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Net Neutrality and Investment Incentives

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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. Classification-JEL: D4, L12, L4, L43, L51, L52

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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 08-03.

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Length: 37 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:net:wpaper:0803

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Web page: http://www.NETinst.org/

Related research

Keywords: Net Neutrality; Investment (Innovation) Incentives; Queuing Theory; Hold-up Problem; Two-sided Markets; Vertical Integration;

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Citations

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Cited by:
  1. repec:pra:mprapa:42457 is not listed on IDEAS
  2. Economides, Nicholas, 2010. "Broadband Openness Rules Are Fully Justified by Economic Research," Working paper 604, Regulation2point0.
  3. 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).
  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. Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-45, NET Institute, revised Nov 2007.
  6. Mark Armstrong & Jidong Zhou, 2011. "Paying for Prominence," Economic Journal, Royal Economic Society, vol. 121(556), pages F368-F395, November.
  7. 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.
  8. 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).
  9. Choi, Jay & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," IDEI Working Papers 753, Institut d'Économie Industrielle (IDEI), Toulouse.
  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. Choi, Jay & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," TSE Working Papers 12-355, Toulouse School of Economics (TSE).
  12. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
  13. Laura Nurski, 2012. "Net Neutrality, Foreclosure and the Fast Lane: An empirical study of the UK," Working Papers 12-13, NET Institute.
  14. 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).
  15. Alexandre de Cornière & Greg Taylor, 2013. "Integration and Search Engine Bias," Economics Series Working Papers 651, University of Oxford, Department of Economics.

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