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

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 NET Institute in its series Working Papers with number 07-45.

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Length: 31 pages
Date of creation: Sep 2007
Date of revision: Nov 2007
Handle: RePEc:net:wpaper:0745
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References listed on IDEAS
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  1. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  2. Schuett Florian, 2010. "Network Neutrality: A Survey of the Economic Literature," Review of Network Economics, De Gruyter, vol. 9(2), pages 1-15, June.
  3. 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.
  4. Nicholas Economides & Evangelos Katsamakas, 2004. "Two-sided competition of proprietary vs. open source technology platforms and the implications for the software industry," Working Papers 04-30, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Wright Julian, 2004. "One-sided Logic in Two-sided Markets," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-21, March.
  6. Volker Nocke & Martin Peitz & Konrad Stahl, 2004. "Platform Ownership," PIER Working Paper Archive 04-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. 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.
  8. Chen, M. Keith & Nalebuff, Barry, 2006. "One-Way Essential Complements," Working Papers 22, Yale University, Department of Economics.
  9. Keith M. Chen & Barry Nalebuff, 2006. "One-Way Essential Complements," Levine's Bibliography 321307000000000669, UCLA Department of Economics.
  10. David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Working Papers 07-22, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. 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 05-07, NET Institute.
  12. Jay Pil Choi, 2006. "Tying in Two-Sided Markets with Multi-Homing," Working Papers 06-04, NET Institute, revised Sep 2006.
  13. Choi, Jay & Kim, Byung-Cheol, 2008. "Net Neutrality and Investment Incentives," Working Paper Series 4010, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
  14. Austan Goolsbee, 2006. "The Value of Broadband and the Deadweight Loss of Taxing New Technology," NBER Working Papers 11994, National Bureau of Economic Research, Inc.
  15. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  16. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  17. 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.
  18. Amelio, Andrea & Jullien, Bruno, 2012. "Tying and freebies in two-sided markets," International Journal of Industrial Organization, Elsevier, vol. 30(5), pages 436-446.
  19. Rochet, Jean-Charles & Tirole, Jean, 2005. "Two-Sided Markets : A Progress Report," IDEI Working Papers 275, Institut d'Économie Industrielle (IDEI), Toulouse.
  20. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  21. 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.
  22. Krämer, Jan & Wiewiorra, Lukas, 2009. "Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate," MPRA Paper 16655, University Library of Munich, Germany.
  23. 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.
  24. Christiaan Hogendorn, 2006. "Broadband Internet: Net Neutrality versus Open Access," Working Papers 2006-09, Center for Network Industries and Infrastructure (CNI).
  25. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  26. Nicholas Economides & Benjamin Hermalin, 2010. "The Economics of Network Neutrality," Working Papers 10-25, NET Institute.
  27. Nicholas Economides, 2007. "“Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet," Working Papers 07-03, NET Institute.
  28. repec:reg:rpubli:428 is not listed on IDEAS
  29. Nicholas Economides, 2007. "Economics of the Internet," Working Papers 07-1, New York University, Leonard N. Stern School of Business, Department of Economics.
  30. 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.
  31. 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.
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