The Economics of Product-Line Restrictions with an Application to the Network Neutrality Debate
Benjamin E. Hermalin
University of California, Berkeley
Michael L. Katz
University of California, Berkeley - Economic Analysis & Policy Group
AEI-Brookings Joint Center Working Paper No. 07-02
We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We consider a platform that brings together households and application providers. We find that restricting a monopoly platform to a single product has the following effects: (a) application providers that would otherwise have purchased a low-quality variant are excluded from the market; (b) applications "in the middle" of the market utilize a higher and more efficient quality; and (c) applications at the top utilize a lower and less efficient quality than otherwise. Total surplus may rise or fall, although the analysis suggests to us that harm to welfare is likely. We also examine a duopoly model and find that the welfare effects are similar.
Number of Pages in PDF File: 48
Keywords: product-line restrictions, duopoly model, welfare effects
JEL Classification: H00
Date posted: July 30, 2007
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