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Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate

  • Krämer, Jan
  • Wiewiorra, Lukas

We model the main arguments of the net neutrality debate in a two-sided market framework with network congestion sensitive content providers and Internet consumers on each side, respectively. The platform is controlled by a monopolistic Internet service provider, who may choose to sell content providers prioritized access to its customers. We explicitly consider the adverse effects of traffic prioritization to the remaining best-effort class and find that network discrimination has overall positive effects on welfare, because congestion is better allocated to those content providers with congestion inelastic advertisement revenues. In the long-run, network discrimination leads to infrastructure investments in transmission capacity and encourages innovation on the content provider side. In the short-run, however, discrimination has no effect on innovation because the ISP expropriates the content providers' increased surplus through the price for priority access. This is the downside of network discrimination: Albeit total welfare is increased, content providers will--at least in the short-run--be worse off than under network neutrality.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16655.

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Date of creation: 05 Aug 2009
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Handle: RePEc:pra:mprapa:16655
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  1. 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.
  2. 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.
  3. Jay Pil Choi & Byung-Cheol Kim, 2010. "Net neutrality and investment incentives," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 446-471.
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