By BRYAN GRULEY and GLENN R. SIMPSON
Staff Reporters of THE WALL STREET JOURNAL

WASHINGTON -- EBay Inc. is bucking some of its big Internet peers in a little-noticed battle on Capitol Hill.

The online auctioneer is pitted against Yahoo! Inc., Amazon.com Inc., America Online Inc. and other Web heavyweights in a debate that all agree is fundamental to the future of the Internet: Should databases that form the core of many sites be protected from competitors that copy and repackage the data for their own customers?

It's a big deal for eBay, of San Jose, Calif. So-called "aggregators" such as Bidder's Edge Inc. have been combining information listed on the sites of eBay and other auction operators, and then offering it to consumers who can see in one place, for example, all the table-hockey games for sale on a wide variety of sites.

The stakes are equally high for Yahoo and other companies that live by searching far and wide on the Web to bring specific information back to customers.

1. What service does eBay provide? What service do Bidder’s Edge, Inc. and Yahoo provide for its customers? Are the services different? Explain your answer.

This week, eBay Chief Executive Margaret Whitman and Yahoo co-founder Jerry Yang plan visits to Capitol Hill to join one of the first battles in which leading Internet companies have disagreed sharply and publicly over federal policy.

The issue is just as vital to older businesses as they adapt to the Internet. For example, real-estate agents complain that online home-sale listings have been pilfered and reused. Publishers worry about pirating of their databases, such as Reed Elsevier PLC's Lexis-Nexis catalog of court cases, news stories and other materials. Newspapers are nervous about having classified ads copied.

They've teamed with eBay to push for legislation championed by Rep. Howard Coble, (R., N.C.), that is designed to strengthen protection of collections of facts and make it easier for companies to sue alleged pirates. The "Collections of Information Antipiracy Act" would prohibit the repeated or systematic extraction of "substantial" information from databases where doing so hurts the business of the original collector. It also calls for criminal fines of up to $250,000 and jail terms of up to five years for first-time violators.

Backers say these steps are necessary to assure start-ups in e-commerce that they won't invest enormous money and toil in compiling and arranging facts only to have a rival easily copy their work.

1. What is government’s most basic role in a market economy? How does this role relate to the issue facing eBay? What incentive does government have to provide copyright protection to firms that collect and distribute information?

"E-commerce is an industry in its infancy, and the lack of protection for one of its core components can stifle the entire sector, bringing everyone down for the sake of a few free riders," argues the e-Commerce Coalition, one of two groups of companies that, with eBay's help, are lobbying for passage of the Coble bill.

2. What is a free rider? What aspect of information leads to the free rider problem here? How can government remedy the situation?

Without protection, they argue, eBay and others may have to erect technological defenses that would make it harder to access their sites. "You don't grow [the Internet] by locking everything up behind firewalls," says Melinda Hatton, a Washington lobbyist for eBay. And while the Coble bill would afford protection to compilations of facts, the facts themselves would remain free for anyone to use, she says.

Opponents of the Coble bill say that, on the contrary, it would stifle e-commerce by broadly prohibiting access to facts and information in the public domain. That, they say, would hamper search engines and shopping "bots" that buttress one of the most alluring features of the Web: the ability to easily locate low prices, airline schedules, medical advice, city maps, basketball scores and other information.

3. What economic argument could you make to support companies such as Yahoo! who oppose the Coble bill? (hint: how do these search engines affect the efficiency of markets?)

Companies that feel they've been ripped off are amply protected by existing federal and state laws covering copyrights, contracts and computer hacking, opponents of the Coble legislation say.

"We would be really concerned about any legislation that impedes the free flow of information," says John Scheibel, a Washington lobbyist for Yahoo, the Santa Clara, Calif., Internet portal.

The conflict involves business models as much as intellectual-property policy. Virtually all the economic value of eBay's enterprise lies in its aggregation of buyers and sellers on its site. It makes money by charging users a listing fee and taking a cut of transactions.

Yahoo and other portals rely more on brokering information created by other content providers -- business phone directories, for instance. One possible result of the legislation, Yahoo's Mr. Scheibel acknowledges, is that Yahoo and others could be forced to pay higher fees for content it provides.

4. What would the effect of the bill have on the quantity of information supplied on the Internet? (Refer to a basic law in economics when answering your question.)

The dispute is rooted in a 1991 Supreme Court decision. The court ruled that the "sweat of the brow" collection of names and telephone numbers didn't entitle a Kansas phone company to copyright protection of its directory. Publishing giants such as Reed Elsevier and Thomson Corp. for years have pushed for legislation that would reinstate some protection. The effort has taken on added urgency as technology has enhanced the ease with which data can be gathered and reassembled on the Web.

The Internet companies only entered the fray in the past several months. "People now see this as an issue that's important for high-tech," Ms. Hatton says.

In the last two years eBay has become one of the most politically active of the dot-coms, opening a Washington office and hiring Tod Cohen, former lobbyist for the Motion Picture Association of America. In the past year, the company has dished out $165,000 in political contributions through top executives and a new political action committee, the eBay Committee for Responsible Internet Commerce. The biggest recipient has been the Democratic National Committee, with $93,500 from eBay executives and their spouses.

6. Using the economic decision rule, how much is eBay willing to pay to get copyright protection for its information?

Yahoo, which opened its own Washington office in 1998, has given about $44,500 in the past year. Again the big winner was the DNC, which got $30,000, with more than half coming from Mr. Yang.

EBay didn't jump into the lobbying over database piracy until last fall. At the time the company was mired in disputes with auction-information sites such as Bidder's Edge over their indexing of eBay's auctions. EBay complained that the companies were putting a drag on eBay's site, and that they were delivering outdated information to eBay customers, hurting the company's sterling brand.

In December, eBay sued Bidder's Edge, citing trespassing, false advertising and other alleged violations of state and federal laws. Bidder's Edge, based in Burlington, Mass., has denied the allegations. Meantime, the Justice Department began asking eBay about the company's efforts to limit aggregators' access to its Web site. EBay says it has done nothing wrong.

By early this year, eBay had become a charter member of the new e-Commerce Coalition. The group joined an older alliance, the Coalition Against Database Piracy, in working with eBay and the National Association of Realtors on behalf of the Coble bill. (Dow Jones & Co., which publishes The Wall Street Journal and WSJ.com, is lobbying for changes to the Coble bill that would protect indexes such as the Dow Jones Industrial Average).

By siding with those groups, eBay broke with NetCoalition.com, an Internet lobbying group eBay helped to form last summer. That group, which includes Yahoo, AOL, Amazon.com and other Internet companies, sent a letter opposing the Coble bill to lawmakers Feb. 7. The Internet group is allied with yet another lobbying group of companies, universities and trade associations opposing the Coble bill. (EBay didn't participate in the February letter, but remains a member of NetCoalition.com.)

Now the various coalitions are seeking a compromise between the Coble bill and a less-stringent bill sponsored by Rep. Thomas Bliley, the Virginia Republican who chairs the House Commerce Committee. But Yahoo and others would be happy with no legislation at all.

For its effort, eBay is getting grass-roots help from the Realtors association. The group's PAC has donated more than $1.3 million in the past year and, next month, more than 5,000 of its members plan to swarm over Congress when they're in Washington for an annual meeting.

But even with eBay on their side, the Realtors are finding it isn't easy to dislodge lawmakers' reluctance to regulate the Web, Realtors lobbyist Edward Miller says. "I don't want to sound flip," he says, "but when people tell me, 'The Internet's like the Wild West,' I like to remind them we used to hang cattle rustlers in the Wild West."

Chapter references appear after the answer to each question. Refer to the following chapters in McConnell and Brue’s Economics and Microeconomics for help when answering these questions: Chapters 3-4 (econ and micro), 17 (30 econ).

Refer to the following chapters in Colander’s Economics and Microeconomics for help when answering these questions: Chapters 2-5 (econ and micro).

1. eBay is an auctioneer that brings together buyers and sellers at its site. Yahoo! on the other hand is a search engine. It combs the Web for information and brings it to the customer. In some respects they are different and in others they are not. Because Yahoo! culls information from a variety of sites and eBay does not, they are different. On the other hand, to the extent that both companies bring together a number of sellers to one location, they do provide the same service. Return to article.
2. Government’s most basic role in a market economy is to provide the set of rules for what people can and cannot do. The most important rule required for a market to function is the establishment and protection of property rights. EBay is arguing that it owns the right to the information that it gathers. Without this sole right, its ability to bring a good or service to the market is compromised. The incentive by government to protect this right is its desire to have markets in which firms are willing to enter and sell goods and services. Without solid property rights, markets can break down. Return to article.
3. A free rider is someone who participates in something for free because others have paid for it. EBay would argue that Yahoo! is a free rider. EBay has invested millions in setting up the auction structure that brings together sellers and buyers and Yahoo! is using the information that results to its own benefit without paying. Information has a public good aspect. A public good is a good that cannot be excluded from anyone and whose consumption by one does not diminish its consumption by others. Information, because it does not disappear when learned by one, and because once broadcast on a venue such as the Internet is available to everyone, is a public good. Government can help by making that information more of a private good by excluding its use by others. Return to the article.
4. I would argue that the Internet increases the efficiency of markets by reducing the cost of obtaining information. With search engines such as Yahoo! consumers can easily find the least-cost product with relatively little cost. On the other hand, without the incentive (future profits) of developing structures that collect such information such as eBay, that information might not be available. That is, the best strategy for government before the firm has invested in collecting information is to promise copyright protection. The best strategy after the investment is made, is to make the information free (assuming there is no additional cost to supplying the information). Return to article.
5. This is difficult to say. The quantity of re-packaged information supplied would decline because the firms such as Yahoo! would have to pay fees for the information. Faced with increased cost, the supply of information would decline and the equilibrium quantity would fall. On the other hand, with the promise of copyright protection (and more profits), more firms may enter the market in collecting original information. This would increase the quantity of information supplied. These two predictions rely on the laws of demand and supply. The equilibrium quantity of repackaged information would be expected to decline while the equilibrium quantity of new information may rise. Return to article.
6. The article states that in the last year, eBay has given $165,000 in political contributions. It is most likely paying lobbyists and lawyers to pursue this issue at even greater cost. EBay is willing to pay for such effort as long as the marginal benefit of such efforts (increased revenue from its auction site) exceeds the marginal cost (cost of lobbyists, etc.).Return to article.

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