Executive Summary

A central aspect of the e-commerce revolution is economic "disintermediation." Disintermediation can be defined as the reduction or elimination of the role of retailers, distributors, brokers, and other middlemen in transactions between the producer and the customer. In some cases, e-commerce sites such as Amazon.com, Travelocity.com, and CDNow have become new online intermediaries that substitute for "bricks and mortar" intermediaries (book stores, travel agents, and music stores). But the technology allows even Web intermediaries to be disintermediated. For example, consumers could buy books online directly from publishers who would ship the books directly from their printing plants. But even publishers and printers might be disintermediated if authors were to sell "e-books" directly to the consumer, as mystery writer Stephen King has attempted to do.

Notwithstanding the current shakeout in the e-commerce space, e-commerce -- especially so-called "clicks and mortar," where producers sell directly to consumers -- is expected to continue to grow as more and more Americans get online and show a greater propensity to conduct commerce online. As a result, all forms of disintermediation are occurring in a wide range of industries and professions, including distributors and retailers of physical goods (e.g., wine and beer wholesalers, auto dealers, music stores); providers of transactional services (e.g., travel agents, stocks and bonds salesmen and traders, banks, real estate agents, the Postal Service, and auctioneers); and even providers of professional services (e.g., lawyers, radiologists, college professors). But it's not just bricks and mortar intermediaries who are threatened; sometimes it's online intermediaries (e.g., online travel services) who are at risk as producers (airlines) use the Net to sell directly to the consumer.

In these cases, those threatened with disintermediation are not sitting by idly; they are using all the judicial, regulatory, and legislative means at their disposal to thwart competitors who would like to use the Net to sell a product or service. For example, car dealers have succeeded in obtaining the passage of laws in 49 states to prevent auto manufacturers from selling cars online. Wine wholesalers have lobbied Congress and the states to prevent wineries from selling wine over the Net. These and many other cases of the revenge of the disintermediated represent perhaps the biggest threat to the rapid and widespread digitization of the U.S. economy. Moreover, there is every indication that in 2001 such efforts will only accelerate as more industries fight in more states, Congress, and the courts for protectionist legislation and regulations. PPI estimates that American consumers pay a minimum of $15 billion annually more for goods and services as a result of such e-commerce protectionism by middlemen.

American economic history is rife with industries buffeted by change using government to protect their markets. But it wasn't a good idea then, and it isn't a good idea now. We don't predict that all middlemen will disappear, nor do we think they should. We do, however, believe that in a free market economy consumer's choices, not vested interests colluding and using the political process, should determine how commerce is structured. As a result, policymakers should follow these principles when deciding cases brought by intermediaries:

• Be on the side of innovation and consumer choice.
• Let the marketplace, not government, determine business winners and losers.
• Distinguish between disintermediated workers and disintermediated industries and firms, and try to assist the former.
• Decide policy on its merits; the disintermediated sometimes want the right thing, even if it's for the wrong reason.

Policy Recommendations

1. Policymakers at all levels of government should resist protectionist pleadings and oppose actions designed to protect the status quo against e-commerce competition.
2. The Bush administration should create the position of e-commerce ombudsman to identify cases of political opposition to e-commerce and serve as an advocate in government for e-commerce competitors.
3. The Federal Trade Commission and the Department of Justice should increase their efforts to prevent retailers and other businesses from colluding to retaliate against companies attempting to sell directly to consumers.
4. In contrast, the FTC and DOJ should take a more tolerant position if producers act collectively to sell goods or services online, as long as they are not colluding on price or keeping out entrants who want to provide lower prices or higher quality.
5. Consider developing national licensing requirements for industries and companies that now need to be licensed in the states.