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

Krämer, Jan and Wiewiorra, Lukas (2009): Network Neutrality and Congestion-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

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