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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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References

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  1. 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.
  2. Tommaso M. Valletti & Carlo Cambini, 2005. "Investments and Network Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 446-468, Summer.
  3. Chris Edmond, 2007. "Information Revolutions and the Overthrow of Autocratic Regimes," Working Papers 07-26, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  5. 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.
  6. Lawrence J. White, 2007. "Reducing Barriers to Services Trade: The U.S. Case," Working Papers 07-8, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. repec:rje:randje:v:37:y:2006:1:p:121-133 is not listed on IDEAS
  8. repec:att:wimass:9508 is not listed on IDEAS
  9. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February.
  10. Edelson, Noel M & Hildebrand, David K, 1975. "Congestion Tolls for Poisson Queuing Processes," Econometrica, Econometric Society, vol. 43(1), pages 81-92, January.
  11. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, 03.
  12. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  13. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
  14. K. R. Balachandran, 1972. "Purchasing Priorities in Queues," Management Science, INFORMS, vol. 18(5-Part-1), pages 319-326, January.
  15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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