1.4.3. Markets

The free market is an important feature of the modern liberal democratic state. In general the free market is a far more efficient mechanism of regulating an economy than central planning, because the market processes information more efficiently. The closer a market is to the classical model of a “perfect market,” the more efficiently it functions in balancing supply and demand, ensuring that prices are set at the optimum level for both suppliers and consumers. The assumptions made in the model of a perfect market are numerous, but amongst the most important are that consumers are rational and seek to maximise their utility (roughly, their happiness), that producers are numerous and seek to maximise their profit, that the product sold in a particular market is uniform and has no substitutes, that all participants are perfectly well-informed, and that no transaction costs are incurred in shopping around.

Remarkably, e-commerce conducted over the Internet allows for many of these usually unrealistic assumptions to be satisfied: producers are indeed numerous, search engines such as Google and online discussion fora such as newsgroups provide consumers with near-perfect knowledge, and transaction costs are low—even approaching zero in the case of markets for intangible goods such as Internet domain names, sold using online shopping cart technology. Thus it has been said that e-commerce over the Internet is one of the closest approximations our society has to a perfect market.[1] For this reason the free market can be a useful mechanism for exercising governance over such things such as the allocation of domain names.

However there are other areas in which markets are manifestly insufficient as a mechanism of governance, for any of three reasons. Firstly, the market is often less efficient than it should be due to the presence of externalities (that is, costs or benefits of a party’s consumption or production decision that accrue not to that party, but to others).[2] A good example is in the case of spam. More spam email is sent than would be economically efficient, because its cost is borne largely by the recipient rather than the sender, in the form of negative utility—annoyance—as well as the pecuniary cost of the Internet bandwidth taken up by receiving spam, that is eventually passed on to consumers by their ISPs. Unless there was a market mechanism to pass these costs back onto spammers, other methods of governance would be required to tackle this problem.

Secondly, efficiency is not the only criterion of the effectiveness of a market. There are also social considerations to be borne in mind, as was noted in the Tunis Agenda, which observes “that market forces alone cannot guarantee the full participation of developing countries in the global market for ICT-enabled services”[3] (ICT being Information and Communications Technologies, including Internet networks).

Third, there are some problems of Internet governance in which markets are not really involved at all. For example, the protection of users’ privacy on the Internet is not an issue which it is particularly useful to analyse in terms of market forces.[4] Other mechanisms of governance are required to manage such issues.



Hasenpusch, Tina, Does an Economist’s Dream Come True—The Internet as a Perfect Market? (2000)


Coase, R, The Problem of Social Cost (1960)


WSIS, Tunis Agenda for the Information Society (2005), paragraph 18.


Agrawal, Ruchika, Why is P3P Not a PET? (2002)