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Domain Name Politics Beats Economics Rationality

Alex Tajirian
March 28, 2001

In November 2000, the Internet Corporation for Assigned Names and Numbers (ICANN) approved seven companies as registrars for seven newly approved top-level domain suffixes. The selection process of the new registrars and the suffixes has come under strong criticism, and for good reason.

ICANN is the group charged by the US government with overseeing the domain name system.

The allocation seems to have been politically motivated as opposed to being economically sound. There is no compelling economic rationale for the negotiated allocations, which are usually inferior to the use of auctions as a means to allocate scarce resources. Moreover, the rejection of some of the proposed extensions is also suspicious.

Auctions can be designed as an efficient mechanism to sell rights, especially when there are no secrets imbedded in the assets being sold. That is how, for example, telecommunication licenses are allocated, as well as the periodic sale of U.S. Treasury bonds. Even the models used in privatizing government-owned companies of Eastern Europe and Soviet Federation take into account competition among the interested parties. Ownership transformation of company asserts were conducted through auctions or through putting together a governance structure that is based on market driven incentives such as the packaging of assets in the form of mutual funds.

For national security reasons, negotiated deals make sense as a means for the government to allocate defense contracts rather than auctioning them off. Another example of common negotiated deals are when companies select an investment bank to underwrite new stock and bond issues or to represent a company in merger & acquisition negotiations. Companies don't want to make public corporate secrets, which whey would have to if they were to select the best investment bank through an auction.

It is not clear what secrets we are talking about in the ICANN deal. Secrecy obviously comes at the expense of some gross misuses of the system as in having the government billed thousand of dollars for an ashtray and a toilet seat!

Also for selection of extensions, especially xxx. Even if ICANN did not see any real economic benefit from this extension, they must have known that there was enough interest in the idea that someone would provide it outside the ICANN umbrella. In fact, there are at least three such companies now. To maintain its legitimacy, ICANN has to eventually negotiate with these independent registries in order to create some stability and reduce uncertainty in the industry. Thus, there is enough smoke to believe that the decision not to approve a ".xxx" or ".sex" extension was politically motivated.