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Net Neutrality and Investment Incentives

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  • Jay Pil Choi
  • Byung-Cheol Kim

Abstract

This paper analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP’s decision on the introduction of discrimination across content depends on a potential trade-off between network access fee and the revenue from the trade of the first-priority. Concerning the ISP’s investment incentives, we find that capacity expansion affects the sale price of the priority right under the discriminatory regime. Because the relative merit of the first priority, and thus its value, becomes relatively small for higher capacity levels, the ISP’s incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist. Contrary to ISPs’ claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2390.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2390

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Related research

Keywords: net neutrality; investment (innovation) incentives; queuing theory; hold-up problem; two-sided markets; vertical integration;

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  1. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, 03.
  2. 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.
  3. Edelson, Noel M & Hildebrand, David K, 1975. "Congestion Tolls for Poisson Queuing Processes," Econometrica, Econometric Society, vol. 43(1), pages 81-92, January.
  4. Hermalin, Benjamin E. & Katz, Michael, 2007. "The Economics of Product-Line Restrictions With an Application to the Network Neutrality Debate," Working paper 541, Regulation2point0.
  5. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  6. Choi, J.P., 1992. "Optimal Tariffs and the Choice of Technology Discriminatory Tariffs vs. the "Most Favored Nation" Clause," Discussion Papers 1992_46, Columbia University, Department of Economics.
  7. repec:rje:randje:v:37:y:2006:1:p:121-133 is not listed on IDEAS
  8. Tommaso M. Valletti & Carlo Cambini, 2005. "Investments and Network Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 446-468, Summer.
  9. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  10. Economides, Nicholas, 2007. ""Net Neutrality," Non-Discrimination and Digital Distribution of Content Through the Internet," Working paper 446, Regulation2point0.
  11. K. R. Balachandran, 1972. "Purchasing Priorities in Queues," Management Science, INFORMS, vol. 18(5-Part-1), pages 319-326, January.
  12. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  13. Viktória Kocsis & Paul Bijl, 2007. "Network neutrality and the nature of competition between network operators," International Economics and Economic Policy, Springer, vol. 4(2), pages 159-184, August.
  14. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
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