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Network Neutrality on the Internet: A Two-sided Market Analysis

  • Economides, Nicholas

    ()

    (Stern School of Business)

  • Tåg, Joacim

    ()

    (Research Institute of Industrial Economics (IFN))

We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers "on the other side" of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees "on the other side" of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees "on the other side" of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 727.

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Length: 23 pages
Date of creation: 15 Jan 2008
Date of revision: 09 Nov 2011
Publication status: Published as Economides, Nicholas and Joacim Tåg, 'Network Neutrality on the Internet: A Two-sided Market Analysis' in Information Economics and Policy, 2012, pages 91-104.
Handle: RePEc:hhs:iuiwop:0727
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Phone: +46 8 665 4500
Fax: +46 8 665 4599
Web page: http://www.ifn.se/
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  1. Goolsbee Austan, 2006. "The Value of Broadband and the Deadweight Loss of Taxing New Technology," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-31, April.
  2. Nicholas Economides & Evangelos Katsamakas, 2005. "Two-sided competition of proprietary vs. open source technology platforms, and the implications for the software industry," Working Papers 05-02, NET Institute, revised Oct 2005.
  3. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute.
  4. Amelio, Andrea & Jullien, Bruno, 2012. "Tying and freebies in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 436-446.
  5. Rochet Jean-Charles & Tirole Jean, 2003. "An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-11, June.
  6. 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.
  7. Jay Pil Choi & Byung-Cheol Kim, 2010. "Net neutrality and investment incentives," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 446-471.
  8. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  9. Jan Kraemer & Lukas Wiewiorra, 2010. "Network Neutrality and Congestion Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation," Working Papers 10-09, NET Institute, revised Sep 2010.
  10. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  11. Keith M. Chen & Barry Nalebuff, 2006. "One-Way Essential Complements," Levine's Bibliography 321307000000000669, UCLA Department of Economics.
  12. Nicholas Economides, 2007. "Nonbanks in the Payments System: Vertical Integration Issues," Working Papers 07-06, NET Institute.
  13. Nocke, Volker & Peitz, Martin & Stahl, Konrad, 2004. "Platform Ownership," CEPR Discussion Papers 4657, C.E.P.R. Discussion Papers.
  14. Nicholas Economides & Benjamin E. Hermalin, 2012. "The economics of network neutrality," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 602-629, December.
  15. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
  16. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
  17. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  18. Nicholas Economides & Evangelos Katsamakas, 2005. "Linux vs. Windows: A comparison of application and platform innovation incentives for open source and proprietary software platforms+," Working Papers 05-03, NET Institute, revised Sep 2005.
  19. Christiaan Hogendorn, 2007. "Broadband Internet: net neutrality versus open access," International Economics and Economic Policy, Springer, vol. 4(2), pages 185-208, August.
  20. Yongmin Chen & Scott J Savage, 2011. "The Effects of Competition on the Price for Cable Modem Internet Access," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 201-217, February.
  21. Schuett Florian, 2010. "Network Neutrality: A Survey of the Economic Literature," Review of Network Economics, De Gruyter, vol. 9(2), pages 1-15, June.
  22. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  23. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  24. Nicholas Economides, 2007. "Economics of the Internet," Working Papers 07-1, New York University, Leonard N. Stern School of Business, Department of Economics.
  25. Andrei Hagiu, 2009. "Two-Sided Platforms: Product Variety and Pricing Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1011-1043, December.
  26. Jay Pil Choi, 2006. "Tying in Two-Sided Markets with Multi-Homing," Working Papers 06-04, NET Institute, revised Sep 2006.
  27. repec:reg:rpubli:428 is not listed on IDEAS
  28. Musacchio John & Schwartz Galina & Walrand Jean, 2009. "A Two-Sided Market Analysis of Provider Investment Incentives with an Application to the Net-Neutrality Issue," Review of Network Economics, De Gruyter, vol. 8(1), pages 1-18, March.
  29. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
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