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Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality

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Author Info

  • Robin S. Lee
  • Tim Wu

Abstract

This paper focuses on the pricing aspect of the "net neutrality" debate -- in particular, the de facto ban on fees levied by Internet service providers on content providers to reach users. This "zero-price" rule may prove desirable for several reasons. Using a two-sided market analysis, we suggest that it subsidizes creativity and innovation in new content creation -- goals shared by copyright and patent laws. The rule also helps to solve a coordination problem: since Internet service providers do not completely internalize the effects of their own pricing decisions, lack of regulation may lead to even higher fees charged by all. Finally, allowing for such fees runs the risk of creating horizontally differentiated Internet service providers with different libraries of accessible content, thereby foreclosing consumers and leading to Internet fragmentation.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.61
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 23 (2009)
Issue (Month): 3 (Summer)
Pages: 61-76

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Handle: RePEc:aea:jecper:v:23:y:2009:i:3:p:61-76

Note: DOI: 10.1257/jep.23.3.61
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References

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  1. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
  2. Chris Edmond, 2007. "Information Revolutions and the Overthrow of Autocratic Regimes," Working Papers 07-26, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Farrell, Joseph & Weiser, Philip J., 2003. "Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age," Competition Policy Center, Working Paper Series qt5ps3f7p9, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  4. repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
  5. Hemphill, C. Scott, 2008. "Network Neutrality and the False Promise of Zero-Price Regulation," Working paper 560, Regulation2point0.
  6. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  7. Landes, William M & Posner, Richard A, 1989. "An Economic Analysis of Copyright Law," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 325-63, June.
  8. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  9. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
  10. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-19, September.
  11. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  12. Wright, Julian, 2003. "One-Sided Logic in Two-Sided Markets," Working paper 382, Regulation2point0.
  13. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  14. Wright, Julian, 2004. "Pricing access to Internet service providers," Information Economics and Policy, Elsevier, vol. 16(3), pages 459-473, September.
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Citations

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Cited by:
  1. Shin, Donghee, 2013. "Governing network neutrality: Public perception and policy capacity," 24th European Regional ITS Conference, Florence 2013 88540, International Telecommunications Society (ITS).
  2. Economides, Nicholas, 2010. "Broadband Openness Rules Are Fully Justified by Economic Research," Working paper 604, Regulation2point0.
  3. Nicolas Curien, 2013. "Net Neutrality is Imperfect and Should Remain So!," EUI-RSCAS Working Papers 22, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  4. Laura Nurski, 2012. "Net Neutrality, Foreclosure and the Fast Lane: An empirical study of the UK," Working Papers 12-13, NET Institute.
  5. Ingo Vogelsang, 2013. "The Endgame of Telecommunications Policy? A Survey," CESifo Working Paper Series 4545, CESifo Group Munich.
  6. Wulf, Jochen & Limbach, Felix & Zarnekow, Rüdiger, 2010. "Analysis of QoS Platform Cooperation Strategies," 21st European Regional ITS Conference, Copenhagen 2010: Telecommunications at new crossroads - Changing value configurations, user roles, and regulation 39, International Telecommunications Society (ITS).
  7. Marc LEBOURGES & Claudia SAAVEDRA, 2011. "Lights and Shadows from Economic Analysis on Net Neutrality and Internet Pricing Policies," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(84), pages 75-92, 4th quart.
  8. Choi, Jay & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," IDEI Working Papers 753, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Krämer, Jan & Wiewiorra, Lukas, 2009. "Network neutrality and congestion sensitive content providers: Implications for content variety, broadband investment and regulation," MPRA Paper 42519, University Library of Munich, Germany, revised 15 Jan 2012.
  10. repec:pra:mprapa:42457 is not listed on IDEAS
  11. Nicolas Curien, 2013. "Net Neutrality is Imperfect and Should Remain So!," RSCAS Working Papers 2013/22, European University Institute.
  12. Stocker, Volker, 2013. "On the weal and woe of internet traffic management in Europe: A critical appraisal from a network economic perspective," 24th European Regional ITS Conference, Florence 2013 88542, International Telecommunications Society (ITS).
  13. Daeho Lee & Junseok Hwang, 2011. "The Effect of Network Neutrality on the Incentive to Discriminate, Invest and Innovate: A Literature Review," TEMEP Discussion Papers 201184, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Nov 2011.
  14. Anna D'Annunzio & Antonio Russo, 2013. "Network Neutrality, Access to Content and Online Advertising," RSCAS Working Papers 2013/57, European University Institute.
  15. Carlo Reggiani & Tommaso Valletti, 2012. "Net neutrality and innovation at the core and at the edge," The School of Economics Discussion Paper Series 1202, Economics, The University of Manchester.
  16. Jonathan Baker & Mark Bykowsky & Patrick DeGraba & Paul LaFontaine & Eric Ralph & William Sharkey, 2011. "The Year in Economics at the FCC, 2010–11: Protecting Competition Online," Review of Industrial Organization, Springer, vol. 39(4), pages 297-309, December.

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