Economics of Network Neutrality

Review of Network Economics, 2000

Network neutrality" encompasses a wide-ranging debate over what limits, if any, should be placed on network providers in pricing or managing Internet traffic. The articles in this volume tackle various aspects of this debate: Have other transportation networks been truly "neutral"? Should broadband providers be allowed to charge content providers for connecting with end users? How much price discrimination is appropriate and is it confined to network operators? How large are the potential costs of constraining traffic management practices? What are the tradeoffs from mandated loop unbundling to deter discrimination and what market power threshold justifies interventions?

This article analyzes the comparisons of net neutrality with the pricing of the Internet. We note that the future threats of congestion which call for the renewal of the infrastructure are accompanied by a search for lucre from the operators of the Internet. This tendency has the ambition of creating a deep discrimination of the Internet by imposing pricing at the inter-operator level as well; at the level of the application, content and service providers rather than that of the users. This leads us to glimpse through the prospective method that highly discriminatory and anti-neutral scenarios will ultimately be characterized by individualized pricing.

2011

The Federal Communications Commission's Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications. This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC's rules are likely to be declared beyond the scope of the agency's charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internet's current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business modelsand vertical integrationat will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust's per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commission's attempt to justify its new policy simply ignores compelling evidence that -open access‖ regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one studynot of the broadband marketto support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anticompetitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCC's economic analysis of net neutrality.

Journal of Competition Law & Economics, 2006

Network neutrality" is the shorthand for a proposed regime of economic regulation for the Internet. Because of the trend to deliver traditional telecommunications services, as well as new forms of content and applications, by Internet protocol (IP), a regime of network neutrality regulation would displace or subordinate a substantial portion of existing telecommunications regulation. If the United States adopts network neutrality regulation, other industrialized nations probably will soon follow. As a result of their investment to create next-generation broadband networks, network operators have the ability to innovate inside the network by offering both senders and receivers of information greater bandwidth and prioritization of delivery. Network neutrality regulation would, among other things, prevent providers of broadband Internet access service (such as digital subscriber line (DSL) or cable modem service) from offering a guaranteed, expedited delivery speed in return for the payment of a fee. The practical effect of banning such differential pricing (called "access tiering" by its critics) would be to prevent the pricing of access to content or applications providers according to priority of delivery. To the extent that an advertiser of a good or service would be willing to contract with a network operator for advertising space on the network operator's affiliated content, another practical effect of network neutrality regulation would be to erect a barrier to vertical integration of network operators into advertising-based business models that could supplement or replace revenues earned from their existing usage-based business models. Moreover, by making end-users pay for the full cost of broadband access, network neutrality regulation would deny broadband access to the large number of consumers who would not be able to afford, or who would not have a willingness to pay for, what would otherwise be less expensive access. For example, Google is planning to offer broadband access to end-users for free in San Francisco by charging other content providers for advertising. This product offering is evidently predicated on the belief that many end-users demand discounted or free broadband access that is paid for by parties other

2011

This paper studies economic utilities and quality of service (QoS) in a two-sided non-neutral market where Internet service providers (ISPs) charge content providers (CPs) for the content delivery. We propose new models that involve a CP, an ISP, end users and advertisers. The CP may have either a subscription revenue model (charging end users) or an advertisement revenue model (charging advertisers).

2013

ABSTRACT. This paper develops a game-theoretic model based on a two-sided market framework to com-pare Internet service providers ’ (ISPs) investment incentives, content providers ’ (CPs) participation, and social welfare between neutral and non-neutral network regimes. We find that ISPs ’ investments are driven by the trade-off between softening consumer price competition and increasing revenues from CPs. Specifically, in-vestments are higher in the non-neutral regime because it is easier to extract revenue through appropriate CP pricing. On the other hand, participation of CPs may be reduced in a non-neutral network due to higher prices. The net impact of non-neutrality on social welfare is determined by which of these two effects is dominant. Overall, we find that the non-neutral network is always welfare superior in a “walled-gardens ” model, while the neutral network is superior in a “priority lanes ” model when CP-quality heterogeneity is large. These results provide useful in...

International Journal of Communication, 2007

Several factors suggest that meaningful network neutrality rules will not be enshrined in near-term U.S. telecommunications policy. These include disagreements over the need for such rules as well as their definition, efficacy and enforceability. However, as van Schewick (2005) 1 has demonstrated in the context of the Internet, network providers may have economic incentives to discriminate in welfare-reducing ways; in addition, network operators may continue to possess market power, particularly with respect to a terminating monopoly. 2 On the other hand, the literature on two-sided markets, 3 the challenge of cost-recovery in the presence of significant fixed and sunk costs, and the changing nature of Internet traffic all provide efficiency-enhancing rationales for

Journal of Competition Law and Economics, 2015

On February 26, 2015, the Federal Communications Commission (FCC) issued new regulations for the Internet. A significant stated motivation for these regulations is the protection and promotion of the quality of Internet service. This paper provides information about the evolution of the quality of Internet service, providing context for this central stated motivation of Internet regulation, including the merits of rules restricting payments by content providers for priority treatment of certain Internet traffic. The history of the FCC's Internet regulations (or lack thereof) is reviewed, the main arguments for and against imposing ex ante price regulation on Internet Service Providers (ISPs) are outlined, and data on industry performance, particularly subscribership levels in general and at substantially increasing speeds in particular, are described. This experience indicates that apparent insufficiencies in competitive alternatives at the fastest available speeds have been ameliorated in fairly short order by new offerings by multiple ISPs. These findings strongly suggest that basing new restrictions on a putative dearth of competition for recently available service levels and transmission speeds is likely to be overtaken by technological and market developments, rendering such ex ante rules superfluous, at best, and counterproductive to competition and innovation, at worst.

Journal of Communications

Several factors suggest that meaningful network neutrality rules will not be enshrined in near-term U.S. telecommunications policy. These include disagreements over the need for such rules as well as their definition, efficacy and enforceability. However, as van Schewick 1 has demonstrated in the context of the Internet, network providers may have economic incentives to discriminate in welfare-reducing ways; in addition, network operators may continue to possess market power, particularly with respect to a terminating monopoly. 2 On the other hand, the literature on two-sided markets, 3 the challenge of cost-recovery in the presence of significant fixed and sunk costs, and the changing nature of Internet traffic all provide efficiency-enhancing rationales for discriminatory pricing and traffic management. Thus, policy-makers face a daunting challenge: discriminatory behavior is likely to occur and distinguishing between good and bad discriminatory behavior is difficult.

International Journal of Communication, 2007

At the heart of the network neutrality debate is a challenging institutional design problem: the selection of a regime to govern the relations between the stakeholders in the complex value net of advanced communication services, most importantly between platform operators and providers of applications and content. How it is resolved will have far-reaching effects on the future evolution of communication industries. A wide spectrum of arrangements to structure these relations is possible, ranging from a minimally restrictive antitrust approach to highly constraining rules and regulations in a framework of full regulation. Based on a stylized model, the paper examines the innovation incentives of platform operators and content providers in next-generation networks under three scenarios: (1) absence of network neutrality rules, (2) various non-discrimination rules, and (3) full regulation. The discussion reveals that no panacea exists to address the potential problems raised by the network neutrality debate. Alternative specifications of rules will result in different innovation trajectories at the platform and content layers and the system overall. Given the lack of knowledge and the high degree of uncertainty, a strategy of monitoring, combined with a willingness and authorization to intervene if a pattern of abuse becomes visible, seems to be the most appropriate immediate step forward. I. Introduction At the heart of the network neutrality debate is a challenging institutional design problem: the selection of a regime to govern the relations between the stakeholders in the complex value net of advanced communication services, most importantly between platform operators and providers of applications and content. How it is resolved will probably have far-reaching effects on the future evolutionary path of communication industries. A wide spectrum of arrangements to structure this

SSRN Electronic Journal, 2000

We analyze the effects of networks offering and charging for premium transmission service, which is central to the net neutrality debate. We find that when a network provider optimally charges for and provides premium transmission for content providers, innovation is stimulated on the edges of the network and smaller content providers benefit more than do larger content providers. Furthermore, we show that the network provider increases its investment in network capacity when it offers premium transmission without degrading service for content providers that do not purchase the premium service. Also the number of network subscribers increases.

The RAND Journal of Economics, 2010

This paper analyzes the e¤ects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP's decision on the introduction of discrimination across content depends on a potential trade-o¤ between network access fee and the revenue from the trade of the …rst-priority. Concerning the ISP's investment incentives, we …nd that capacity expansion a¤ects the sale price of the priority right under the discriminatory regime. Because the relative merit of the …rst priority, and thus its value, becomes relatively small for higher capacity levels, the ISP's incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction e¤ects do not exist. Contrary to ISPs'claims that net neutrality regulations would have a chilling e¤ect on their incentive to invest, we cannot dismiss the possibility of the opposite. JEL Classi…cation: D4, L12, L4, L43, L51, L52

2010

SSRN Electronic Journal, 2000

In this POLICY BULLETIN, we evaluate Network Neutrality proposals from the standpoint of consumer welfare and economic efficiency by presenting a cost/benefit analysis framework for examining the effect on consumers of Network Neutrality proposals that would limit operators from injecting intelligence into broadband Internet access networks. For a Network Neutrality proposal to be justified, the purported benefits of that proposal must exceed the costs, including the inefficiency in network design as well as the risk of increased industry concentration and market power. Publicly available cost studies show that if IP video services increase in popularity, the cost of providing a residential subscriber a "stupid" network that is video-capable could reach $300 to $400 per month more than an "intelligent" network, which would certainly put broadband out of the reach of many Americans. We also present a simple model which shows that voluntary investments in network efficiency always improve consumer and social welfare-even if, as some Network Neutrality proponents contend, stupid networks are otherwise preferred by consumers.

Telecommunications Policy, 2013

This paper is intended as an introduction to the debate on net neutrality and as a progress report on the growing body of academic literature on this issue. Different non-net neutrality scenarios are discussed and structured along the two dimensions of network and pricing regime. With this approach, the consensus on the benefits of a deviation from the status quo as well as the concerns that are unique to certain non-net neutrality scenarios can be identified. Moreover, a framework for policy decisions is derived and it is discussed how the concept of neutrality extends to other parts of the Internet ecosystem.