Economic Report President

companies begin to offer DSL service to businesses and consumersseeking low-cost options for high-speed telecommunications. Theincumbents’ decision finally to offer DSL service followed closely theemergence of competitive pressure from cable television networksdelivering similar high-speed services, and the entry of new direct competitorsattempting to use the local-competition provisions of theTelecommunications Act of 1996 to provide DSL over the incumbents’facilities.Third, a network monopolist may have advantages in selling complementarygoods that allow it to extend its dominance from one marketto another. Advantages in complementary markets are not necessarilyanticompetitive. The provider of one good may be able to exploiteconomies of scale and scope that make it a superior provider of thecomplementary good. But a monopoly provider of one product may alsobe able to tie or bundle a second product in a way that forecloses competitionin the second product market. For example, it may conditionsale of the monopoly good on whether the buyer also purchases thecomplementary good.The Challenge for AntitrustIn network markets as in others, antitrust law does not condemnmonopolies legitimately achieved. Incentives to innovate and competemight diminish if dominance itself, honestly earned, could be secondguessedby enforcement authorities. Instead, what antitrust proscribesis anticompetitive conduct—predatory or exclusionary practices—thatcreates or maintains monopoly power. The particular challenge of networkmarkets is that, because network effects can accrue rapidly andbe costly to reverse, there is a premium on being able to identify andstop anticompetitive activity quickly. Once dominance is acquired, itmay be impractical or undesirable to use regulatory or antitrust remediesto undo the outcome, even if an inferior standard prevails or ifanticompetitive tactics have been employed. To be sure, antitrust cantarget unlawful conduct designed to preserve or extend those outcomes.But once customers have adopted a standard, remedies thatwould reduce the accrued network externality are costly, no matterhow dominance was achieved.Identifying predatory or exclusionary practices early can be difficultin the network context. Competitive strategies that would be inherentlysuspect in a conventional goods market may be reasonable in networkmarkets, especially when competitors believe, rightly or wrongly, thatthe winner will take all. For example, pricing below cost is often a telltalesign of predation in conventional markets. But in network marketsit may be a matter of competitive necessity to price below cost inorder to penetrate the market quickly, gain a lead in installed base,and raise expectations that a product will deliver a large network benefit.Predatory pricing rules in Federal antitrust policy do allow for188