Should government intervene? Incumbent companies in Canada charge $30 to $60 a month for broadband services. There are sound arguments that prices could fall with more competition as there are two or at most three firms providing broadband access to most locations in Canada, a market characterized by very high concentration.

Government should do something, but should avoid trying to get into providing services themselves. There are a lot of inefficient Wi-Fi business models that exist, one of the worst of which is to aim for full coverage, which a municipality is likely to pursue due to political necessity. Providing across-the-board municipal Wi-Fi is a broad brush that will create wasteful overlapping infrastructure. In fact, customers tend to demand Wi-Fi to be provided at hubs (social environments?) such as cafes.

Government supported broadband Internet access is already widely available in schools, libraries, community centers, and other specialized locations such as employment service agencies. Any proposed investment to bridge the digital divide should be focused on strengthening the services provided through these channels rather than to build and operate a city-wide service.

Moreover, sociopreneurs from the private sector are better equipped to provide low-cost Wi-Fi than the government – the Ile Sans Fil Wi-Fi service which is supported by volunteer resources and revenue from hotspot locations such as cafes and restaurants in Montreal is extremely successful. Municipalities can support such organizations through existing channels such as volunteer and community support agencies.

The general experience of regulation in the telecommunications sector is that it has stifled innovation. However, this is not to say that all regulation curbs innovation (Anthony, Roth & Christensen, 2002, link to pdf). In a situation where there are few companies providing broadband services to the market, theory tells us that this lack of competition leads to higher prices, and less rapid innovation by incumbents. We note that there is no shortage of motivation by would-be private-sector entrepreneurs to start-up Wi-Fi services. However, their ability to achieve this is hindered by their ultimate dependency on the telecommunication companies to carry their back-haul traffic.

One problem they face is incumbent terms of service that potentially abuse dominant market power. For example, some terms for DSL or cable Internet service prohibit commercial use, forcing Wi-Fi entrepreneurs to purchase less cost effective services based on older leased line technologies. Another example bans residential end-users from sharing DSL or cable connections with neighbors using a Wi-Fi router. This policy biases against small apartment units, and creates an unequal burden on lower-income households. Many Wi-Fi startups are small companies and may not be able to co-ordinate themselves to bring forward an anti-competitive legal case against any of the incumbents without help. The federal government can assist in providing a platform to alleviate these concerns, releasing true points of modularity by taking down barriers.

The federal government could also support advancement in Wi-Fi based technologies by releasing more unlicensed spectrum, or by providing at low-cost spectrum demarcated for Wi-Fi type services only. Is spectrum allocation currently biased against Wi-Fi? Government should have a hard look at their spectrum allocation policies (and internal motivations). Theory suggests that there might be a innovation gains from encouraging the development of Wi-Fi as it could be disruptive to incumbent broadband providers’ markets characterized by customers who are over-served from a technical perspective, but under-served in terms of quality of customer service.

In summary, government should focus on enhancing the ability of entrants, and avoid programs that require detailed selection of private sector partners to implement municipality funded projects. These programs will only distort entrant motivations, undermining entrepreneurial intentions that already exist in the industry.

There were also predictions that the growth of new e-commerce retailers will result in re-intermediation where independent websites provide automated price comparison services for consumers; and dis-intermediation where the middleman is made redundant, resulting in the reduction of aggregate mark-ups suffered by consumers due to traditional multi-tier product distribution. Proponents claim that the enhanced ability for consumers to compare prices online will reduce the likelihood that firms can charge supra-competitive prices, alleviating the situation of asymmetric information that existed before the advent of e-commerce.

An example where consumers have benefited is Priceline.com where air travellers are able to compare airline fares and obtain last-minute discount fares at search costs far below traditional means, resulting in more severe competition in the air travel industry. While there are many examples where consumers have benefited greatly from the effects of re-intermediation and dis-intermediation, the evidence overall is mixed and the consensus has shifted towards a less lofty view of what e-commerce can in fact contribute to increasing consumer clout.

Recent research increasingly substantiates the view that reputation effects are more important online than offline. In other words, unless the product is highly undifferentiated or the quality of the product standardised, firms that have a well-established reputation offline have a much higher chance of succeeding online than firms that have no reputation, especially for high value goods. This explains why many Internet start-ups have either gone under or have sold their operations to more established corporations once faced with competition arising from firms that have a substantial offline presence.

This implies that the Internet may not enhance competition significantly in markets such as the car industry where firms are able to leverage their existing offline reputation online. Moreover, the impact of the Internet on the purchasing process of consumers is often not to replace existing distribution channels but to supplement them. This is the case for most new car buyers who use the Internet to compare prices, read reviews and comments from other consumers, but who ultimately go to a local dealer to test-drive and to make the purchase, rather than order directly online.

There is also evidence to suggest that the posting of prices online by firms of an oligopoly (industry with a small number of firms capturing the entire market) may facilitate implicit collusion by providing a means of exchanging pricing information in order to effectively coordinate cartel behaviour. This is analogous to the use of price releases in traditional media for the same purpose. Online posting of prices could be used by these dominant firms for price fixing and resale price maintenance (i.e. enabling dealers to coordinate the prices that they set) in the new car retail market. In fact, a complaint was filed with the Competition Bureau of Canada against Toyota alleging use of the car configurator/pricing system that they provided on their website for resale price maintenance.