The Debate on Net Neutrality: A Policy Perspective

Abstract:     
The status quo of prohibiting broadband service providers from charging websites for preferential access to their customers - the bedrock principle of net neutrality - is under fierce debate. We develop a game-theoretic model to address two critical issues of net neutrality: (1) Who are gainers and losers of abandoning net neutrality; and (2) Will broadband service providers have greater incentive to expand their capacity without net neutrality? We find that if the principle of net neutrality is abolished, the broadband service provider stands to gain from the arrangement, as a result of extracting the preferential access fees from content providers. Content providers are thus left worse off, mirroring the stances of the two sides in the debate. Depending on parameter values in our framework, consumer surplus either does not change or is higher in the short run. When compared to the baseline case under net neutrality, social welfare in the short run increases if one content provider pays for preferential treatment, but remains unchanged if both content providers pay. Finally, we find that the incentive to expand infrastructure capacity for the broadband service provider and its optimal capacity choice under net neutrality are higher than those under the no net neutrality regime except in some specific cases. Under net neutrality, the broadband service provider always invests in broadband infrastructure at the socially optimal level, but either under- or over-invests in infrastructure capacity in the absence of net neutrality.

Keywords: Net Neutrality, Economics of Net Neutrality, Broadband Service Providers, Content Providers

JEL Classifications: L43, L51, L52

Accepted Paper Series