Network Neutrality and Congesition-Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation

Krämer, Jan and Wiewiorra, Lukas (2009): Network Neutrality and Congesition-Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation.

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. Although price regulation can shift some of the congestion alleviation gains back to content providers, it is inapt as a policy instrument, because welfare is proportionally destroyed in the process.

• Item Type: MPRA Paper
• Language: English
• Keywords: Telecommunications, Internet, Net Neutrality, Network Congestion, Two-Sided Market, Quality of Service, Innovation, Investment, Regulation, Internet Freedom Preservation Act
• 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

References

Berners-Lee, T. (2006, June). Net neutrality: This is serious. http://dig.csail.mit.edu/breadcrumbs/node/144. Last visit 13.06.2009.

Businessweek (2008, Feb). The fcc, comcast, and net neutrality. http://www.businessweek.com/technology/content/feb2008/tc20080225_498413.htm. Last visit 13.06.2009.

Choi, J. P. and B.-C. Kim (2008). Net neutrality and investment incentives. mimeo No.2390, CESIFO.

Crawford, S. (2007). The internet and the project of communications law. mimeo, University of Michigan.

Crowcroft, J. (2007). Net neutrality: The technical side of the debate - a white paper. International Journal of Communication 1, 567{579.22

Dou, W. (2004). Will internet users pay for online content? Journal of Advertising Research 44 (4), 349{359.

Economides, N. and J. Tag (2008). Net neutrality on the internet: A twosided market analysis. mimeo, University of New York, School of Law.

Faulhaber, G. and B. Rasmussen (2006). Network neutrality and the economics of congestion. In Conference Telecommunications Policy Research, pp. 1847{1908.

Google (2009). Net neutrality. http://www.google.com/help/ netneutrality.html. Last visit 11.06.2009.

Hahn, R., R. Litan, and H. Singer (2007, Juni). The economics of wireless net neutrality. Journal of Competition Law and Economics 3, 399{451.

Hermalin, B. and M. Katz (2007). The economics of product-line restrictions with an application to the network neutrality debate. Information Economics and Policy 19, 215{248.

Wu, T. (2005). Network neutrality, broadband discrimination. Change 925, 77{90.

Yoo, C. (2005). Beyond network neutrality. Harvard Journal of Law & Technology 19, 1{77.23