Network Neutrality, Consumers, and Innovation

Abstract:     
In this Article, Professor Christopher Yoo directly engages claims that mandating network neutrality is essential to protect consumers and to promote innovation on the Internet. It begins by analyzing the forces that are placing pressure on the basic network architecture to evolve, such as the emergence of Internet video and peer-to-peer architectures and the increasing heterogeneity in business relationships and transmission technologies. It then draws on the insights of demand-side price discrimination (such as Ramsey pricing) and the two-sided markets, as well as the economics of product differentiation and congestion, to show how deviating from network neutrality can benefit consumers, a conclusion bolstered by the empirical literature showing that vertical restraints tend to increase rather than reduce consumer welfare. In fact, limiting network providers' ability to vary the prices charged to content and applications providers may actually force consumers to bear a greater proportion of the costs to upgrade the network. Restricting network providers' ability to experiment with different protocols may also reduce innovation by foreclosing applications and content that depend on a different network architecture and by dampening the price signals needed to stimulate investment in new applications and content. In the process, Professor Yoo draws on the distinction between generalizing and exemplifying theory to address some of the arguments advanced by his critics. While the exemplifying theories on which these critics rely are useful for rebutting calls for broad, categorical, ex ante rules, their restrictive nature leaves them ill suited to serve as the foundation for broad, categorical ex ante mandates pointing in the other direction. Thus, in the absence of some empirical showing that the factual preconditions of any particular exemplifying theory have been satisfied, the existence of exemplifying theories pointing in both directions actually supports an ex post, case-by-case approach that allows network providers to experiment with different pricing regimes unless and until a concrete harm to competition can be shown.

Keywords: Ramsey pricing, two-sided markets, product differentiation, congestion, vertical integration, vertical restraints, prioritization, price signals, dynamic efficiency, exclusivity, network economic effects, exemplifying theory, per se rules, rule of reason, network diversity

JEL Classifications: K23

Accepted Paper Series