Net Neutrality and Investment Incentives

Jay Choi and Byung-Cheol Kim

No 08-03, Working Papers from NET Institute

Abstract: This paper analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP's decision on the introduction of discrimination across content depends on a potential trade-off between network access fee and the revenue from the trade of the first-priority. Concerning the ISP's investment incentives, we find that capacity expansion affects the sale price of the priority right under the discriminatory regime. Because the relative merit of the first priority, and thus its value, becomes relatively small for higher capacity levels, the ISP's incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist. Contrary to ISPs' claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite. Classification-JEL: D4, L12, L4, L43, L51, L52

Keywords: Net Neutrality; Investment (Innovation) Incentives; Queuing Theory; Hold-up Problem; Two-sided Markets; Vertical Integration (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008-09
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Net neutrality and investment incentives (2010)
Working Paper: Net Neutrality and Investment Incentives (2008)
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