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Network Neutrality, Access to Content and Online Advertising

We investigate the implications of Network Neutrality regulation for 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 Network Neutrality, CPs can have their traffic delivered to consumers by ISPs for free, while in the Unregulated Regime they have to pay a (non-discriminatory) termination fee. In our model multiple impressions of an ad on a consumer are partially wasteful. Thus, equilibrium ad rates decrease when the audiences of CPs overlap. We show that universal distribution of content is always an equilibrium when Network Neutrality regulation is in place. In contrast, when competition among CPs strongly reduces their profits, in the Unregulated Regime ISPs can use termination fees to induce fragmentation and extract CPs’ extra profits. This occurs when repeated impressions of an ad rapidly lose value and consumers care for content availability to a relatively small extent. Our results suggest that the Unregulated Regime is never superior to Network Neutrality from a consumer surplus and social welfare point of view.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 13-344.

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Length: 45 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:kof:wpskof:13-344
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  1. Nicholas Economides & Joacim Tåg, 2007. "Net Neutrality on the Internet: A Two-sided Market Analysis," Working Papers 07-14, NET Institute, revised Sep 2007.
  2. Krämer, Jan & Wiewiorra, Lukas & Weinhardt, Christof, 2013. "Net neutrality: A progress report," Telecommunications Policy, Elsevier, vol. 37(9), pages 794-813.
  3. Ambrus, Attila & Reisinger, Markus, 2006. "Exclusive vs Overlapping Viewers in Media Markets," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 161, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. 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.
  5. Marc Bourreau & Frago Kourandi & Tommaso Valletti, 2014. "Net Neutrality with Competing Internet Platforms," CEIS Research Paper 307, Tor Vergata University, CEIS, revised 14 Feb 2014.
  6. Susan Athey & Emilio Calvano & Joshua Gans, 2013. "The Impact of the Internet on Advertising Markets for News Media," NBER Working Papers 19419, National Bureau of Economic Research, Inc.
  7. Schuett Florian, 2010. "Network Neutrality: A Survey of the Economic Literature," Review of Network Economics, De Gruyter, vol. 9(2), pages 1-15, June.
  8. Nicholas Economides & Benjamin Hermalin, 2010. "The Economics of Network Neutrality," Working Papers 10-25, NET Institute.
  9. Emilio Calvano & Bruno Jullien, 2012. "Issues in Online Advertising and Competition Policy: A Two-sided Market Perspective," Chapters, in: Recent Advances in the Analysis of Competition Policy and Regulation, chapter 9 Edward Elgar.
  10. Harsanyi, John C., 1995. "A new theory of equilibrium selection for games with complete information," Games and Economic Behavior, Elsevier, vol. 8(1), pages 91-122.
  11. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  12. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," CESifo Working Paper Series 2390, CESifo Group Munich.
  13. Robin S. Lee & Tim Wu, 2009. "Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 61-76, Summer.
  14. Choi, Jay & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," IDEI Working Papers 753, Institut d'Économie Industrielle (IDEI), Toulouse.
  15. Ambrus, Attila & Reisinger, Markus, 2006. "Exclusive vs Overlapping Viewers in Media Markets," Discussion Papers in Economics 1178, University of Munich, Department of Economics.
  16. Weeds, Helen, 2012. "TV Wars: Exclusive Content and Platform Competition in Pay TV," CEPR Discussion Papers 8781, C.E.P.R. Discussion Papers.
  17. Esther Gal-Or & Anthony Dukes, 2003. "Minimum Differentiation in Commercial Media Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(3), pages 291-325, 09.
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