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The Debate on Net Neutrality: A Policy Perspective

Author

Listed:
  • Hsing Kenneth Cheng

    (Department of Information Systems and Operations Management, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Subhajyoti Bandyopadhyay

    (Department of Information Systems and Operations Management, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Hong Guo

    (Department of Management, Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

Abstract

The status quo of prohibiting broadband service providers from charging websites for preferential access to their customers---the bedrock principle of net neutrality (NN)---is under fierce debate. We develop a game-theoretic model to address two critical issues of NN: (1) Who are gainers and losers of abandoning NN? (2) Will broadband service providers have greater incentive to expand their capacity without NN? We find that if the principle of NN is abolished, the broadband service provider stands to gain from the arrangement, as a result of extracting the preferential access fees from content providers. Content providers are thus left worse off, mirroring the stances of the two sides in the debate. Depending on parameter values in our framework, consumer surplus either does not change or is higher in the short run. When compared to the baseline case under NN, social welfare in the short run increases if one content provider pays for preferential treatment but remains unchanged if both content providers pay. Finally, we find that the incentive to expand infrastructure capacity for the broadband service provider and its optimal capacity choice under NN are higher than those under the no-net-neutrality (NNN) regime, except in some specific cases. Under NN, the broadband service provider always invests in broadband infrastructure at the socially optimal level but either under- or overinvests in infrastructure capacity in the absence of NN.

Suggested Citation

  • Hsing Kenneth Cheng & Subhajyoti Bandyopadhyay & Hong Guo, 2011. "The Debate on Net Neutrality: A Policy Perspective," Information Systems Research, INFORMS, vol. 22(1), pages 60-82, March.
  • Handle: RePEc:inm:orisre:v:22:y:2011:i:1:p:60-82
    DOI: 10.1287/isre.1090.0257
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    References listed on IDEAS

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    4. 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.
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