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Investment in Two-Sided Markets and the Net Neutrality Debate

Author

Listed:
  • Njoroge Paul
  • Ozdaglar Asuman

    (Laboratory of Information Decision Systems, MIT, Cambridge, MA 02139, USA)

  • Stier-Moses Nicolás E.
  • Weintraub Gabriel Y.

    (Decision, Risk and Operations Division, Columbia Business School, NY 10027, USA)

Abstract

This paper develops a game-theoretic model based on a two-sided market framework to compare 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, investments 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 insights that inform the net-neutrality debate.

Suggested Citation

  • Njoroge Paul & Ozdaglar Asuman & Stier-Moses Nicolás E. & Weintraub Gabriel Y., 2014. "Investment in Two-Sided Markets and the Net Neutrality Debate," Review of Network Economics, De Gruyter, vol. 12(4), pages 355-402, February.
    • Handle: RePEc:bpj:rneart:v:12:y:2014:i:4:p:355-402:n:1
    DOI: 10.1515/rne-2012-0017
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    References listed on IDEAS

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    Cited by:

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