Notice & Comment

On the Infrastructural Nature of NPUs, by Brett M. Frischmann

*This is the second post in a symposium on Morgan Ricks, Ganesh Sitaraman, Shelley Welton, and Lev Menand’s “Networks, Platforms, and Utilities: Law and Policy.” For other posts in the series, click here.

Networks, Platforms, and Utilities is the casebook I wish I’d written. It’s also the casebook I wish I’d had available for the past two decades. I can’t wait to use the book in the classroom. It is comprehensive, deep, and written in an accessible manner. At 1,200 plus pages, it probably weighs like 50 pounds if printed. So fortunately, we can use the digital copy. The book has been thoroughly vetted and peer-reviewed. Along with other folks, I was honored to participate in a workshop at Vanderbilt to review draft chapters and discuss the book generally. As the authors stressed throughout the process, the book remains a work-in-progress. The next edition will include chapters on a bunch of cool topics, including payment systems, social media, and cloud computing. I appreciate that in addition to the book, the authors have developed a community of interdisciplinary scholars and teachers interested in sharing ideas, research, and teaching materials.

My scholarly work surfaces in the book primarily in terms of the stage-setting concept of infrastructure. As the authors note in chapter one, Networks, Platforms, and Utilities (“NPUs”) are infrastructural, meaning NPUs are shared means to many other ends, intermediate inputs into other social and economic activities, and foundations upon which other structures and systems are built. This was the topic of my first book, Infrastructure: The Social Value of Shared Resources (Oxford 2012). At the outset, I had argued in favor of a capacious understanding of infrastructure that would encompass: (1) traditional infrastructure such as transportation systems, communication systems, governance systems, and basic public services and facilities; and (2) nontraditional infrastructure such as environmental infrastructure, including oceans and the atmosphere, and intellectual infrastructure, including basic research, ideas, and languages. I then developed a functional economic account of infrastructural resources that focused extensively on the demand-side and how infrastructure generate social value. (For those unfamiliar with that work, see the first note at the end of this post.)

Naturally, I was excited to see how the Networks, Platforms, and Utilities casebook would capture and extend the functional economic analysis of infrastructure.  The casebook adopts the capacious definition, recognizing both the shared functional characteristics of infrastructure and the corresponding social demand for governance (described in note below). Not only does this move bring together many different sectors of social and economic activity, including new sectors like money and finance and technology platforms, but it also supports comparative analysis of social dilemmas and governance institutions across the different sectors. This was exciting to see raised in the casebook, and it’s a pedagogical theme that could be pursued more thoroughly in future editions, for example, with more direct comparisons raised as questions for students in the notes and comments sections.

Having made this bold field-defining move, the casebook does not quite go as far as I’d hoped in terms of exploring why it matters that NPUs are infrastructural. The casebook mostly describes NPUs in the familiar terms of antitrust, regulated industries, and regulatory economics, which emphasizes supply-side issues and fails to attend to many of the demand-side issues I’d hoped to see explored. The casebook raises concerns about network effects and externalities, which often raise demand-side concerns when those effects result from infrastructure users’ activities. Unfortunately, the brief treatment in the casebook suggests that externalities are exceptional in the field of NPU law. I would argue the opposite. Social demand for infrastructure/NPUs is derived demand, and it diverges substantially from private demand manifest in markets because of diverse externalities generated by the productive activities of infrastructure users. There are some instances where these types of issues are raised, for example, in a note about externalities that graciously refers to my work (thanks!), when considering how platform dependence and value extraction strategies may impact user innovation, and in a few other passing references. But I think it is a theme that should be explored across the various sectors.

Related, I would like more discussion of the normative foundations for social investment in and governance of infrastructure/NPUs. What social values are at stake in this field? The justifications for having NPU law in Chapter 1.B, for example, seem incomplete; the authors seemed constrained to talk in terms supplied by the policy makers, regulatory economists and lawyers who have shaped the dominant discourse about NPUs. There are teasing hints of deeper (broader) normative considerations, for example, in the final subsection of 1.B on Enabling and Sustaining Democracy. The normative foundations for NPUs and NPU laws need better explanation in the beginning and throughout the book.

One might approach the demand-side / normative foundation question from various angles. One could ask: What does, could, and should affected with the public interest mean for infrastructure/NPUs? What does, could, and should essentiality mean in the context of the essential services and the essential facility doctrine? Why do infrastructure/NPUs generate social demand for governance in a manner that is undeniably different than horses (or most other goods and services)? Answers need not be derived exclusively from historical tradition, the statements of policymakers, or the disciplines of antitrust, regulated industries, and regulatory economics. One might, for example, begin with some of the ideas touched on in the subsection about enabling and sustaining democracy. Or one might begin with human rights, sustainable development, and other normative frameworks. After all, infrastructure/NPUs certainly are means to these ends. 

My answer would be something like: What makes infrastructures/NPUs essential and affected with the public interest (and different from horses) is the functional role they play in providing social affordances, enabling diverse productive activities that generate substantial social surplus (spillovers), and supporting public capabilities vital to human flourishing. Of course, this answer needs further elaboration and attention to contextual details. There are other reasonable answers too. But I think these types of questions need to be asked and considered more seriously throughout the book.

Another approach to the demand-side / normative foundation question would be to critically re-examine the normative foundations of specific doctrines in NPU law. For example, I’d focus on equal access, nondiscrimination, and neutrality rules. The casebook discusses these rules extensively in various sectors but does not fully explore why the rules are so important. An account rooted in antitrust and regulatory economics surfaces in the casebook, but what of other economic and noneconomic justifications for such rules? We get a glimpse in Chapter 9’s excerpt from Tim Wu’s Network Neutrality, Broadband Discrimination article. I would like to see more, however, for two reasons.

First, even in the context of network neutrality, there is more to say about the normative justifications. Beyond concerns about competition and innovation incentives, network neutrality resists (seductive promises of) intelligent optimization by infrastructure owners. It creates and sustains an important governance seam (for further explanation, see the second note at the end of this post). When a Broadband Internet Access Service (“BIAS”) provider knows who is doing what online, the BIAS provider gains power that can be exercised in various ways, such as price discrimination or prioritization. At its core, network neutrality regulation aims to constrain intelligence-enabled social control by infrastructure owners so that users retain their freedom in an under-determined techno-social environment. Such freedom engenders an incredible diversity of externalities, often through user-generated public and social goods.

Second, social demand for governance of intelligence-enabled social control is likely to return again and again in all of the sectors discussed in the casebook. In other words, the network neutrality debate should return for smart cities, smart transportation, and every other smart infrastructure/NPU. (I just ask that whenever you see “smart” that you insert “supposedly” in front and then begin to ask a series of questions about who gains what intelligence and power, and for what purpose.) My point is that there is a set of social governance considerations about power and social control, among other things, on the horizon (if not already present) for NPUs, and they are not reducible to market power and other familiar analyses framed in conventional regulatory economics and antitrust traditions.

Let me wrap up by reiterating that this casebook is one of the best I’ve read in a very long time. I plan to design a new class around it, and I look forward to continuing conversations with the authors and the community of scholars they’ve brought together with this book. I hope many others will join us.

Brett M. Frischmann is the Charles Widger Endowed University Professor in Law, Business and Economics at Villanova University.

Note 1: On demand-side theory of infrastructure, drawn from Frischmann (2012).

Infrastructural resources satisfy the following criteria:

(1) The resource may be consumed nonrivalrously for some appreciable range of demand.

(2) Social demand for the resource is driven primarily by productive activities that require the resource as an input.

(3) The resource may be used as an input into a wide range of goods and services, which may include private goods, public goods, and social goods.

The first criterion captures the consumption attribute of public and impure public goods.  In short, this characteristic describes the “sharable” nature of infrastructural resources. Infrastructural resources are sharable in the sense that the resources can be accessed and used by multiple users at the same time. Infrastructural resources vary in their capacity to accommodate multiple users, and this variance in capacity differentiates purely nonrival (infinite capacity) resources from partially nonrival (finite but renewable capacity) resources. For nonrival resources, the marginal cost of allowing an additional person to access the resource is zero. For partially nonrival resources, the cost-benefit analysis is more complicated because of the possibility of congestion and depreciation. The second and third criteria focus on the manner in which infrastructural resources create social value. The second criterion emphasizes that infrastructural resources are capital goods that create social value when utilized productively and that such use is the primary source of social benefits.  Thus, societal demand for infrastructure is derived demand.  The third criterion emphasizes both the variance of outputs (the genericness of the input) and the nature of those outputs, particularly, public goods and social goods.   

Infrastructural resources are intermediate capital resources that often serve as essential foundations for productive behavior within economic and social systems. Infrastructural resources structure in-system behavior at the micro-level by providing and shaping the capabilities and available opportunities of many actors. In some cases, infrastructural resources make possible what would otherwise be impossible, and in other cases, infrastructural resources reduce the costs and/or increase the scale and scope of participation for actions that are otherwise possible.  Often, infrastructural resources structure in-system behavior in a manner that leads to spillovers. That is, infrastructural resources facilitate productive behaviors by users that affect third parties, including other users and even non-users of the infrastructure. The third-party effects often are accidental, incidental, and not especially relevant to the infrastructure provider or user. As a result, the social returns on infrastructure investment and use may exceed the private returns because society realizes benefits above and beyond those realized by providers and users.

Infrastructural resources enable many (market and non-market) systems to function and satisfy demand derived from many different types of users.  Infrastructural resources are not special-purpose resources, optimized for a particular user or use to satisfy the demand derived from a particular downstream market.  Instead, they provide basic, multipurpose functionality. 

An electricity grid, for example, delivers power to the public, supporting an incredibly wide range of uses, users, markets, and technologies. It is not specially designed or optimized for any particular use, user, market, technology, or appliance; it provides nondiscriminatory service for a toaster and a computer, for Target and a pizzeria, and so on. The same could be said of the national highway system, the Internet, contract law or even a language.  These resources provide basic functionalities and thereby support and structure more complex systems of user activities, but the resources (or the owners and managers of such resources) do not determine what users do.

Users determine what to do with the capabilities provided by infrastructure.  Genericness implies a range of capabilities, options, opportunities, choices, even freedoms.  Subject to standardized compatibility requirements, users decide what to plug in, run, use, work with, play with. Users decide which roads to travel, where to go, what to do, who to visit. Users choose their activities; they can choose to experiment, to innovate, to roam freely. Users decide whether and what to build. Users decide how to use their time, attention, and other complementary resources.  

To understand societal demand and how value is created and realized, it is necessary to pay closer attention to the nature of the user activities and the outputs users produce; the value of an infrastructural resource is realized by producers and consumers of these outputs. It is thus the demand for these outputs that determines demand for the infrastructure. For this reason, the third criterion emphasizes the nature of the outputs and, more specifically, the potential production of public and social goods. When infrastructure supports these productive activities, markets will not work well in assessing demand and supplying infrastructural resources; a gap between private demand and social demand arises because the social value created by allowing users to access and use the resource to produce public and social goods is underrepresented in the prices people are willing to pay for infrastructure.  The social value may be substantial but extremely difficult to measure.  The reason for the gap is relatively straightforward:  Infrastructure users’ willingness to pay reflects private demand — the value that they expect to realize — and does not take into account value that others might realize as a result of their use. That is, it does not account for external effects associated with the production of public and social goods.  This means that infrastructure users who produce public and social goods are not necessarily optimal purchasers of access and use rights, because they do not themselves capture the full social value of their use. 

Not only is there a gap between private and social demand, but to make matters even more complex, the shape of the social demand curve can be quite different from that of the private demand curve due to the variance in producers and outputs.  This added complexity gives rise to specific and substantial demand-side market failures with static and dynamic consequences (explored in detail in Frischmann 2012). 

Difficulties in measuring and appropriating value generated in output markets translates into a problem for infrastructure suppliers and, consequently, the public. This “demand-manifestation” problem may affect infrastructure allocation, design, investment, and management, as well as other supply-side decisions. At least in market contexts, infrastructure suppliers base such decisions in large part on the prospect of foreseeable returns in downstream markets. Demand signals manifested in those markets, aggregated and, in a sense, communicated by dynamic operation of the price mechanism, provide critical raw information for making assessments about prospective returns. To society’s detriment, demand-manifestation problems can lead to the undersupply of infrastructure essential to various producers of public and social goods, and this undersupply can lead to an optimization of infrastructure design or prioritization of access and use of the infrastructure for a narrower range of uses than would be socially optimal.

In this context, “commons management” is a mode of governance for infrastructure that can be especially attractive from an economic and social perspective.  The core principle of commons management is sustainable sharing on nondiscriminatory terms within a defined community (Frischmann, Madison, Strandburg 2014).  With respect to most infrastructure, this means nondiscrimination among users and uses, and the corresponding preservation of equality, flexibility, and general purposiveness.  From an economic perspective, it makes sense to manage certain infrastructural resources in an openly accessible manner because doing so permits a wide range of producers of private, public, and social goods to flourish. As Benkler (2001) noted, “[t]he high variability in value of using both transportation and communications facilities from person to person and time to time have made a commons-based approach to providing the core facilities immensely valuable.”  The point is not that all infrastructural resources (traditional or nontraditional) should be managed in an openly accessible manner. Rather, for certain classes of resources, the economic arguments for managing the resources in an openly accessible manner vary in strength and substance. 

By precluding optimization and prioritization based on market demands alone, commons management sustains the social option value of the infrastructure; it retains “flexibility” or “breathing room” in the face of uncertainty.  But commons management is not only a buffer from market pressures.  It also serves as a buffer from government pressures to optimize or prioritize infrastructure (use), which may originate from market actors lobbying for government interventions or from other pressures to regulate. Finally, managing infrastructure as commons also reduces reliance on government to pick winners and direct subsidies to users who produce public and social goods.  In the end, the basic idea is that commons management leverages nonrivalry and the sharable nature of the infrastructure (first criterion) to sustain the general-purpose nature of the infrastructure and support the wide range of user activities that generate private, public and social goods (second and third criteria).

Note 2: On network neutrality and governance seams, excerpt from Frischmann and Selinger (2018).

The Internet evolved with the end-to-end design principle as its central tenet. … End-to-end design defines a seam [that] provides a general technology- and application-independent interface between the higher and lower layers of the network. This design engineered a form of blindness—a lack of a particular type of intelligence—into the techno-social system. End-to-end design insulated end-users from certain types of market-driven restrictions on access to and use of the infrastructure. It precluded particular forms of intelligence-enabled control and thus maintained corresponding degrees of freedom from techno-social engineering. Notably, the end-to-end principle is not law. Compliance with the principle has always been voluntary. In various ways and for various reasons, network owners developed tools and business strategies to circumvent the design principle. The familiar logics of efficiency and fetishized computation pushed networks to pursue more intelligent architectures capable of differentiating and discriminating among end-uses and end-users in the name of traffic management and in pursuit of profit maximization. This led to the network neutrality debate.

Though still highly contentious, network neutrality is one example of a regulatory rule that aims to sustain the Internet as an underdetermined environment. Network neutrality sustains a degree of freedom for users by preventing owners of broadband networks from prioritizing Internet traffic based on the identity of users or their activities—basically, based on who is doing what. Users decide what to do with the intellectual, relational, and many other capabilities that the Internet affords. This freedom is not absolute; nor is it free for users who still must pay to access and use the Internet. And there are tradeoffs involved. … [N]etwork neutrality engineers a powerful [governance] seam that constrains broadband networks exercise of social control and creates a substantial gap within the techno-social environment.

Yet it is important to make clear that network neutrality only operates at a specific seam, at a particular scale, on a particular set of powerful techno-social engineers, and at the interface between particular layers. It may be necessary. But it is by no means sufficient.

On one hand, powerful techno-social engineers operate within and between other … layers, such as the applications and content layers. … On the other hand, we’re likely to need network neutrality style rules in many other contexts. Frankly, we already have similar nondiscrimination rules at the infrastructural layers of many other techno-social systems, ranging from electricity to law. But … infatuation with the power of smart techno-social systems will lead to recurring conflicts resembling the network neutrality debate. … Specifically, the smart grid and smart transportation systems of the near future will give rise to debates about whether or not to engineer (by law or architectural design principle) a seam that prevents discrimination or prioritization based on who you are or what you’re doing. …

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