Differential Pricing of Internet Traffic: Theory and Empirical Analysis

Danhou Li (danhou@u.nus.edu) and Ce Matthew Shi (shice@cuhk.edu.hk)
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Danhou Li: Department of Economics, National University of Singapore, Singapore
Ce Matthew Shi: Department of Economics, Chinese University of Hong Kong, Hong Kong SAR

No 24-09, Working Papers from NET Institute

Abstract: This paper examines theoretically and empirically the welfare effects of differential pricing for Internet traffic in a network market. We begin by analyzing a model of differential pricing by a monopolist Internet service provider (ISP), wherein charges are levied on content providers for traffic flow and on consumers for Internet access. Content providers differ in terms of their demand for Internet traffic and their value to consumers (“network effects†). Under linear demands, we show that compared to uniform pricing, differential pricing based solely on network effects is welfare-enhancing, while purely elasticity-based differential pricing reduces content provider surplus and social welfare. The welfare effects become ambiguous when both network effects and demand elasticities differ across content providers. Using a unique dataset on monthly transactions between a large ISP and major content providers in China (where ISPs legally own Internet traffic services in the form of CDN), we estimate the model and quantify the welfare effects using the demand and cost estimates. Our counterfactual analysis shows that consumer surplus and content provider surplus increase under differential pricing; however, a disproportionate share of the welfare gain is captured by several big content providers, while smaller content providers tend to become worse off.

Keywords: differential pricing; Internet traffic; network industry; welfare (search for similar items in EconPapers)
JEL-codes: L12 L86 L96 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2024-09
New Economics Papers: this item is included in nep-com, nep-ict, nep-ind, nep-reg and nep-sea
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