Net Neutrality and Investment Incentives
AbstractThis 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. Classification-JEL: D4, L12, L4, L43, L51, L52
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 08-03.
Length: 37 pages
Date of creation: Sep 2008
Date of revision:
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Web page: http://www.NETinst.org/
Net Neutrality; Investment (Innovation) Incentives; Queuing Theory; Hold-up Problem; Two-sided Markets; Vertical Integration;
Other versions of this item:
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
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