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The economics of network neutrality

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  • Nicholas Economides
  • Benjamin E. Hermalin

Abstract

Pricing of Internet access has been characterized by two properties. Parties are directly billed only by the Internet Service Provider (ISP) through which they connect to the Internet and the ISP charges them on the basis of the amount of information transmitted rather than its content. These properties define a regime known as “network neutrality.” In 2005, some large ISPs proposed that application and content providers directly pay them additional fees for accessing the ISPs’ residential clients, as well as differential fees for prioritizing certain content. We analyze the private and social incentives to introduce such fees when the network is congested and more traffic implies delays. We find that network neutrality is welfare superior to bandwidth subdivision (granting or selling priority service). We also consider the welfare properties of the various regimes that have been proposed as alternatives to network neutrality. In particular, we show that the benefit of a zero-price “slow lane” is a function of the bandwidth the regulator mandates be allocated it. Extending the analysis to consider ISPs’ incentives to invest in more bandwidth, we show that, under general conditions, their incentives are greatest when they can price discriminate; this investment incentive offsets to some degree the allocative distortion created by the introduction of price discrimination. A priori, it is ambiguous whether the offset is sufficient to justify departing from network neutrality.

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Bibliographic Info

Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 43 (2012)
Issue (Month): 4 (December)
Pages: 602-629

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Handle: RePEc:bla:randje:v:43:y:2012:i:4:p:602-629

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References

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  1. Jean Tirole, 1985. "Procurement and Renegotiation," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 362, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Duranton, Gilles & Turner, Matthew A, 2009. "The Fundamental Law of Road Congestion: Evidence from US cities," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7462, C.E.P.R. Discussion Papers.
  3. Chris Edmond, 2007. "Information Revolutions and the Overthrow of Autocratic Regimes," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 07-26, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," CESifo Working Paper Series 2390, CESifo Group Munich.
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Citations

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Cited by:
  1. Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, Elsevier, vol. 24(2), pages 91-104.
  2. Edmond Baranes & Jean-Christophe Poudou, 2011. "Internet access and investment incentives for broadband service providers," Working Papers, LAMETA, Universtiy of Montpellier 11-09, LAMETA, Universtiy of Montpellier, revised Apr 2011.
  3. Antonio Russo & Anna D’Annunzio, 2013. "Network Neutrality, Access to Content and Online Advertising," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 13-344, KOF Swiss Economic Institute, ETH Zurich.
  4. Gilroy, Bernard Michael & Vollpert, Tobias, 1999. "Zukunftsperspektiven betriebswirtschaftlicher Forschung im Bereich der Internetökonomie
    [Future perspectives of economic research in the context of internet economics]
    ," MPRA Paper 21086, University Library of Munich, Germany.
  5. Duarte Brito & Pedro Pereira & João Vareda, 2013. "Network Neutrality under ISP duopoly: on the ability to assign capacity," CEFAGE-UE Working Papers 2013_19, University of Evora, CEFAGE-UE (Portugal).
  6. Baglioni, Laura & Calabrese, Armando & Ghiron, Nathan Levialdi, 2013. "Net neutrality at internet backbone provider level," 24th European Regional ITS Conference, Florence 2013 88506, International Telecommunications Society (ITS).

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