Bertin Martens, Joint Research Centre of the European Commission (IPTS - Seville)
Declining online transaction costs have facilitated entry of small suppliers into newly emerging online services markets that put competitive pressure on established firms. At the same time, large online platforms aggregate a substantial share of online transactions within a private market place. As such, information technology has not only changed the organisation of firms and the dynamics of markets; it has also shifted the boundary between the firm and the market or the modalities for doing transactions. This shift has triggered regulatory debates and controversies. Established firms claim that online market places circumvent existing regulation; market operators claim that this regulation does not apply to them. This paper proposes a theoretical framework to analyse the economic impact of shifting boundaries between firms and markets and the regulatory implications of that shift. It combines theories of the firm with recent developments in the theory of multi-sided markets to explain how falling information costs create this simultaneous trend of integration and disintegration, driven by the evolution of relative transaction costs in firms and markets. Property rights or residual decision making rights become endogenous to the state of information technology. This has important implications for the balance between private and public governance of markets and firms. It applies these insights to some EU policy debates on regulation for online firms and markets.