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Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality

  • Robin S. Lee
  • Tim Wu

This paper focuses on the pricing aspect of the "net neutrality" debate -- in particular, the de facto ban on fees levied by Internet service providers on content providers to reach users. This "zero-price" rule may prove desirable for several reasons. Using a two-sided market analysis, we suggest that it subsidizes creativity and innovation in new content creation -- goals shared by copyright and patent laws. The rule also helps to solve a coordination problem: since Internet service providers do not completely internalize the effects of their own pricing decisions, lack of regulation may lead to even higher fees charged by all. Finally, allowing for such fees runs the risk of creating horizontally differentiated Internet service providers with different libraries of accessible content, thereby foreclosing consumers and leading to Internet fragmentation.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.61
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 23 (2009)
Issue (Month): 3 (Summer)
Pages: 61-76

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Handle: RePEc:aea:jecper:v:23:y:2009:i:3:p:61-76
Note: DOI: 10.1257/jep.23.3.61
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  1. 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.
  2. Economides, Nicholas & Tåg, Joacim, 2008. "Network Neutrality on the Internet: A Two-sided Market Analysis," Working Paper Series 727, Research Institute of Industrial Economics, revised 09 Nov 2011.
  3. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-19, September.
  4. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  5. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
  7. Farrell, Joseph & Weiser, Philip J., 2003. "Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age," Competition Policy Center, Working Paper Series qt5ps3f7p9, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  8. Landes, William M & Posner, Richard A, 1989. "An Economic Analysis of Copyright Law," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 325-63, June.
  9. Jean Tirole & Jean-Charles Rochet, 2006. "Two-Sided Markets : A Progress Report," Post-Print hal-00173715, HAL.
  10. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  11. repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
  12. Robin S. Lee, 2007. "Vertical Integration and Exclusivity in Two-Sided Markets," Working Papers 07-39, NET Institute, revised Aug 2012.
  13. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  14. Wright, Julian, 2004. "Pricing access to Internet service providers," Information Economics and Policy, Elsevier, vol. 16(3), pages 459-473, September.
  15. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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