subsequent marketing). These technologies can also limit
access to paying subscribers, and filter information to serve clients or to
conform to the requirements of law. But technologies developed for one
use are, of course, available for other uses. Filters used to block offensive
material from reaching a user's computer can be used by governments to
filter political information. Systems for monitoring how and when people
access commercial data can be deployed by governments to keep track of
whom citizens communicate with and what information they receive.
Clearly, there are a number of countries in which these kinds of uses
of the technology are common today. Many argue that, even though tech-
nically feasible, it is unlikely that such practices will be politically sustain-
able over an extended period of time. Nevertheless, it is clear that the
continuing development of these and similar technologies has the poten-
tial to create a network architecture whose inherent properties no longer
promote the freedom and anonymity of the early days of the Internet.
A final example relates to the practicalities of accessing and transmit-
ting information. One of the most important characteristics of the Internet
is the sheer volume of information that it permits users to access or com-
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municate. The continual improvement in chip performance and band-
width leads to ever-expanding capacity that, unlike the electromagnetic
spectrum, is almost without limit. In principle, this should all but elimi-
nate competition for a share of the communication space, a major issue in
broadcasting and telecommunication.
But in practice, the average user depends on intermediaries such as
search engines to sort through the information overload of the Internet.
At the very least, both users and providers need search engines to help
them find each other. A smaller but still significant number of users rely
on host providers. These intermediaries are commercial entities, and one
rational business strategy for them is to offer information providers
greater prominence in the information universe a first-page location in
the list of "hits" for certain key words, for example, or more direct and
convenient linkages from user to favored provider for a price. In effect,
market forces can tilt the playing field for information. Whether or not
this occurs on a grand scale will depend on whether the market rewards
intermediaries more for the quality and breadth of their service to infor-
mation users than for their service to information producers.
7.6 THE IMPACT OF E-COMMERCE ON LOCAL, SOCIAL,
AND POLITICAL VALUES
The impact of e-commerce on values is generally not separable from
its impact on local values. Privacy, freedom of information, and the right
of free speech, as discussed in earlier chapters of this report, are local
values, though their precise interpretation may differ from one locality to
another. Therefore many of the issues raised in this chapter can be inter-
preted as potential impacts on local values.
Over and above those issues, however, is what may be labeled the
decoupling of commerce and community, which the expansion of e-com-
merce may well provoke. Commerce, particularly local commerce, is a
social activity that promotes community connections, reinforces commu-
nity values, establishes community identity, and supports community
development. Some kinds of market activity, of course, must always be
local for example, the provision of food, housing, and much of health
care. However, competition between local commerce and global e-com-
merce is not only possible but already evidenced in a number of business
arenas. Online booksellers such as amazon.com compete with local book-
stores, for example, and mail-order retailing, once primarily a phenom-
enon of rural areas, is now equally commonplace in large cities. As noted
earlier, such activities are likely to remain a small part of the total value of
e-commerce, but their local effects may be significant nonetheless.
Because the United States has already seen the replacement of many
THE IMPACT OF GLOBAL E-COMMERCE ON LOCAL VALUES
189
kinds of local businesses by large chains, the social change prompted by
retail activity on the Internet may be less obvious than in Europe. On the
other hand, the receptivity to online retailing in the United States may be
greater than in Europe precisely because it is the continuation of a pattern
that has already been accepted.
Depending on how the tax consequences of e-commerce ultimately
play out, there may be additional, and significant, impact on local politi-
cal and social life. It is not our intention in this report to offer a compre-
hensive analysis of Internet taxation. However, it should be noted that in
the United States, with its many local tax authorities and its heavy depen-
dence on sales tax to run local government, a significant shift from local to
Internet commerce would have serious ramifications. On the face of it,
this would put local businesses (which are taxed) at a competitive disad-
vantage, and it would certainly reduce the funds available for local social
services. One interesting possibility is that the United States may respond
to these pressures by moving toward a European-style value-added tax.
It would be a mistake to think that e-commerce inevitably leads to a
weakening of local social and political structures. Many of the Internet's
service functions, which comprise a far larger fraction of e-commerce ac-
tivity than does brick-and-mortar retailing, may serve to stabilize com-
munities by reducing the tight coupling of job and residence location.
In the United States, for example, small rural communities whose ex-
istences were threatened by the failure of family farms have been able to
remain intact by creating employment in information-network services-
e.g., airline-reservation centers and credit-card processing centers. In ad-
dition, telecommuting has been growing in the United States, allowing
families more choices with respect to child-rearing arrangements. Indeed,
the virtual mobility of labor permitted by global networks can have sig-
nificant effects on policies, institutions, and social patterns regional so-
cial infrastructure (e.g., housing, health care, and transportation), immi-
gration law, dress standards, eating habits, and others.
In all these examples, locality is important because it determines
whether the value set will be receptive or resistant to the opportunities of
e-commerce. The attractiveness of telecommuting is likely to be relatively
high in the United States, where commuting distances are getting longer
and longer and the dearth of efficient, inexpensive public transportation
is a growing problem. As noted above, the issue of Internet taxation may
be much less important in Europe than in the United States. On the other
hand, the threat to the local nature of commerce may be more serious in
the European setting. What remains an interesting question is whether
these various patterns of acceptance or tension will lead to changes in
local values or to a pattern of e-commerce development that differs no-
ticeably from the penetration pattern of global networks themselves.
