The Economics of Network Neutrality

Nicholas Economides () and Benjamin Hermalin

No 10-25, Working Papers from NET Institute

Abstract: Pricing of Internet access has been characterized by two properties. Parties are directly billed only by the Internet Service Provider (ISP) through which they connect to the Internet and the ISP charges them on the basis of the amount of information transmitted rather than its content. These properties define a regime known as “network neutrality.” In 2005, some large ISPs proposed that application and content providers directly pay them additional fees for accessing the ISPs’ residential clients, as well as differential fees for prioritizing certain content. We analyze the private and social incentives to introduce such fees when the network is congested and more traffic implies delays. We find that network neutrality is welfare superior to bandwidth subdivision (granting or selling priority service). We also consider the welfare properties of the various regimes that have been proposed as alternatives to network neutrality. In particular, we show that the benefit of a zero-price “slow lane” is a function of the bandwidth the regulator mandates be allocated it. Extending the analysis to consider ISPs’ incentives to invest in more bandwidth, we show that, under general conditions, their incentives are greatest when they can price discriminate; this investment incentive offsets to some degree the allocative distortion created by the introduction of price discrimination. A priori, it is ambiguous whether the offset is sufficient to justify departing from network neutrality.

Keywords: network neutrality; two-sided markets; Internet; monopoly; price discrimination; regulation; congestion (search for similar items in EconPapers)
JEL-codes: C63 D4 D42 D43 L1 L12 L13 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2010-12
New Economics Papers: this item is included in nep-com, nep-ict, nep-ind, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The economics of network neutrality (2012)
Working Paper: The Economics of Network Neutrality (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:1025

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