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Investment in quality upgrade and regulation of the internet

Edmond Baranes () and Cuong Hung Vuong ()
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Edmond Baranes: University of Montpellier
Cuong Hung Vuong: University of Montpellier

Journal of Regulatory Economics, 2022, vol. 61, issue 1, No 1, 31 pages

Abstract: Abstract This paper studies the investment decision by a monopolistic internet service provider (ISP) in different regulatory environments. We consider that the ISP can technically provide separate quality upgrades to two vertically differentiated content providers (CPs). Our results show that if unregulated, the ISP could optimally provide asymmetric quality upgrades to both CPs, in favor of the high-quality CP. This subsequently increases the degree of content differentiation, softening competition between the CPs. Imposing a nondiscrimination regulation that forces the ISP to provide an equal quality upgrade to both CPs, however, reduce the ISP’s investment incentive and social welfare. Furthermore, the social planner provides preferential treatment to the high-quality CP if the degree of substitutability is sufficiently low. In contrast, it is socially optimal to prioritize the low-quality CP if the contents are sufficient substitutes, or provide exclusivity if vertical differentiation is high.

Keywords: Complementarity; Differentiation; Investment; Internet; Regulation (search for similar items in EconPapers)
JEL-codes: L13 L51 L96 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11149-021-09441-4

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