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11 Eur. J.L. & Econ. 5 (2001)

handle is hein.journals/eurjlwec11 and id is 1 raw text is: European Journal of Law and Economics, 11:1; 5-22, 2001 W © 2001 Kluwer Academic Publishers. Manufactured in The Netherlands. Efficiency, Viability and the New Rules of the Internet* MICHAEL HUTTER iwk@uni-wh.de Faculty of Economics and Management, Witten Herdecke University, Alfred-Herrhausen-Strafle 50, 58448 Witten, Germany Abstract What is the role of rational efficiency and evolutionary viability in explaining long-term processes of institutional change? The rapid changes surrounding the emergence of markets on and around the Internet are observed as evidence for such processes. Events involving rule emergence on the Internet observed between 1985 and 2000 are registered and ordered within a three-dimensional matrix of 90 cells. They are reported in a narrative account that gives a rough impression of the richness of rule and regime emergence. The account highlights major episodes to illustrate the more general process. The results confirm that efficiency maintains its explanatory power under the new circumstances, particularly in accounting for private rule adjustment behavior due to changes in transaction costs. The results also suggest that the evolutionary competition for viability of public organizations and institu- tions operates as another, complementary explanation. It explains, among other things, the overall growth of influence of new public-private organizations at the expense of national legal institutions. Keywords: Internet, institutional change, copyright law, evolutionary theory, viability JEL Classification: Eli, K 00, K 33, 034 The growth of the new communication networks has been epitomized by the growth of the Internet.' The number of hosts connected to the Internet has increased from less than 1000 in 1988 to about 50 million in mid-1999.2 An end to this phase of accelerating growth is not in sight. The technological forces driving the phenomenon are the increase in computa- tion power of electronic microchips and, second, the increase in communication power through the use of software and protocols which interconnect local com- puter systems. Electronic processors reduce the variable cost of reproducing and transforming information virtually to zero, while interconnected computers realize network externalities that increase exponentially with the number of net users. The * I would like to thank Herbert Burkert, Henry Perritt, Gunther Teubner and the members of workshops in Maastricht, Hamburg and Jena for their comments.

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