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Net Neutrality and Internet Fragmentation: The Role of Online Advertising

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  • Anna D'Annunzio
  • Antonio Russo

Abstract

We investigate the relation between Net Neutrality regulation and Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs), and CPs sell consumers’ attention to advertisers. Under Net Neutrality, a zero-price rule is enforced. By contrast, in the Unregulated Regime, ISPs make access to their subscribers for CPs conditional on payment of a termination fee. Multiple impressions of an ad on the same consumer are partially wasteful. Thus, equilibrium ad rates decrease when audiences overlap. We show that ISPs may strategically set termination fees to induce fragmentation. This takes place when advertising revenues are potentially large but strongly diminished by competition among CPs, and when consumers are not highly sensitive to content availability. We therefore identify an important link between termination fees, the online advertising market and Internet fragmentation. We extend the model to account for multi-homing consumers, vertically integrated ISPs, third-party advertising platforms and heterogeneous CPs.

Suggested Citation

  • Anna D'Annunzio & Antonio Russo, 2015. "Net Neutrality and Internet Fragmentation: The Role of Online Advertising," CESifo Working Paper Series 5467, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5467
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. repec:eee:indorg:v:52:y:2017:i:c:p:358-392 is not listed on IDEAS

    More about this item

    Keywords

    net neutrality; two-sided markets; internet; advertising; fragmentation;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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

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