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August 10, 2006
EU looks for exclusivity in high-definition DVD competition

Officials from the European Union's competition directorate have been investigating whether the backers of competing standards for high-definition DVDs, including Sony and Toshiba, are stifling competition through exclusive contracts, reports the New York Times. The EU wants to know if studios are being pressured to favor a single format.

The two formats have similar storage capacity, at the moment, and analysts report that the image quality is comparable. Yet the Blu-ray coalition, led by Sony, has persuaded more studios to adopt the Blu-ray standard even though the cost of a Blu-ray player -- currently almost $1,000 -- is twice that of an HD-DVD player. An analyst who was interviewed for the New York Times story speculated that Sony will be looked at most closely.

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Nothing about the Blu-ray versus HD-DVD brawl suggests that consumers won't ultimately get a chance to vote with their feet. Both of the standards have distinct advantages and powerful backers. An investigation by the EU would just be a waste of time for everyone but the bureaucrats and the lawyers if it weren't for the fact it will lead to uncertainty for investors and consumers.

The reason the European Commission would be concerned about Sony's aggressive competition is it's been fooled by the "network effects" theory of antitrust. As the Commission observed in the Microsoft decision, "once the network effects work in favour of a company which has gained a decisive momentum, they will amount to entry barriers for potential competitors." This cynical theory postulates that consumers will value a product not so much according to their own opinion of the product's value, but according to what they think the majority of consumers think. Therefore, it is possible that consumers will collectively opt for an inferior product just because they think their fellow consumers will do so (it's easy to see this theory's appeal to unsuccessful rivals who can't bring themselves to confront the possibility something is wrong with their product, isn't it?).

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Sure, the fact that a product is used by many of one's friends and neighbors is a positive selling point, but it's a huge leap to say consumers will buy an inferior product on this basis alone. Of course, the Betamax proves the leap too far. Betmax was another $1,000 Sony product that had a huge lead in the marketplace but ultimately failed -- notwithstanding its superior image quality -- because VHS was much cheaper and had higher storage capacity. There are other examples that contradict "network effects" theory, but competition authorities in Europe accept the theory as gospel anyway.

See: "European Panel Investigates DVD-Standards Rivalry," by James Kanter and Ken Belson, New York Times, Aug. 9, 2006

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