Regulation Effects on Investment Decisions in Two-Sided Market Industries: The Net Neutrality Debate

Abstract:     
This paper studies, using a two-sided market framework, the impact of regulation on platform's pricing scheme, on investment decisions, on network users' decision to join the network, and on welfare. We take a monopoly platform that serves a continuum of vertically differentiated buyers and sellers that, after deciding to enter, will start to trade. The profit-maximizing platform can only charge a different entry fee to all network users. If profit-maximizing platform cannot charge sellers, i.e. Net Neutrality regulation, will be more network users, more investment, and welfare is higher. If profit-maximizing platform cannot charge buyers there will be more investment than without the regulation. If on top of not charging buyers, network effects make sellers' trade surplus and buyers' trade surplus close, then less network users will be excluded, and welfare will be higher with the regulation than with the profit-maximizing platform. If network effects make sellers' surplus high enough compared to buyers' surplus, welfare is higher with the profit-maximizing platform. Finally, we show that welfare when a profit-maximizing platform cannot charge sellers, is higher than when he cannot charge buyers

Number of Pages in PDF File: 46

Keywords: Investment incentives, Two-Sided Markets, Regulation, Net Neutrality, Pricing Scheme

JEL Classification: L11, L12, L51, L96

working papers series