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

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  • Robin S. Lee
  • Tim Wu

Abstract

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.

Suggested Citation

  • Robin S. Lee & Tim Wu, 2009. "Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 61-76, Summer.
  • 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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    References listed on IDEAS

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    1. 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.
    2. Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, pages 2960-3000.
    3. Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, pages 91-104.
    4. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    5. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, pages 645-667.
    6. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
    7. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, pages 309-328.
    8. Landes, William M & Posner, Richard A, 1989. "An Economic Analysis of Copyright Law," The Journal of Legal Studies, University of Chicago Press, pages 325-363.
    9. Wright, Julian, 2004. "Pricing access to Internet service providers," Information Economics and Policy, Elsevier, vol. 16(3), pages 459-473, September.
    10. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, pages 1-21.
    11. 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 822-841, August.
    12. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
    13. repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
    14. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, pages 1-19.
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    More about this item

    JEL classification:

    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • L88 - Industrial Organization - - Industry Studies: Services - - - Government Policy
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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