Name Politics Beats Economics Rationality
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
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.