Investment in Two Sided Markets and the Net Neutrality Debate
Massachusetts Institute of Technology (MIT) - Laboratory for Information and Decision Systems
Asuman E. Ozdaglar
Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science
Nicolas E. Stier-Moses
Facebook; Universidad Torcuato Di Tella - School of Business
Gabriel Y. Weintraub
Stanford Graduate School of Business, Stanford University; Columbia University - Columbia Business School - Decision Risk and Operations
Columbia Business School DRO (Decision, Risk and Operations) Working Paper No. 2010-05
This paper develops a game theoretic model based on a two-sided market framework to investigate the net neutrality debate. In particular, we consider investment incentives of Internet Service Providers (ISPs) under a neutral and non-neutral network regimes. In our model, two interconnected ISPs compete over quality and prices for heterogeneous content providers (CPs) and heterogeneous consumers. We consider two definitions of a non-neutral network: in the first, ISPs charge access fees to off-network CPs; in the second, ISPs offer "priority lanes''. In the neutral regime, connecting to a single ISP allows a CP to communicate with all consumers and all CPs obtain the same quality of service. With a combination of theoretical and numerical results we find that under both definitions ISPs' quality-investment levels are driven by the trade-off they make between softening price competition on the consumer side and increasing revenues extracted from CPs. Specifically, in the non-neutral regime, because it is easier to extract surplus through appropriate CP pricing, ISPs' investment levels are larger. Because CP quality is enhanced by the quality of ISPs, larger investment levels imply that CPs' revenues increase. Similarly, consumer surplus increases as well. The main insight resulting from our model is that social welfare is larger in the non-neutral regime. Our results highlight important mechanisms related to ISPs' investments that play a key role in market outcomes, providing useful insights that enrich the net neutrality debate.
Number of Pages in PDF File: 60
Keywords: Two Sided Markets, Net Neutrality, Investments
Date posted: July 18, 2010 ; Last revised: April 21, 2013
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