Investment in Two-Sided Markets and the Net Neutrality Debate

Njoroge Paul (), Ozdaglar Asuman, Stier-Moses Nicolás E. and Weintraub Gabriel Y.
Additional contact information
Njoroge Paul: Laboratory of Information Decision Systems, MIT, Cambridge, MA 02139, USA
Ozdaglar Asuman: Laboratory of Information Decision Systems, MIT, Cambridge, MA 02139, USA
Stier-Moses Nicolás E.: Columbia Business School, NY 10027, USA Business School, Universidad Torcuato Di Tella, Buenos Aires, Argentina; and CONICET Argentina
Weintraub Gabriel Y.: Decision, Risk and Operations Division, Columbia Business School, NY 10027, USA

Review of Network Economics, 2014, vol. 12, issue 4, 355-402

Abstract: This paper develops a game-theoretic model based on a two-sided market framework to compare Internet service providers’ (ISPs) investment incentives, content providers’ (CPs) participation, and social welfare between neutral and non-neutral network regimes. We find that ISPs’ investments are driven by the trade-off between softening consumer price competition and increasing revenues from CPs. Specifically, investments are higher in the non-neutral regime because it is easier to extract revenue through appropriate CP pricing. On the other hand, participation of CPs may be reduced in a non-neutral network due to higher prices. The net impact of non-neutrality on social welfare is determined by which of these two effects is dominant. Overall, we find that the non-neutral network is always welfare superior in a “walled-gardens” model, while the neutral network is superior in a “priority lanes” model when CP-quality heterogeneity is large. These results provide useful insights that inform the net-neutrality debate.

Keywords: investments; net neutrality; two-sided markets (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/rne-2012-0017

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