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Net neutrality and inflation of traffic

Author

Listed:
  • Peitz, Martin
  • Schuett, Florian

Abstract

Under strict net neutrality Internet service providers (ISPs) are required to carry data without any differentiation and at no cost to the content provider. We provide a simple framework with a monopoly ISP to evaluate the short-run effects of different net neutrality rules. Content differs in its sensitivity to delay. Content providers can use congestion control techniques to reduce delay for their content, but do not take into account the effect of their decisions on the aggregate volume of traffic. As a result, strict net neutrality often leads to socially inefficient allocation of traffic and traffic inflation. We show that piece-meal departures from net neutrality, such as transmission fees or prioritization based on sensitivity to delay, do not necessarily improve efficiency. However, the ISP implements the efficient allocation when allowed to introduce bandwidth tiering and charge for prioritized delivery.

Suggested Citation

  • Peitz, Martin & Schuett, Florian, 2016. "Net neutrality and inflation of traffic," International Journal of Industrial Organization, Elsevier, vol. 46(C), pages 16-62.
  • Handle: RePEc:eee:indorg:v:46:y:2016:i:c:p:16-62
    DOI: 10.1016/j.ijindorg.2016.03.003
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    References listed on IDEAS

    as
    1. Marc Bourreau & Frago Kourandi & Tommaso Valletti, 2015. "Net Neutrality with Competing Internet Platforms," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 30-73, March.
    2. Peitz, Martin & Reisinger, Markus, 2014. "The Economics of Internet Media," Working Papers 14-23, University of Mannheim, Department of Economics.
    3. Nicholas Economides & Benjamin E. Hermalin, 2012. "The economics of network neutrality," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 602-629, December.
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    5. Jan Krämer & Lukas Wiewiorra, 2012. "Network Neutrality and Congestion Sensitive Content Providers: Implications for Content Variety, Broadband Investment, and Regulation," Information Systems Research, INFORMS, vol. 23(4), pages 1303-1321, December.
    6. Jay Pil Choi & Doh-Shin Jeon & Byung-Cheol Kim, 2013. "Asymmetric Neutrality Regulation and Innovation at the Edges: Fixed vs. Mobile Networks," Working Papers 13-24, NET Institute.
    7. Simon P. Anderson & André de Palma, 2009. "Information congestion," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 688-709.
    8. Timothy Van Zandt, 2004. "Information Overload in a Network of Targeted Communication," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 542-560, Autumn.
    9. Frago Kourandi & Jan Krämer & Tommaso Valletti, 2015. "Net Neutrality, Exclusivity Contracts, and Internet Fragmentation," Information Systems Research, INFORMS, vol. 26(2), pages 320-338, June.
    10. Jay Pil Choi & Byung-Cheol Kim, 2010. "Net neutrality and investment incentives," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 446-471.
    11. Simon P. Anderson & Stephen Coate, 2005. "Market Provision of Broadcasting: A Welfare Analysis," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 947-972.
    12. Hermalin, Benjamin E. & Katz, Michael L., 2007. "The economics of product-line restrictions with an application to the network neutrality debate," Information Economics and Policy, Elsevier, vol. 19(2), pages 215-248, June.
    13. Bruno Jullien & Wilfried Sand-Zantman, 2014. "Pricing Internet Traffic: Exclusion, Signalling and Screening," CESifo Working Paper Series 4709, CESifo Group Munich.
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    Citations

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    Cited by:

    1. Jullien, Bruno & Sand-Zantman, Wilfried, 2018. "Internet regulation, two-sided pricing, and sponsored data," International Journal of Industrial Organization, Elsevier, vol. 58(C), pages 31-62.
    2. repec:bla:jindec:v:66:y:2018:i:1:p:172-204 is not listed on IDEAS
    3. Shane Greenstein & Martin Peitz & Tommaso Valletti, 2016. "Net Neutrality: A Fast Lane to Understanding the Trade-Offs," Journal of Economic Perspectives, American Economic Association, vol. 30(2), pages 127-150, Spring.
    4. José Marino García García & Aurelia Valiño Castro & A. Jesús Sánchez Fuentes, 2016. "Price discrimination of ott providers under duopolistic competition and multi-dimmesional product differentiation in retail broadband access," Working Papers. Collection A: Public economics, governance and decentralization 1607, Universidade de Vigo, GEN - Governance and Economics research Network.
    5. repec:eee:indorg:v:52:y:2017:i:c:p:358-392 is not listed on IDEAS
    6. Jullien, Bruno & Sand-Zantman, Wilfried, 2014. "Pricing Internet Traffic: Exclusion, Signalling and Screening," CEPR Discussion Papers 9896, C.E.P.R. Discussion Papers.
    7. Reggiani, Carlo & Valletti, Tommaso, 2016. "Net neutrality and innovation at the core and at the edge," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 16-27.
    8. Jay Pil Choi & Doh†Shin Jeon & Byung†Cheol Kim, 2018. "Net Neutrality, Network Capacity, and Innovation at the Edges," Journal of Industrial Economics, Wiley Blackwell, vol. 66(1), pages 172-204, March.
    9. Daniel Goetz, 2016. "Broadband Mergers and Dynamic Bargaining: An Application to Netflix," Working Papers 16-07, NET Institute.
    10. Peitz, Martin & Reisinger, Markus, 2014. "The Economics of Internet Media," Working Papers 14-23, University of Mannheim, Department of Economics.
    11. repec:kap:revind:v:50:y:2017:i:4:d:10.1007_s11151-016-9552-x is not listed on IDEAS
    12. Jay Pil Choi & Doh-Shin Jeon & Byung-Cheol Kim, 2013. "Asymmetric Neutrality Regulation and Innovation at the Edges: Fixed vs. Mobile Networks," Working Papers 13-24, NET Institute.

    More about this item

    Keywords

    Net neutrality; Network congestion; Telecommunications; Quality of service;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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