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A Consumer-Welfare Approach To Network Neutrality Regulation Of The Internet

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  • J. Gregory Sidak

Abstract

“Network neutrality” is the shorthand for a proposed regime of economic regulation for the Internet. Because of the trend to deliver traditional telecommunications services, as well as new forms of content and applications, by Internet protocol (IP), a regime of network neutrality regulation would displace or subordinate a substantial portion of existing telecommunications regulation. If the United States adopts network neutrality regulation, other industrialized nations probably will soon follow. As a result of their investment to create next-generation broadband networks, network operators have the ability to innovate inside the network by offering both senders and receivers of information greater bandwidth and prioritization of delivery. Network neutrality regulation would, among other things, prevent providers of broadband Internet access service (such as digital subscriber line (DSL) or cable modem service) from offering a guaranteed, expedited delivery speed in return for the payment of a fee. The practical effect of banning such differential pricing (called “access tiering” by its critics) would be to prevent the pricing of access to content or applications providers according to priority of delivery. To the extent that an advertiser of a good or service would be willing to contract with a network operator for advertising space on the network operator's affiliated content, another practical effect of network neutrality regulation would be to erect a barrier to vertical integration of network operators into advertising-based business models that could supplement or replace revenues earned from their existing usage-based business models. Moreover, by making end-users pay for the full cost of broadband access, network neutrality regulation would deny broadband access to the large number of consumers who would not be able to afford, or who would not have a willingness to pay for, what would otherwise be less expensive access. For example, Google is planning to offer broadband access to end-users for free in San Francisco by charging other content providers for advertising. This product offering is evidently predicated on the belief that many end-users demand discounted or free broadband access that is paid for by parties other than themselves. Proponents of network neutrality regulation argue that such restrictions on the pricing policies of network operators are necessary to preserve innovation on the edges of the network, as opposed to innovation within the network. However, recognizing that network congestion and real-time applications demand some differential pricing according to bandwidth or priority, proponents of network neutrality regulation would allow broadband Internet access providers to charge higher prices to end-users (but not content or applications providers) who consume more bandwidth or who seek priority delivery of certain traffic. Thus, the debate over network neutrality is essentially a debate over how best to finance the construction and maintenance of a broadband network in a two-sided market in which senders and receivers have additive demand for the delivery of a given piece of information—and hence additive willingness to pay. Well-established tools of Ramsey pricing from regulatory economics can shed light on whether network congestion and recovery of sunk investment in infrastructure are best addressed by charging providers of content and applications, broadband users, or both for expedited delivery. Apart from this pricing problem, an analytically simpler component of proposed network neutrality regulation would prohibit a network operator from denying its users access to certain websites and Internet applications, such as voice over Internet protocol (VoIP). Although some instances of blocking of VoIP have been reported, such conduct is not a serious risk to competition. To address this concern, I analyze whether market forces (that is, competition among access providers) and existing regulatory structures are sufficient to protect broadband users. I conclude that economic welfare would be maximized by allowing access providers to differentiate services vis-à-vis providers of content and applications in value-enhancing ways and by relying on existing legal regimes to protect consumers against the exercise of market power, should it exist.

Suggested Citation

  • J. Gregory Sidak, 2006. "A Consumer-Welfare Approach To Network Neutrality Regulation Of The Internet," Journal of Competition Law and Economics, Oxford University Press, vol. 2(3), pages 349-474.
  • Handle: RePEc:oup:jcomle:v:2:y:2006:i:3:p:349-474.
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    File URL: http://hdl.handle.net/10.1093/joclec/nhl016
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    Cited by:

    1. Lee, Daeho & Kim, Yong-Hwa, 2014. "Empirical evidence of network neutrality – The incentives for discrimination," Information Economics and Policy, Elsevier, vol. 29(C), pages 1-9.
    2. Jörn Kruse, 2010. "Priority and Internet Quality," Chapters, in: Morten Falch & Jan Markendahl (ed.), Promoting New Telecom Infrastructures, chapter 10, Edward Elgar Publishing.
    3. repec:vuw:vuwscr:19074 is not listed on IDEAS
    4. D'Ignazio, Alessio & Giovannetti, Emanuele, 2009. "Asymmetry and discrimination in Internet peering: evidence from the LINX," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 441-448, May.
    5. 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.
    6. Carter, Kenneth R. & Marcus, J. Scott & Wernick, Christian, 2008. "Network neutrality: Implications for Europe," WIK Discussion Papers 314, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    7. Robert Hahn & Robert Litan & Hal Singer, 2010. "Addressing the next wave of Internet regulation: Toward a workable principle for nondiscrimination," Regulation & Governance, John Wiley & Sons, vol. 4(3), pages 365-382, September.
    8. Howell, Bronwyn, 2007. "A Pendulous Progression: New Zealand's Telecommunications Regulation 1987-2007," Working Paper Series 3974, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    9. Alison Powell & Alissa Cooper, 2011. "Net neutrality discourses: comparing advocacy and regulatory arguments in the United States and the United Kingdom," LSE Research Online Documents on Economics 39024, London School of Economics and Political Science, LSE Library.
    10. Howell, Bronwyn, 2007. "A Pendulous Progression: New Zealand's Telecommunications Regulation 1987-2007," Working Paper Series 19074, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    11. Martyn Taylor, 2010. "Access Regulation versus Infrastructure Investment: Important Lessons from Australia," Chapters, in: Anastassios Gentzoglanis & Anders Henten (ed.), Regulation and the Evolution of the Global Telecommunications Industry, chapter 3, Edward Elgar Publishing.
    12. Daeho Lee & Junseok Hwang, 2011. "The Effect of Network Neutrality on the Incentive to Discriminate, Invest and Innovate: A Literature Review," TEMEP Discussion Papers 201184, Seoul National University; Technology Management, Economics, and Policy Program (TEMEP), revised Nov 2011.
    13. Hau, Thorsten & Burghardt, Dirk & Brenner, Walter, 2011. "Multihoming, content delivery networks, and the market for Internet connectivity," Telecommunications Policy, Elsevier, vol. 35(6), pages 532-542, July.

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