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Investment in quality upgrade and regulation of the internet

Author

Listed:
  • Edmond Baranes

    (University of Montpellier)

  • Cuong Hung Vuong

    (University of Montpellier)

Abstract

This paper studies the investment decision by a monopolistic internet service provider (ISP) in different regulatory environments. We consider that the ISP can technically provide separate quality upgrades to two vertically differentiated content providers (CPs). Our results show that if unregulated, the ISP could optimally provide asymmetric quality upgrades to both CPs, in favor of the high-quality CP. This subsequently increases the degree of content differentiation, softening competition between the CPs. Imposing a nondiscrimination regulation that forces the ISP to provide an equal quality upgrade to both CPs, however, reduce the ISP’s investment incentive and social welfare. Furthermore, the social planner provides preferential treatment to the high-quality CP if the degree of substitutability is sufficiently low. In contrast, it is socially optimal to prioritize the low-quality CP if the contents are sufficient substitutes, or provide exclusivity if vertical differentiation is high.

Suggested Citation

  • Edmond Baranes & Cuong Hung Vuong, 2022. "Investment in quality upgrade and regulation of the internet," Journal of Regulatory Economics, Springer, vol. 61(1), pages 1-31, February.
    • Handle: RePEc:kap:regeco:v:61:y:2022:i:1:d:10.1007_s11149-021-09441-4
    DOI: 10.1007/s11149-021-09441-4
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    More about this item

    Keywords

    Complementarity; Differentiation; Investment; Internet; Regulation;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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