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Network Neutrality on the Internet: A Two-sided Market Analysis

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Author Info

  • Economides, Nicholas

    ()
    (Stern School of Business)

  • Tåg, Joacim

    ()
    (Research Institute of Industrial Economics (IFN))

Abstract

We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers "on the other side" of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees "on the other side" of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees "on the other side" of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 727.

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Length: 23 pages
Date of creation: 15 Jan 2008
Date of revision: 09 Nov 2011
Publication status: Published as Economides, Nicholas and Joacim Tåg, 'Network Neutrality on the Internet: A Two-sided Market Analysis' in Information Economics and Policy, 2012, pages 91-104.
Handle: RePEc:hhs:iuiwop:0727

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Keywords: Net Neutrality; Two-sided Markets; Internet; Monopoly; Duopoly; Regulation; Discrimination;

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References

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  1. Nicholas Economides & Benjamin E. Hermalin, 2012. "The economics of network neutrality," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 602-629, December.
  2. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
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  4. Yongmin Chen & Scott J Savage, 2011. "The Effects of Competition on the Price for Cable Modem Internet Access," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 201-217, February.
  5. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute.
  6. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  7. Christiaan Hogendorn, 2007. "Broadband Internet: net neutrality versus open access," International Economics and Economic Policy, Springer, vol. 4(2), pages 185-208, August.
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  9. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  10. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  11. Nicholas Economides, 2007. "Nonbanks in the Payments System: Vertical Integration Issues," Working Papers 07-06, NET Institute.
  12. Hermalin, Benjamin E & Katz, Michael L, 2006. "The Economics of Product-Line Restrictions With an Application to the Network Neutrality Debate," Competition Policy Center, Working Paper Series qt81r3b7xs, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  13. Andrei Hagiu, 2009. "Two-Sided Platforms: Product Variety and Pricing Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1011-1043, December.
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  15. Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
  16. Schuett, F., 2010. "Network Neutrality: A Survey of the Economic Literature," Discussion Paper 2010-014, Tilburg University, Tilburg Law and Economic Center.
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  21. Keith M. Chen & Barry Nalebuff, 2006. "One-Way Essential Complements," Levine's Bibliography 321307000000000669, UCLA Department of Economics.
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  28. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
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  30. Jan Kraemer & Lukas Wiewiorra, 2010. "Network Neutrality and Congestion Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation," Working Papers 10-09, NET Institute, revised Sep 2010.
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Citations

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Cited by:
  1. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  2. Caves, Kevin W., 2012. "Modeling the welfare effects of net neutrality regulation: A Comment on Economides and Tåg," Information Economics and Policy, Elsevier, vol. 24(3), pages 288-292.
  3. Nicolas Curien, 2013. "Net Neutrality is Imperfect and Should Remain So!," EUI-RSCAS Working Papers 22, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  4. Nicholas Economides & Benjamin E. Hermalin, 2012. "The economics of network neutrality," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 602-629, December.
  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. Shin, Donghee, 2013. "Governing network neutrality: Public perception and policy capacity," 24th European Regional ITS Conference, Florence 2013 88540, International Telecommunications Society (ITS).
  7. Robin S. Lee & Tim Wu, 2009. "Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 61-76, Summer.
  8. Ingo Vogelsang, 2013. "The Endgame of Telecommunications Policy? A Survey," CESifo Working Paper Series 4545, CESifo Group Munich.
  9. Olga Shurchkov, 2013. "Coordination and learning in dynamic global games: experimental evidence," Experimental Economics, Springer, vol. 16(3), pages 313-334, September.
  10. Baranes, Edmond & Poudou, Jean-Christophe, 2011. "Internet access and investment incentives for broadband service providers," 22nd European Regional ITS Conference, Budapest 2011: Innovative ICT Applications - Emerging Regulatory, Economic and Policy Issues 52196, International Telecommunications Society (ITS).
  11. Isabel Amigo & Pablo Belzarena & Sandrine Vaton, 2013. "A pricing scheme for QoS in overlay networks based on first-price auctions and reimbursement," Netnomics, Springer, vol. 14(1), pages 69-93, November.
  12. Anna D'Annunzio & Antonio Russo, 2013. "Network Neutrality, Access to Content and Online Advertising," DIAG Technical Reports 2013-09, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  13. Helmut Dietl & Markus Lang & Panlang Lin, 2012. "Advertising Pricing Models in Media Markets: Lump-Sum versus Per-Consumer Charges," Working Papers 0157, University of Zurich, Institute for Strategy and Business Economics (ISU).
  14. Hong Guo & Subhajyoti Bandyopadhyay & Hsing K. Cheng, 2009. "Broadband User Discrimination and the Net Neutrality Debate," Working Papers 09-13, NET Institute, revised Aug 2009.
  15. Pier Luigi Parcu, 2013. "Electronic Communications Regulation in Europe: An Overview of Past and Future Problems," RSCAS Working Papers 2013/92, European University Institute.
  16. Chang, Chih-Wei & Lin, Yan-Shu & Ohta, Hiroshi, 2013. "Optimal location in two-sided markets," Economic Modelling, Elsevier, vol. 35(C), pages 743-750.
  17. Nicolas Curien, 2013. "Net Neutrality is Imperfect and Should Remain So!," RSCAS Working Papers 2013/22, European University Institute.

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