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The economics of product-line restrictions with an application to the network neutrality debate

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  • Hermalin, Benjamin E.
  • Katz, Michael L.

Abstract

We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We find that restricting a monopoly supplier to a single product has the following effects: (a) consumers who would otherwise have consumed a low-quality variant are excluded from the market; (b) consumers "in the middle" of the market consume a higher and more efficient quality; and (c) consumers at the top of the market consume a lower and less efficient quality. Total surplus may rise or fall. We also examine a duopoly model and find that imposition of a single-product restriction always reduces welfare. Absent the restriction, the two firms engage in head-to-head competition across full product lines. In some circumstances, the restriction induces the two firms to offer identical products. The resulting loss of variety reduces welfare. In other circumstances, the restriction induces the firms to offer non-overlapping, or vertically differentiated, products. Here, the resulting loss of competition harms both consumers and economic efficiency. Lastly, we find that, to the extent that the regulation is intended to eliminate low-quality products, it may fail. Even though any one firm can offer only a single product, various firms can collectively offer a menu of products.

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Bibliographic Info

Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 19 (2007)
Issue (Month): 2 (June)
Pages: 215-248

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Handle: RePEc:eee:iepoli:v:19:y:2007:i:2:p:215-248

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Web page: http://www.elsevier.com/locate/inca/505549

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References

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Citations

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Cited by:
  1. repec:pra:mprapa:42457 is not listed on IDEAS
  2. 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.
  3. Nicholas ECONOMIDES, 2011. "Broadband Openness Rules Are Fully Justified by Economic Research," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(84), pages 127-151, 4th quart.
  4. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  5. Economides, Nicholas & Tåg, Joacim, 2008. "Network Neutrality on the Internet: A Two-sided Market Analysis," Working Paper Series 727, Research Institute of Industrial Economics, revised 09 Nov 2011.
  6. John Mayo & Scott Wallsten, 2011. "From Network Externalities to Broadband Growth Externalities: a Bridge not yet Built," Review of Industrial Organization, Springer, vol. 38(2), pages 173-190, March.
  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. Nicholas Economides & Joacim Tag, 2011. "Network Neutrality and Network Management Regulation: Quality of Service, Price Discrimination, and Exclusive Contracts," Working Papers 11-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  9. Köksal, Emin, 2010. "Network Neutrality and Quality of Service: A two-sided market analysis," 21st European Regional ITS Conference, Copenhagen 2010: Telecommunications at new crossroads - Changing value configurations, user roles, and regulation 43, International Telecommunications Society (ITS).
  10. 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.
  11. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
  12. Bauer, Johannes M. & Shim, Woohyun, 2012. "Regulation and digital innovation: Theory and evidence," 23rd European Regional ITS Conference, Vienna 2012 60364, International Telecommunications Society (ITS).

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