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http://ssrn.com/abstract=1723945
 
 

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The Economics of Network Neutrality


Nicholas Economides


New York University - Leonard N. Stern School of Business - Department of Economics

Benjamin E. Hermalin


University of California, Berkeley

January 27, 2012

RAND Journal of Economics, 2012
NET Institute Working Paper No. 10-25
NYU Law and Economics Research Paper No. 10-57

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. Pricing, moreover, is not contingent on the type of content being transmitted. 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 greater delays. We derive conditions under which network neutrality would be welfare superior to any feasible scheme for prioritizing service. Extending our analysis to encompass ISPs’ incentives to invest in more bandwidth, we show that the ability to price discriminate increases their incentives to invest. In terms of overall welfare, we show the additional investment may or may not offset any static inefficiency associated with discrimination.

Number of Pages in PDF File: 39

Keywords: Network Neutrality, Two-Sided Markets, Internet, Monopoly, Price Discrimination, Regulation, Congestion

JEL Classification: L1, D4, L12, L13, C63, D42, D43

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Date posted: December 12, 2010 ; Last revised: December 24, 2013

Suggested Citation

Economides, Nicholas and Hermalin, Benjamin E., The Economics of Network Neutrality (January 27, 2012). RAND Journal of Economics, 2012; NET Institute Working Paper No. 10-25; NYU Law and Economics Research Paper No. 10-57. Available at SSRN: http://ssrn.com/abstract=1723945 or http://dx.doi.org/10.2139/ssrn.1723945

Contact Information

Nicholas Economides (Contact Author)
New York University - Leonard N. Stern School of Business - Department of Economics
44 West 4th Street
New York, NY 10012
United States
212-998-0864 (Phone)
212-995-4218 (Fax)
HOME PAGE: http://www.stern.nyu.edu/networks/
Benjamin E. Hermalin
University of California, Berkeley ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)
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