Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate

Krämer, Jan and Wiewiorra, Lukas (2009): Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate.

Abstract

We model the main arguments of the net neutrality debate in a two-sided market framework with network congestion sensitive content providers and Internet consumers on each side, respectively. The platform is controlled by a monopolistic Internet service provider, who may choose to sell content providers prioritized access to its customers. We explicitly consider the adverse effects of traffic prioritization to the remaining best-effort class and find that network discrimination has overall positive effects on welfare, because congestion is better allocated to those content providers with congestion inelastic advertisement revenues. In the long-run, network discrimination leads to infrastructure investments in transmission capacity and encourages innovation on the content provider side. In the short-run, however, discrimination has no effect on innovation because the ISP expropriates the content providers' increased surplus through the price for priority access. This is the downside of network discrimination: Albeit total welfare is increased, content providers will--at least in the short-run--be worse off than under network neutrality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Telecommunication, Network Neutrality, Two-Sided Market, Traffic Prioritization, Innovation, Broadband Investment
• Subjects: L - Industrial Organization > L5 - Regulation and Industrial Policy; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L96 - Telecommunications; D - Microeconomics > D4 - Market Structure, Pricing, and Design

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