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Zero Rating, Content Quality and Network Capacity

Emmanuel Lorenzon ()

Bordeaux Economics Working Papers from Groupe de Recherche en Economie Théorique et Appliquée (GREThA)

Abstract: We consider a departure from net neutrality by an Internet service provider (ISP) that financially discriminates among content providers through bilateral zero rating contracts. Zero rating is an instrument to distort competition between content providers and the way in which consumers value content. We analyze its implications for the incentives to provide quality in the market for content and to invest in broadband infrastructure. Zero rating makes content more expensive for consumers to access and implies a downward distortion of quality by increasing downward vertical differentiation. Content providers move from a minimal differentiation equilibrium to a downward vertical differentiation outcome. Next, we find that while zero rating happens to reduce congestion, a profit-maximizing ISP always underinvests in the broadband infrastructure in the discriminatory network. We highlight that this underprovision comes from a standard rent-extraction argument and a new cost-alleviation channel, which relates to the complementarity between network capacity and content quality. Finally, the ISP always implements zero rating, which is welfare reducing and detrimental to consumers.

Keywords: Internet; Net-Neutrality; Zero-Rating; Network capacity; Content quality; Congestion; Three-part tariff (search for similar items in EconPapers)
JEL-codes: D21 L12 L51 L96 R41 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-com, nep-ict and nep-reg
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