Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate
AbstractWe model the main arguments of the net neutrality debate in a two-sided market framework with network congestion sensitive content providers and Internet consumers on each side, respectively. The platform is controlled by a monopolistic Internet service provider, who may choose to sell content providers prioritized access to its customers. We explicitly consider the adverse effects of traffic prioritization to the remaining best-effort class and find that network discrimination has overall positive effects on welfare, because congestion is better allocated to those content providers with congestion inelastic advertisement revenues. In the long-run, network discrimination leads to infrastructure investments in transmission capacity and encourages innovation on the content provider side. In the short-run, however, discrimination has no effect on innovation because the ISP expropriates the content providers' increased surplus through the price for priority access. This is the downside of network discrimination: Albeit total welfare is increased, content providers will--at least in the short-run--be worse off than under network neutrality.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16655.
Date of creation: 05 Aug 2009
Date of revision:
Telecommunication; Network Neutrality; Two-Sided Market; Traffic Prioritization; Innovation; Broadband Investment;
Find related papers by JEL classification:
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
- D4 - Microeconomics - - Market Structure and Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-16 (All new papers)
- NEP-COM-2009-08-16 (Industrial Competition)
- NEP-INO-2009-08-16 (Innovation)
- NEP-MIC-2009-08-16 (Microeconomics)
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