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Surplus extraction by network providers: Implications for net neutrality and innovation

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  • Shrimali, Gireesh
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    Abstract

    This paper looks at surplus extraction by network providers who control the medium of information transfer between application developers and consumers, and addresses the following questions: is net neutrality beneficial to society? and does providing network providers flexibility in pricing stunt innovation in the long run? To answer the first question, it looks at a market consisting of a monopoly network provider and two application providers with non-substitutable products, using a simple single period model. It shows that net neutrality is necessary to ensure maximal benefit to the society. To answer the second question, the paper shows that a monopoly network provider, if allowed complete flexibility in pricing, does not necessarily stunt innovation. Looking at a market that consists of one network provider and one application provider, and using a simple multi-period model, it shows that given maximum flexibility the network provider not only encourages innovation when the potential benefits are sufficiently high but also maximizes surplus. This paper takes the view that the topic of net neutrality is not only controversial but also complicated, and suggests that policy makers use a balanced approach based on sound analysis.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0308596108000700
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    Bibliographic Info

    Article provided by Elsevier in its journal Telecommunications Policy.

    Volume (Year): 32 (2008)
    Issue (Month): 8 (September)
    Pages: 545-558

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    Handle: RePEc:eee:telpol:v:32:y:2008:i:8:p:545-558

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    Related research

    Keywords: Net neutrality Surplus extraction Innovation Dynamic effects Internet Stackelberg game;

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    Cited by:
    1. Bauer, Johannes M. & Obar, Jonathan & Koh, Taejin, 2011. "Disentangling economic and political goals in the net neutrality debate," 22nd European Regional ITS Conference, Budapest 2011: Innovative ICT Applications - Emerging Regulatory, Economic and Policy Issues 52187, International Telecommunications Society (ITS).
    2. 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).
    3. Hau, Thorsten & Burghardt, Dirk & Brenner, Walter, 2011. "Multihoming, content delivery networks, and the market for Internet connectivity," Telecommunications Policy, Elsevier, vol. 35(6), pages 532-542, July.
    4. 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.
    5. Shin, Dong-Hee, 2012. "A case study of network neutrality in Korea," 23rd European Regional ITS Conference, Vienna 2012 60383, International Telecommunications Society (ITS).
    6. Shin, Donghee, 2013. "Governing network neutrality: Public perception and policy capacity," 24th European Regional ITS Conference, Florence 2013 88540, International Telecommunications Society (ITS).

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