Modeling the welfare effects of net neutrality regulation: A Comment on Economides and Tåg
In a recent article in Information Economics and PolicyEconomides and Tåg (2012), analyze a theoretical model of two-sided markets designed to assess the welfare effects of net neutrality. According to the model, the only unambiguous beneficiaries of net neutrality regulation are content providers. Consumers are unambiguously worse off under net neutrality, while the effect on platform operators is ambiguous. In the aggregate, net neutrality may be either surplus-enhancing or surplus-reducing, because the gains to content providers (and possibly platform operators) may or may not outweigh the losses to consumers (and possibly platform operators), depending on whether certain parameter restrictions are satisfied. However, these restrictions are difficult to interpret, given that the structural parameters lack real-world analogs. In this Comment, I demonstrate that the assumptions underlying the authors’ surplus-enhancing result imply a straightforward and testable hypothesis. Specifically, I show that the ratio of aggregate content provider profits to aggregate platform operator profits must be strictly less than 0.4 under net neutrality for the surplus-enhancing result to hold. For many parameter values, the upper bound to the profit ratio is significantly lower. Finally, I provide a brief empirical assessment of the relative profitability of content providers and ISPs. The balance of the empirical evidence reviewed provides little basis for assuming that the relative profitability constraint implied by the model is satisfied in practice.
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- repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
- Nicholas Economides & Joacim Tåg, 2007.
"Net Neutrality on the Internet: A Two-sided Market Analysis,"
07-45, NET Institute, revised Nov 2007.
- Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, vol. 24(2), pages 91-104.
- 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.
- Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-14, NET Institute, revised Sep 2007.
- 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.
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